Industry Risk Premia in Pakistan

Mohammed Nishat
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Mohammed Nishat: Institute of Business Administration, University of Karachi, Karachi.

The Pakistan Development Review, 2001, vol. 40, issue 4, 929-949

Abstract: Industry characteristics is one of the main factors that determines a firm’s business risk [Kale, Hakansson, and Platt (1991)], and a single information can affect more than one security price change, perhaps even the whole market. Lessard (1974, 1976) explains that industry plays an important role in explaining national market volatility. One of the reasons for stock index behaviour are attributed to industrial composition as some industries are internally more volatile than the other [Grinold, Rudd, and Stefek (1989)]. Moreover, some sectors show a high degree of global integration, for example, the finance sector [Roll (1992)]. Similarly, consumer goods, fuel and energy, and transportation sectors are extremely important for any country index. King (1966) suggests that if a significant difference in industry risk premia is observed, then we need to isolate the market risk premia and industry risk premia. He observed that the industry components of variance showed much less change from sub-period to sub-period. Significant differential impact of regulatory policy on cost of capital across various sectors was also observed [Isimbabi (1994); Prager (1989)]. The industry specific policies in Pakistan are observed either as a part of the reform package during 1988 and early 1990s, or as an additional policy measure to further boost the private investments in priority sectors. These policies included incentives for foreign investment through permission for repatriation of profits, the easing of investment and banking sector regulations and easy access to loans and tax exemptions on priority sectors like power, exports and agriculture based industries. In addition, the government encouraged equity participation to avoid instability through growing leverage.

Date: 2001
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