The Capital Asset Pricing Model: Empirical Evidence from Pakistan
The purpose of this study is to examine the validity of the CAPM in the capital markets of the Pakistan. The study used daily stock returns of the top 20 companies listed on the KSE (the main equity market in Pakistan) from 16th December 2008 to 26th February 2010. The market 100 index is used as a proxy for the market portfolio and 6-month Treasury bill rate is used as the risk free rate. The least squares method (OLS) is used to find the beta of the stocks in the first step and then find the regression equations in the second step. These regression equations are used to find the coefficients which are used to test the validity of CAPM. The findings of the study are not in support of CAPM. The critical conditions of the CAPM that the intercept term is equal to zero, there is a positive relation between the risk and return, and market risk premium is a significant explanatory variable for the determination stock’s risk premium are rejected. The findings also show that residual risk plays some role for pricing risky assets. The market risk alone does not explain the stocks excess returns but also the unique risk contributes towards the excess returns. Tests may provide evidence against the CAPM but they do not necessarily constitute evidence in support of any alternative model.
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- Attiya Y. Javid & Eatzaz Ahmad, 2008. "The Conditional Capital Asset Pricing Model: Evidence from Karachi Stock Exchange," PIDE-Working Papers 2008:48, Pakistan Institute of Development Economics.
- Eugene F. Fama & Kenneth R. French, 2004. "The Capital Asset Pricing Model: Theory and Evidence," Journal of Economic Perspectives, American Economic Association, vol. 18(3), pages 25-46, Summer.
- William F. Sharpe, 1964. "Capital Asset Prices: A Theory Of Market Equilibrium Under Conditions Of Risk," Journal of Finance, American Finance Association, vol. 19(3), pages 425-442, 09.
- Bhandari, Laxmi Chand, 1988. " Debt/Equity Ratio and Expected Common Stock Returns: Empirical Evidence," Journal of Finance, American Finance Association, vol. 43(2), pages 507-528, June.
- Attiya Y. Javid & Eatzaz Ahmad, 2008. "Test of Multi-moment Capital Asset Pricing Model: Evidence from Karachi Stock Exchange," PIDE-Working Papers 2008:49, Pakistan Institute of Development Economics.
- Fama, Eugene F & French, Kenneth R, 1992. " The Cross-Section of Expected Stock Returns," Journal of Finance, American Finance Association, vol. 47(2), pages 427-465, June.
- Kothari, S P & Shanken, Jay & Sloan, Richard G, 1995. " Another Look at the Cross-Section of Expected Stock Returns," Journal of Finance, American Finance Association, vol. 50(1), pages 185-224, March.
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