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A Test Of The Validity Of The CAPM In Pakistani Equity Market

Author

Listed:
  • Muhammad Akbar

    (Bahria University, Islamabad)

  • Shahid Ali

    (Institute of Management Sciences, Peshawar)

Abstract

We investigate the validity of the Sharpe-Lintner (traditional) capital asset pricing model (CAPM) and the higher moments CAPM using a sample 34 companies listed on the Karachi Stock Exchange (KSE) over sample period January 2004 to March 2007. The end of month stock prices of all the 34 firms and the end of month values of the KSE100 index are utilized to obtain monthly stock returns and market returns respectively. We used the standard two-step procedure to test the validity of the CAPM. Our results suggest no statistically significant support for both the traditional and the higher moments CAPM. We, however, found that the intercept term mostly remained to be significant in the tests of both the Sharpe-Lintner CAPM and the higher moments CAPM. We found positive risk premiums for both covariance and coskewness in the higher moments CAPM. Positive risk premium for covariance and/or coskewness is in line with the theory of the CAPM. The cokurtosis risk was found to be statistically insignificant. Further the introduction of high moments in the CAPM improved the results. This shows that investors are positively rewarded for coskewness risk in the KSE

Suggested Citation

  • Muhammad Akbar & Shahid Ali, 2010. "A Test Of The Validity Of The CAPM In Pakistani Equity Market," Business & Economic Review, Institute of Management Sciences, Peshawar, Pakistan, vol. 2(1), pages 23-28, April.
    • Handle: RePEc:bec:imsber:v:2:y:2010:i:1:p:23-28
    DOI: .
    as

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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Capital asset pricing model; coskewness; cokurtosis;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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