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Size and value premium in Karachi stock exchange

Author

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  • Nawazish Mirza

    () (Lahore School of Economics, Lahore, Pakistan.)

Abstract

Investment decisions are based on the rational return expectations and investors require returns that are aligned with their risk and utility. This phenomenon has been extensively discussed in the financial theory as well as practice and the first known theory of asset pricing leads back to as early as Bachelier (1900). The current study evaluates the performance of Fama and French Three Factor model in Karachi Stock Exchange (KSE). It employs a multivariate regression approach after sorting six portfolios on size and bookto market. The constituent stocks were selected to represent each and every sector of KSE. Daily returns were employed for a period of five years starting from January 2003 to December 2007. The six month Pakistan’s T Bill yield was used as proxy for risk free rate to determine excess returns. The excess returns for each portfolio were regressed on market, size and value factors. The results were encouraging for the three factor model. The three factor model was able to explain the variations in returns for most of the portfolios and the results remain consistent when the sample was reduced to control for the size effect. Our findings are consistent with most of the studies that suggested the validity of three factor model in emerging markets. These findings havesubstantial implications for fund managers, analysts and investors. The results suggest that size and value premium must be incorporated for asset valuations and portfolio management decisions.

Suggested Citation

  • Nawazish Mirza, 2008. "Size and value premium in Karachi stock exchange," CREB Working papers 1-2008, Centre for Research in Economics and Business, The Lahore School of Economics, revised 2008.
  • Handle: RePEc:lje:wpaper:1-2008
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    References listed on IDEAS

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    1. repec:ajm:journl:v:11:y:2017:i:2:p:124-139 is not listed on IDEAS
    2. repec:ebl:ecbull:eb-17-00809 is not listed on IDEAS
    3. repec:gam:jecomi:v:6:y:2018:i:1:p:14-:d:134024 is not listed on IDEAS
    4. Nahzat Abbas & Jahanzeb Khan & Rabia Aziz & Zain Sumrani, 2015. "A Study to Check the Applicability of Fama and French, Three-Factor Model on KSE 100-Index from 2004-2014," International Journal of Financial Research, International Journal of Financial Research, Sciedu Press, vol. 6(1), pages 90-100, January.
    5. Sana Tauseef, 2017. "Cross-Sectional Variation in Stock Returns: Evidence from an Emerging Market," Proceedings of Economics and Finance Conferences 4807087, International Institute of Social and Economic Sciences.
    6. Javed Iqbal & Sara Azher, 2014. "Value-at-Risk and Expected Stock Returns: Evidence from Pakistan," Lahore Journal of Economics, Department of Economics, The Lahore School of Economics, vol. 19(2), pages 71-100, July-Dec.

    More about this item

    Keywords

    Size Premium; Value Premium; Market Premium; Three Factor Model.;

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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