Rolling regression technique and cross-sectional regression : A tool to analyze Capital Asset Pricing Model

The Capital Asset Pricing Model (henceforth, CAPM) is considered an extensively usedtechnique to approximate asset pricing in the field of finance. The CAPM holds thepower to explicate stock movements by means of its sole factor that is beta co-efficient.This study focuses on the application of rolling regression and cross-sectional regressiontechniques on Indian BSE 30 stocks. The study examines the risk-return analysisby using this modern technique. The applicability of these techniques is being viewedin changing business environments. These techniques help to find the effect of selectedvariables on average stock returns. A rolling regression study rolls the data for changingthe windows for every 3-month period for three years. The study modifies themodel with and without intercept values. This has been applied to the monthly pricesof 30 BSE stocks. The study period is from January 2009 to December 2018. The studyrevealed that beta is a good predictor for analyzing stock returns, but not the interceptvalues in the developed model. On the other hand, applying cross-section regressionaccepts the null hypothesis. α, β, β2 ≠ 0. Therefore, a researcher is faced with the taskof finding the limitations of each methodology and bringing the best output in the model