TWO-PASS MODEL OF CAPM: EVIDENCE FROM PAKISTAN STOCK EXCHANGE

  • Ruqia Shaikh
  • Dr. Sarfaraz Ahmed Shaikh
  • Muhammad Usman
Keywords: Capital Asset Price Modelling, CAPM, Stock Returns, Pakistan Stock Exchange (PSX), Idiosyncratic Risk

Abstract

This research study analyzes the variation in monthly returns of securities for companies listed in Pakistan Stock Exchange-PSX (Formerly known as KSE). The Capital Asset Pricing Model (CAPM) of SLB has provided a method for researchers and experts to forecast the risks and returns. The main purpose of CAPM is to estimate beta of security to explain how much security is aligned or sensitive with the movement or changes in the market return. The research is conducted by means of monthly market capitalization of companies; portfolios are formed and the role of idiosyncratic risk in explaining the variations in the stock returns have been studied. With the same portfolios, the relationship of risk and return relationship has also been analyzed. This empirical analysis is conducted for the period of May 2010 - April 2014. Data analysis reveal that the idiosyncratic risk is a significant factor in explaining the stock returns. Capital Asset Pricing model is rejected in this study context because of positive and significant intercept in all portfolios. The research findings strongly support Chan and Chui (1996) and Strong and Xu (1997),assertions that the relationship between beta and security returns is weak. Therefore, CAPM is an empirically anemic model to be used in the Pakistani market.

Author Biographies

Ruqia Shaikh

Ruqia Shaikh is an enthusiastic researcher pursuing her Ph.D. at Zhongnan University of Economics and Law, Wuhan, China. She can be contacted through email at ruqia111@outlook.com

Dr. Sarfaraz Ahmed Shaikh

Dr. Sarfaraz Ahmed shaikh is an eminent scholar currently working as Associate Professor and Head of the Department of Business Administration at the Newports Institute of Communication and Economics, Karachi. Dr. Sarfaraz has published many research papers and has a vast experience of research in Finance and Economics. He can be reached at sarfarazz.ahmed@gmail.com

Muhammad Usman

Muhammad Usman is a passionate researcher and a Ph.D. Scholar at the Zhongnan University of Economics and Law, Wuhan, China. His email address is usmanzuel@yahoo.com

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Published
2018-12-15
How to Cite
Shaikh, R., Shaikh, D. S., & Usman, M. (2018). TWO-PASS MODEL OF CAPM: EVIDENCE FROM PAKISTAN STOCK EXCHANGE. Journal of Business Strategies, 12(2), 125-144. Retrieved from http://greenwichjournals.com/index.php/businessstudies/article/view/345