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Testing of CAPM in An Emerging Economy: A Case Study of Pakistan

Author

Listed:
  • Amir Hussain

    (Institute of Management Studies, UoP, Peshawar)

  • Zia Obaid

    (Florida State University, USA)

  • Sajid Afridi

    (State Bank of Pakistan)

Abstract

The theme of this paper is to test the validity of the Capital Asset Pricing Model of Sharpe [1964] and Lintner [1965] version which is considered as a standard Asset Pricing Model and generally performs poorly in both developed and emerging markets. For this purpose, 45 companies have been selected randomly which are listed at Karachi Stock Exchange. Their daily share price data for a period of five years have been analyzed in order to test the validity of CAPM in an emerging economy taking a case of KSE-100 index. The research finding concludes that CAPM version of Sharpe [1964] and Lintner [1965] is still one of a useful method for estimating the cost of equity capital in an emerging market as from the selected sample of forty five companies, the values of beta for thirty seven companies are found significant which proved that beta is still a useful measure of risk in an emerging market like Pakistan

Suggested Citation

  • Amir Hussain & Zia Obaid & Sajid Afridi, 2011. "Testing of CAPM in An Emerging Economy: A Case Study of Pakistan," Business & Economic Review, Institute of Management Sciences, Peshawar, Pakistan, vol. 3(2), pages 143-153, October.
    • Handle: RePEc:bec:imsber:v:3:y:2011:i:2:p:143-153
    DOI: dx.doi.org/10.22547/BER/3.2.2
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    File URL: http://imsciences.edu.pk/files/journals/Vol.%203%20No.%202%20October%202011/(2)%20Amir%20Hussain.pdf
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    References listed on IDEAS

    as
    1. Basu, Sanjoy, 1983. "The relationship between earnings' yield, market value and return for NYSE common stocks : Further evidence," Journal of Financial Economics, Elsevier, vol. 12(1), pages 129-156, June.
    2. Ehsan Ahmed & J. Barkley Rosser, Jr., 1995. "Non-linear Speculative Bubbles in the Pakistani Stock Market," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 34(1), pages 25-41.
    3. Banz, Rolf W., 1981. "The relationship between return and market value of common stocks," Journal of Financial Economics, Elsevier, vol. 9(1), pages 3-18, March.
    4. Chui, Andy C. W. & Wei, K. C. John, 1998. "Book-to-market, firm size, and the turn-of-the-year effect: Evidence from Pacific-Basin emerging markets," Pacific-Basin Finance Journal, Elsevier, vol. 6(3-4), pages 275-293, August.
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    Cited by:

    1. Imran Riaz Malik & Attaullah Shah, 2016. "Resumption of Single Stock Futures (SSFs) with Stringent Regulations and their Impact on the Risk Characteristics of the Underlying Stocks," Business & Economic Review, Institute of Management Sciences, Peshawar, Pakistan, vol. 8(2), pages 1-22, October.

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    More about this item

    Keywords

    Capital asset pricing model; emerging markets; risk; KSE-100 index;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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