Quality minus junk factor: A study on asset pricing dynamics in the equity market of Pakistan

ShahrBano, Sumayya Chughtai () and Tahira Awan
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ShahrBano: International Islamic University-Pakistan
Sumayya Chughtai: International Islamic University-Pakistan
Tahira Awan: International Islamic University-Pakistan

Business Review, 2020, vol. 15, issue 2, 27-50

Abstract: This study examines the role of quality minus junk factor in explaining cross-sectional differences in stock returns for the equity market of Pakistan. A new factor quality minus junk has been added to the existing Fama & French three factor model (1993) as a fourth factor to check whether it is priced as a risk factor. The study also compares the explanatory power of the newly proposed model with the existing single-factor Capital Asset Pricing Model (CAPM) and Fama & French three factor model (1993). A high quality data set of 70 nonfinancial firms listed on the PSX is employed as a sample for the period 2008- 2016. Results show that quality minus junk factor is priced in the equity market of Pakistan and this newly proposed four factor model has significantly higher explanatory power than the existing three factor model.

Keywords: Asset; pricing; ·; Quality; minus; junk; factor; ·; Capital; asset; pricing; model; ·; Fama; &; French; three; factor; model (search for similar items in EconPapers)
Date: 2020
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Persistent link: https://EconPapers.repec.org/RePEc:aho:journl:v:15:y:2019:i:2:p:27-50

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