An Empirical Analysis of Higher Moment Capital Asset Pricing Model for Karachi Stock Exchange (KSE)

Abstract

The purpose behind this study is to explore the relationship between expected return and risk of portfolios. It is observed that standard CAPM is inappropriate, so we introduce higher moment in model. For this purpose, the study takes data of 60 listed companies of Karachi Stock Exchange 100 index. The data are inspected for the period of 1 st January 2007 to 31 st December 2013. From the empirical analysis, it is observed that the intercept term and higher moments coefficients (skewness and kurtosis) are highly significant and different from zero. When higher moment is introduced in the model, the adjusted R square is increased. The higher moment CAPM performs cooperatively perform well. Keywords Capital Assets Price Model, Higher Moment

Mean reversion in international markets: evidence from G.A.R.C.H. and half-life volatility models

“…The results of the study also demonstrate that there is a direct relation between stock returns and volatilities of the emerging and developed stock markets. These results are also consistent with previous research studies (Balsara et al, 2007;Kim et al, 2001;Lal, Mubeen, Hussain, & Zubair, 2016;Ribeiro et al, 2017;Slim et al, 2017;Trypsteen, 2017). Since the results indicate the mean reversion process in all the 12 emerging and developed markets, the returns of these markets revert back to their original past mean values after the certain time periods.…”

Speed of Mean Reversion: An Empirical Analysis of Kse, Lse and Ise Indices

“…Therefore, enabling investors to forecast future returns on the basis of their historical value helping them in earning above average returns. Thus, supporting the studies of Chen and Hsu (2016), Vveinhardt et al (2016), Chaves and Viswanathan (2016), Lal et al (2016), Chaudhuri and Wu (2003), Riaz (2014), Poterba and Summers (1987), Malliaropulos and Priestley (1996), Mustafa and Ahmed (2013), Balvers et al (2000) etc. who also found the existence of mean reversion in different stock indices of the world.…”

“…However, the implication of time-varying estimates made them reject the hypothesis, which was concluding that mean reversions are not produced due to behavioral responses of investors. Similarly, Balsara et al (2007) while evaluating Shanghai and Shenzhen markets found that these markets fail to follow random walk, further found their study to support the findings of Lal et al (2016), Wang et al (2015), Balvers et al (2000), according to which, if stocks follow mean reversion theory then investors are likely to get profit from contrarian strategy.…”

“…It is further concluded that the existence of mean reversion in particular country varies from country to country or region to region. Moreover, as highlighted in the literature the few studies conducted on this topic for the Karachi stock exchange index, which has demonstrated the existence of mean reversion (e.g., Lal et al 2016;Vveinhardt et al 2016;etc.). Therefore, this study aims to contribute to the literature by identifying the presence of mean reversion in other stock exchange indices along with determining and comparing the pace of mean reversion of the stock markets indices of Pakistan.…”

“…In addition to above studies, few researchers have tried to found the existence of mean reversion in Karachi stock exchange also. These researchers include Lal et al (2016), Vveinhardt et al (2016), Riaz (2014), Mustafa and Ahmed (2013) found that Karachi stock exchange also exhibits mean reversion process.…”