A Comparison of Competing Asset Pricing Models: Empirical Evidence from Pakistan
In recent years, the rapid and significant development of emerging markets has globally led to insight from potential investors and academicians seeking to assess these markets in terms of risk inheritance. Therefore, this study aims to explore the validity and applicability of the capital asset pri...
| Main Authors: | , , , , |
|---|---|
| Format: | Article |
| Language: | English |
| Published: |
MDPI AG
2023-03-01
|
| Series: | Risks |
| Subjects: | |
| Online Access: | https://www.mdpi.com/2227-9091/11/4/65 |
| _version_ | 1797603554667528192 |
|---|---|
| author | Eleftherios Thalassinos Naveed Khan Shakeel Ahmed Hassan Zada Anjum Ihsan |
| author_facet | Eleftherios Thalassinos Naveed Khan Shakeel Ahmed Hassan Zada Anjum Ihsan |
| author_sort | Eleftherios Thalassinos |
| collection | DOAJ |
| description | In recent years, the rapid and significant development of emerging markets has globally led to insight from potential investors and academicians seeking to assess these markets in terms of risk inheritance. Therefore, this study aims to explore the validity and applicability of the capital asset pricing model (henceforth CAPM) and multi-factor models, namely Fama–French models, in Pakistan’s stock market for the period of June 2010–June 2020. This study collects data on 173 non-financial firms listed on the Pakistan stock exchange, namely the KSE-100 index, and follows Fama-MacBeth’s regression methodology for empirical estimation. The empirical findings of this study conclude that small portfolios (small-size companies) earn considerably higher returns than big portfolios (large-size companies). Ultimately, the risk associated with portfolio returns is reported to be higher for small portfolios (small-size companies) than for big portfolios (large-size companies). According to the regression output, the CAPM was found to be valid for explaining the market risk premium above the risk-free rate. Similarly, the FF three-factor model was found to be valid for explaining time-series variation in excess portfolio returns. Later, we added human capital into FF three- and five-factor models. This study found that the human capital base six-factor model outperformed the other competing asset pricing models. The findings of this study indicate that small portfolios (small-size companies) earn more returns than big portfolios (large-size companies) to reward the investor for taking extra risks. Investors may benefit by timing their investments to maximize stock returns. Company investment in human capital adds reliable information, replicates the value of the company and, in the long term, helps investors make rational decisions. |
| first_indexed | 2024-03-11T04:33:42Z |
| format | Article |
| id | doaj.art-18b1462beb7a4b28a48c9ca96972dc5e |
| institution | Directory Open Access Journal |
| issn | 2227-9091 |
| language | English |
| last_indexed | 2024-03-11T04:33:42Z |
| publishDate | 2023-03-01 |
| publisher | MDPI AG |
| record_format | Article |
| series | Risks |
| spelling | doaj.art-18b1462beb7a4b28a48c9ca96972dc5e2023-11-17T21:13:52ZengMDPI AGRisks2227-90912023-03-011146510.3390/risks11040065A Comparison of Competing Asset Pricing Models: Empirical Evidence from PakistanEleftherios Thalassinos0Naveed Khan1Shakeel Ahmed2Hassan Zada3Anjum Ihsan4Department of Maritime Studies, Faculty of Maritime and Industrial Studies, University of Piraeus, 185-33 Piraeus, GreeceDepartment of Management Sciences, Hitec University, Taxila 47080, PakistanDepartment of Management Sciences, Hitec University, Taxila 47080, PakistanDepartment of Management Sciences, Shaheed Zulfikar Ali Bhutto Institute of Science and Technology, Islamabad 44000, PakistanDepartment of Management Sciences, Islamia College University, Peshawar 25120, PakistanIn recent years, the rapid and significant development of emerging markets has globally led to insight from potential investors and academicians seeking to assess these markets in terms of risk inheritance. Therefore, this study aims to explore the validity and applicability of the capital asset pricing model (henceforth CAPM) and multi-factor models, namely Fama–French models, in Pakistan’s stock market for the period of June 2010–June 2020. This study collects data on 173 non-financial firms listed on the Pakistan stock exchange, namely the KSE-100 index, and follows Fama-MacBeth’s regression methodology for empirical estimation. The empirical findings of this study conclude that small portfolios (small-size companies) earn considerably higher returns than big portfolios (large-size companies). Ultimately, the risk associated with portfolio returns is reported to be higher for small portfolios (small-size companies) than for big portfolios (large-size companies). According to the regression output, the CAPM was found to be valid for explaining the market risk premium above the risk-free rate. Similarly, the FF three-factor model was found to be valid for explaining time-series variation in excess portfolio returns. Later, we added human capital into FF three- and five-factor models. This study found that the human capital base six-factor model outperformed the other competing asset pricing models. The findings of this study indicate that small portfolios (small-size companies) earn more returns than big portfolios (large-size companies) to reward the investor for taking extra risks. Investors may benefit by timing their investments to maximize stock returns. Company investment in human capital adds reliable information, replicates the value of the company and, in the long term, helps investors make rational decisions.https://www.mdpi.com/2227-9091/11/4/65capital asset pricing modelFama–French modelshuman capitalKarachi stock exchange |
| spellingShingle | Eleftherios Thalassinos Naveed Khan Shakeel Ahmed Hassan Zada Anjum Ihsan A Comparison of Competing Asset Pricing Models: Empirical Evidence from Pakistan Risks capital asset pricing model Fama–French models human capital Karachi stock exchange |
| title | A Comparison of Competing Asset Pricing Models: Empirical Evidence from Pakistan |
| title_full | A Comparison of Competing Asset Pricing Models: Empirical Evidence from Pakistan |
| title_fullStr | A Comparison of Competing Asset Pricing Models: Empirical Evidence from Pakistan |
| title_full_unstemmed | A Comparison of Competing Asset Pricing Models: Empirical Evidence from Pakistan |
| title_short | A Comparison of Competing Asset Pricing Models: Empirical Evidence from Pakistan |
| title_sort | comparison of competing asset pricing models empirical evidence from pakistan |
| topic | capital asset pricing model Fama–French models human capital Karachi stock exchange |
| url | https://www.mdpi.com/2227-9091/11/4/65 |
| work_keys_str_mv | AT eleftheriosthalassinos acomparisonofcompetingassetpricingmodelsempiricalevidencefrompakistan AT naveedkhan acomparisonofcompetingassetpricingmodelsempiricalevidencefrompakistan AT shakeelahmed acomparisonofcompetingassetpricingmodelsempiricalevidencefrompakistan AT hassanzada acomparisonofcompetingassetpricingmodelsempiricalevidencefrompakistan AT anjumihsan acomparisonofcompetingassetpricingmodelsempiricalevidencefrompakistan AT eleftheriosthalassinos comparisonofcompetingassetpricingmodelsempiricalevidencefrompakistan AT naveedkhan comparisonofcompetingassetpricingmodelsempiricalevidencefrompakistan AT shakeelahmed comparisonofcompetingassetpricingmodelsempiricalevidencefrompakistan AT hassanzada comparisonofcompetingassetpricingmodelsempiricalevidencefrompakistan AT anjumihsan comparisonofcompetingassetpricingmodelsempiricalevidencefrompakistan |