Remittances Review

ISSN:2059-6588 | e-ISSN: 2059-6596

ISSN:2059-6588 | e-ISSN: 2059-6596

Testing the empirical validity of the CAPM, Higher order moment CAPM and the downside risk based CAPM for Pakistan Stock exchange

Syed Aziz Rasool , Muhammad Ali Khan


There is plethora of asset pricing models proposed to explain the asset returns; however, the popularity gained by Capital Asset Pricing Model (CAPM) is unique when we compare it to the other rival asset pricing models. The present study aims to investigate the empirical validity and comparative performance of the three versions of the CAPM unconditional settings for Pakistan’s emerging stock market. For empirical analysis study uses the Fama-MacBeth methodology (Fama & MacBeth, 1973). Accordingly, a sample of 550 stocks is chosen. Selected sample represents all sectors listed at the concerned stock exchanges. Monthly data on all the variables was obtained over sample period January 2018 to December 2023. Market indices were used as a proxy for market returns and the Treasury bills (T-Bill) rate is used as a substitute for risk free rate. Lagged macroeconomic variables, mostly containing business cycle information, are used for conditioning information. The information set includes the first lag of the following business cycle variables: market return, call money rate, term structure, inflation rate and growth in oil prices. Time series and cross section regressions were used in line with the Fama-MacBeth methodology. To overcome the problem of heteroskedasticity Generalized Least Squares (GLS) method is used. Based on the main findings of this study, it is concluded that the content is missing evidence to validate traditional CAPM, the higher moment CAPM and the D-CAPM.