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Time Varying Risk Return Relationship: Evidence from Listed Pakistani Firms

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  • Javid, Attiya Yasmin

Abstract

This study empirically investigates the Fama-French three-factor model and consumption CAPM model in unconditional and conditional setting with individual stocks traded at Karachi Stock Exchange (KSE), the main equity market in Pakistan for the period 1993-2004. These extensions are in response of the empirical findings that do not support standard CAPM as a model to explain assets pricing in Pakistani equity market. The observation is that the dynamic size and book-to-market value coefficients explain the cross-section of expected returns in some sub-periods. In the second stage, the consumption risk is incorporated in standard CAPM in static and dynamic context. The findings reveal that the market rewards systematic risk for higher return, but the relevant measure for systematic risk appears to be conditional consumption beta rather than market beta. This evidence leads to investigate macroeconomic risks that can describe the variation in expected return in a more complete and meaningful way.

Suggested Citation

  • Javid, Attiya Yasmin, 2008. "Time Varying Risk Return Relationship: Evidence from Listed Pakistani Firms," MPRA Paper 37561, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:37561
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    Cited by:

    1. Akbar, Muhammad & Nguyen, Thuy Thu, 2016. "The explanatory power of higher moment capital asset pricing model in the Karachi stock exchange," Research in International Business and Finance, Elsevier, vol. 36(C), pages 241-253.
    2. Javid, Attiya Yasmin, 2008. "Forecasting performance of capital asset pricing models in case of Pakistani market," MPRA Paper 37562, University Library of Munich, Germany.
    3. 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.

    More about this item

    Keywords

    Capital asset pricing model; Fama-French Three-Factor model; market risk; information set; business-cycle variables; consumption risk and market efficiency;

    JEL classification:

    • A1 - General Economics and Teaching - - General Economics

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