Acomparative Empirical Investigation Of The Validity Of The Traditional Capm, The Higher Moment Capm And The Downside Risk Based Capm In The Emerging Equity Market Of Pakistan

Muhammad, Akbar (2013) Acomparative Empirical Investigation Of The Validity Of The Traditional Capm, The Higher Moment Capm And The Downside Risk Based Capm In The Emerging Equity Market Of Pakistan. Doctoral thesis, Bahria University, Islamabad.

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Abstract

Though there is plethora of asset pricing models proposed to explain the cross-section of asset returns,however, these models require ideal perfect conditions which are grossly present in developed markets of the world.The present study aims to investigate the empirical validity and comparative performance of the traditional capital asset pricing model (CAPM), the highermoment CAPM and the downside risk based CAPM in explaining the cross section of stock returns in the emerging equity market of Pakistan.Given the acclaimed theoretical supremacy of the downside risk based CAPM it is expected to perform better at explaining the cross section of stock returns in the Pakistani equity market, i.e. KSE. For empirical analysis, this study uses the Fama-MacBeth methodology (Fama & MacBeth, 1973). Accordingly a sample of 313 stocks from 30 different sectors listed on the Karachi stock exchange is used to form portfolios and the KSE100 index is used as a proxy for the market portfolio. Monthly data on all the variables was obtained over sample period July 2000 to June 2011.The six month’s Treasury bills rate is used as a proxy for the risk free rate.Time series regression and cross sectional regression techniques are used for empirical analysis in line with the Fama-MacBeth methodology.To overcome the problem of heteroskedasticity in the cross sectional regression, the models are estimated using two alternative techniques; white heteroskedasticity consistent standard errors and covariance matrix and generalized least squares (GLS). Further the traditional CAPM and the highermoment CAPM are also estimated in the conditional form using generalized autoregressive conditional heteroskedasticity (GARCH) model.The findings of the present study on the empirical validity of the traditional CAPM, the highermoment CAPM and the downside risk based CAPM are mostly mixed and inconclusive.This implies that though the downside risk based CAPM may have a stronger theoretical background however, empirically it performs no differently than the traditional CAPM and higher-moment CAPM in explaining the cross section of stock returns in the KSE. In the empirical estimation of all the models, the intercept terms has been mostly found to be statistically insignificant which evidences the absence of consistent mispricing at the KSE over the sample period.This finding is consistent with the underlying theories of the traditional CAPM, the higher-moment CAPM and the downside risk based CAPM which state the hypothesis that the intercept term should bev statistically insignificant.The findings of the study suggest that there is no statistically significant risk premium for systematic risk as defined in traditional CAPM, higher-moment CAPM and the downside risk based CAPM over the full and sub-sample periods. However, the unconditional systematic risk in the traditional CAPM has been found to positive and statistically significant over the sub-sample period of July 2007 to June 2009 using GLS as estimation technique.

Item Type: Thesis (Doctoral)
Uncontrolled Keywords: Traditional, Emerging, Acomparative, Moment, Based, Validity, Market, Risk, Investigation, Equity, Higher, Downside
Subjects: H Social Sciences > HD Industries. Land use. Labor > HD28 Management. Industrial Management
Depositing User: Muhammad Khan Khan
Date Deposited: 30 Sep 2016 12:12
Last Modified: 30 Sep 2016 12:12
URI: http://eprints.hec.gov.pk/id/eprint/1948

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