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Quantile Methods for Testing the Applicability of CAPM and FF-Model in Pakistan
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Quantile Methods for Testing the Applicability of CAPM and FF-Model in Pakistan
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Journal Article
Quantile Methods for Testing the Applicability of CAPM and FF-Model in Pakistan
2016
Overview
Applicability of the invaluable financial models of CAPM and Fama-French has been tested in Pakistan for an extended period of 2001-2010 employing monthly data in panel data models and quantile regression analysis. Findings of the study are useful for the investors, policy makers and academicians. Results of the quantile regression outperform panel data models in supporting the FF-model for KSE listed companies. Findings of the study support Connor and Sehgal (2001) perhaps due to the similar historical perspective of India and Pakistan. The results reveal linear exposure of stock returns and risk premium to market, size and value factors explaining the cross-sectional variations in the stock returns. Findings of the study also support Brien (2008) that SMB and HML augment ability of the two models in explaining the expected returns. Significant findings of the study may be attributed to the extended data set, natural randomness of the companies for the period of 2001-2010, and efficient methods employed in the present study. One of the objectives of the study was exploring significance of the Fama and French model for Pakistani corporate culture and secondary market environment. Findings of the study endorse applicability of FF-model in Pakistani context. Particularly, findings support FF-model and its significance in the long run. An efficient calculation of required rate of return is recommended using the CAPM and FF-model. In this perspective, findings of the present study support efficient market hypothesis (EMH), positively relating the principle of high risk with high returns. Evidence of risk-return relationship elucidated by FF-model might be very useful for medium and long term investors.
Publisher
Bahria University
Subject
