Time Varying Risk Return Relationship: Evidence from Listed Pakistani Firms

Attiya Javid

MPRA Paper from University Library of Munich, Germany

Abstract: This study empirically investigates the Fama-French three-factor model and consumption CAPM model in unconditional and conditional setting with individual stocks traded at Karachi Stock Exchange (KSE), the main equity market in Pakistan for the period 1993-2004. These extensions are in response of the empirical findings that do not support standard CAPM as a model to explain assets pricing in Pakistani equity market. The observation is that the dynamic size and book-to-market value coefficients explain the cross-section of expected returns in some sub-periods. In the second stage, the consumption risk is incorporated in standard CAPM in static and dynamic context. The findings reveal that the market rewards systematic risk for higher return, but the relevant measure for systematic risk appears to be conditional consumption beta rather than market beta. This evidence leads to investigate macroeconomic risks that can describe the variation in expected return in a more complete and meaningful way.

Keywords: Capital asset pricing model; Fama-French Three-Factor model; market risk; information set; business-cycle variables; consumption risk and market efficiency (search for similar items in EconPapers)
JEL-codes: A1 (search for similar items in EconPapers)
Date: 2008
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Citations: View citations in EconPapers (5)

Published in European Journal of Scientific Research 1.22(2008): pp. 16-39

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