Exploring the Volatile Behavior of Stock Prices in Pakistan: An Industry-Level Analysis

Abstract

This study uses daily stock price data from the non-financial sector from 2006 to 2020 to assess the effect of institutional development on the industry risk premia of the Pakistan Stock Exchange (PSX). The main objective is to look into how industry risk premia behave stochastically following institutional development and changes to regulatory policies in the Pakistan Stock Market. The GARCH-M framework has been employed to capture time-varying risk premia, while Carhart’s four-factor model is used to detect risk premia. The Four-Factor asset pricing model's results show notable momentum premium in addition to market, size, and value effects in the PSX. A strong relationship has been observed using the GARCH-M framework between industry returns and risk. There is a considerable amount of fluctuation in the expected returns across different industries. The Pakistan Stock Exchange likewise exhibits the non-synchronous trading effect and persistent industry return volatility. The dummy variable's coefficient appears to be highly significant across a variety of industry portfolios, demonstrating the PSX's strong impact from institutional advancements and changes in regulatory policy.