AN EMPIRICAL ANALYSIS OF STOCK RETURN DRIVERS AND VOLATILITY DYNAMICS IN THE INDIAN EQUITY MARKET: A COMPARATIVE STUDY OF SELECT NIFTY 50 COMPANIES USING FAMA-FRENCH 5-FACTOR AND GARCH MODELS

Abstract

This study conducts an empirical analysis of stock return drivers and volatility dynamics in the Indian equity market, focusing on select Nifty 50 companies. It comparatively examines the Fama-French 5-Factor model and GARCH models. The Fama-French 5-Factor model demonstrates limited explanatory power for the returns of large-cap stocks, indicating that company-specific strategies, industry trends, and macroeconomic conditions are more influential than traditional factors. This suggests that a simple factor-based approach may not fully capture the complexities of alpha generation in India. In contrast, the GARCH model consistently and effectively captures dynamic, time-varying volatility, as evidenced by pronounced spikes during periods of heightened risk, such as the COVID-19 pandemic in early 2020. This dynamic risk modelling approach offers a more realistic and actionable understanding of risk compared to static measures, proving crucial for robust portfolio management and informed investment decisions in the evolving Indian equity market.