Testing The Robustness of Capital Asset Pricing Model During the Covid-19 Crisis: Evidence from Indian Stock Market

Abstract

In order to help investors better understand how risk and return work in the stock market when significant societal catastrophes strike, the COVID-19 pandemic is used as an instance to examine the Capital Asset Pricing Model's (CAPM) reliability in the Indian stock market during COVID-19 pandemic outbreak. This study's goal is to estimate the security market line CAPM test for Nifty Fifty stocks over the COVID-19 Period (2019–2021). two types of regression: first-pass and second-pass were used to assess the CAPM model in this study. Furthermore, using regression analysis, we calculate the excess return, beta, alpha, and R-Squared on the Nifty50 companies in first-pass regression. If the CAPM is true, then in second pass regression, Y0 should equal zero and Y1 should equal excess return.  The t-test for beta is also not significant. As a result, the SML test was unsuccessful, and the CAPM does not accurately reflect the link between excess return and beta in the study. We cannot explain the relationship between return and stock sensitivity because the CAPM is invalid and the model does not adequately explain the outcome.