Quantile Methods for Testing the Applicability of CAPM and FF-Model in Pakistan

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. R...

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Bibliographic Details
Published inGlobal management journal for academic & corporate studies Vol. 6; no. 2; p. 100
Main Authors Shoaib, Adnan, Siddiqui, Muhammad Ayub
Format Journal Article
LanguageEnglish
Published Karachi Bahria University 01.01.2016
Subjects
Capital assets
Capital markets
Data models
Economic models
Efficiency
Efficient markets
Investments
Macroeconomics
New stock market listings
Rates of return
Regression analysis
Risk premiums
Securities markets
Stock exchanges
Studies
Time series
Trends
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Summary: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.
ISSN:2219-6145
2305-0756