Empirical Obstacles in the Carhart Model-Insights from the Fama-Macbeth

Analysis of Nifty 50 for the Period April 2008-June 2023

Abstract

This research paper is an attempt to find the empirical challenges before the Carhart model which is the expansion of the Fama-French Three-Factor (FF3F) model which is itself an expansion of the Capital Asset Pricing Model (CAPM). The recent economic events, such as demonetization, GST implementation, and the COVID-19 pandemic, have impacted the Indian economy significantly. This study explores whether the Carhart model remains effective in this altered economic landscape, filling a gap in asset pricing literature specific to emerging markets like India. The study, further, aims to compare the model with the empirical power of other two well-known models i.e., FF3F model and the CAPM. The Carhart model has been empirically tested with reference to the stock portfolios constituted from the Nifty fifty data over the period April 2008 to June 2023 using the Fama-MacBeth regression. The findings of the paper show that the model is not empirically supported by the data suggesting the potential limitations of the same to explain asset returns in Indian context. It is found that neither of the three models is empirically supported, however, in relative terms, FF3F shows a relatively better explanatory power explaining the average returns. This paper can be regarded as a contribution to the limited amount of literature on the Carhart model in Indian context within the timeframe of the period April 2008 to June 2023 with an aim to expose the empirical validity of the Carhart model.