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Testing multifactor capital asset pricing model in case of Pakistani market

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  • Javid, Attiya Yasmin
  • Ahmad, Eatzaz

Abstract

The analysis of this study explores a set of macroeconomic variables along with market return as the systematic sources of risks explaining variations in expected stock returns for 49 stocks traded at Karachi Stock Exchange for the period 1993-2004. Some of these economic variables are found to be significant in explaining expected stock returns. The test of conditional multifactor CAPM is carried out by specifying conditional variance as a GARCH (1,1)-M process. The results of the conditional multifactor CAPM-with-GARCH-M model reveal that conditional model shows very marginal improvement in explaining risk-return relationship in Pakistani Market during the sample period. As regards the risk premium for variance risk, the results are not so supportive, only for a few stocks significant compensation for variance risk to investors is observed. The model is then extended to allow variability in economic risk variables and conditioning information is taken as lagged macroeconomic variables that influence business conditions in Pakistan. The results show evidence in support of conditional multifactor CAPM. The economic variables that are observed to perform relatively well in explaining variations in assets’returns include consumption growth, inflation risk, call money rate, term structure. However, the market return, foreign exchange risk and oil price risk, which explain a significant portion of the time series variability of stock returns, have limited influence on the asset pricing. Therefore we can conclude that expected returns variation could be explained by macroeconomic variations and this variability has some business cycle correlations.

Suggested Citation

  • Javid, Attiya Yasmin & Ahmad, Eatzaz, 2008. "Testing multifactor capital asset pricing model in case of Pakistani market," MPRA Paper 37341, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:37341
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    References listed on IDEAS

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    Cited by:

    1. Jawad Mohammad & Attiya Yasmin Javid, 2015. "An Analysis of Accrual Anomaly in Case of Karachi Stock Exchange," PIDE-Working Papers 2015:116, Pakistan Institute of Development Economics.
    2. repec:gam:jecomi:v:6:y:2018:i:1:p:14-:d:134024 is not listed on IDEAS

    More about this item

    Keywords

    Multifactor Capital Asset Pricing Model; Information Set; Business-Cycle Variables; Time Varying Risk; Time Varying Risk Premium; GARCH-M Model and Market Efficiency;

    JEL classification:

    • A1 - General Economics and Teaching - - General Economics
    • N2 - Economic History - - Financial Markets and Institutions
    • M2 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Economics
    • G0 - Financial Economics - - General

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