IS THERE A BETA ANOMALY? — EVIDENCE FROM THE INDIA

Abstract

This paper investigates the Indian equity market for the presence of a beta anomaly. A beta anomaly occurs when the additional market risk taken by an investor is not rewarded. Academic literature shows mixed evidence on whether the market rewards risk-takers or not for the additional risk taken. Using a sample of monthly returns of 265 companies during a period of 240 months from January 2000 to December 2019, the authors test the Indian equity market for the presence of an anomaly. A decile descriptive analysis shows a positive relationship between market risk and returns, and a negative relationship between company-specific risk and returns. A two-stage Fama–MacBeth (FMB) regression procedure is employed to empirically test for the relationship between beta and expected returns. The findings refute the presence of a beta anomaly in the Indian capital market. Also, the study concludes that a linear model of slope-intercept form is enough to explain the beta and expected returns’ relationship. The findings benefit investment managers and wealth advisors by explaining the market risk and expected returns relationship.