An empirical investigation of Tobin’s-Q augmented various Asset Pricing Models: Evidence from Pakistan

Abstract

Despite the strong growing popularity of Asset Pricing Models, it is difficult to estimate which factor contributes significantly in explaining average excess portfolio returns particularly in emerging equity market. Using an extensive sample over Jan-1994-Dec-2020 period, this paper aims to extend the literature by augmenting Tobin-Q adjusted risk premium with various unconditional standard asset pricing models which seeks to postulate the nexus between expected portfolios stock returns and risk-factors using monthly data of 521 enlisted financial and non-financial firms from Pakistan Stock Exchange. The multiple time-series OLS regression analysis models are employed to analyze Tobin-q risk-factor augmented with various factors models. Fama and French (2015) five-factor model excessively explains average equity returns however, our results reveal that size, value, profitability and particularly Tobin-q factor are significant while market and investment factor are redundant in Pakistan Stock Exchange. The momentum factor shows weak results in describing average equity returns in the market. Based on Gibbons, Ross and Shanken (1989) test, our findings support Tobin-Q augmented Fama and French (2015) five-factor model as appropriate for pricing stocks returns in emerging market of Pakistan. The investors, portfolio managers and policy-makers should assume the Tobin-q factor while constructing diversified portfolios for investments in Pakistan Stock Exchange

Fama and French (2015) five-factor model using SEM with a Mediating Role of Liquidity: Evidence from Pakistan

“…The results demonstrate that CAPM failed to forecast expected returns, leading to its discovery as redundant and a mispriced risk-factor, which is consistent with recent studies such as (Hasler, & Martineau, 2022;Azam, 2021;2022c;Lohano & Kashif, 2018;Urooj & Shah, 2016). To infer, the monthly returns based on SEM framework show poor CAPM findings in PSX.…”

“…On the other hand, the market risk premium exhibits statistically insignificant relationship with portfolio stock returns except one portfolio SBM6 (-0.0488) which shows significant coefficient. The market-factor show mix results in terms of magnitude, three positive (SBM1, SBM4, SBM5) and three negative (SBM2, SBM3, SBM6) which demonstrates inconsistent with the findings of (Azam, 2022c). For all portfolios, the size-factor produces highly statistically significant findings.…”

Unveiling the black swan of the Inflation-Adjusted Real Excess Returns-Risk Nexus: Evidence from Pakistan

“…Before making a decision, potential investors are provided further information about the PSX investment patterns backed up by real-world data. The future potential studies in the similar discipline may be feasible if they investigate Covid-19 era as suggested by (Azam & Azeem, 2021); augmenting Human-Capital as additional factor with nested APMs as suggested by (Azam, 2022a); using GDP-Growth as macroeconomic additional mediating variable proposed by (Azam & Naveed, 2021); recently used Tobin-q as additional factor augmented with APMs advocated by (Azam, 2022b); using Leverage as added factor for further robustness of results as recommended by (Azam & Ilyas, 2011) in their studies. Moreover, employing developed and datasets from different nations, it is feasible to use macroeconomic variables and a variety of statistical and econometrical approaches for further robustness.…”

Tobin-Q, Liquidity and Momentum risk-premia: A Demonstration of Weighted Least Squares Regression Approach

“…The q-ratio is used to measure the efficiency of a firm's investment decisions, and to measure the relative value of a company's stock. The q-ratio can also be used to compare the relative value of different companies in the same industry (Tobin-q, 1969;Azam, 2022c).…”