Size premium, value premium and market timing: evidence from an emerging economy

Abstract

Purpose This study aims to investigate the market timing strategy in different market conditions (i.e. up, down, normal and in-financial-crisis situation) in the emerging market of Pakistan over the period 1995 to 2015. Furthermore, this study tests the validity of the capital asset pricing model (CAPM) and Fama and French model. Design/methodology/approach This study considers monthly stock returns of 167 firms and constructs six different portfolios on the basis of different size and book to market ratio. The Treynor and Mazuy model is used to capture the market timing strategy. Findings The results indicate evidence of the market timing in normal market conditions. However, there is less supportive evidence of market timing in up-market, down-market and in-financial-crisis situations. This study also confirms the validity of the capital asset pricing model and Fama and French three-factor model with strong support of value premium and size premium in the stock market. Practical implications The findings of this study are helpful to companies in estimating the cost of issuing equity more accurately. The investors can use market timing to make their investment in a more better and profitable manner. Originality/value Unlike other previous studies, this study considers an extended period to test the validity of the capital asset pricing model and Fama and French model. In addition, this study is novel in testing the marketing timing of the firms in the context of emerging economy of Pakistan.

Human capital-based four-factor asset pricing model: An empirical study from Pakistan

“…Similar findings were report by Ref. [ 75 ], that in Pakistani equity market, small-size portfolio returns are higher than returns of large-size portfolios. Although [ 1 ], conclude that in the context of India, earlier studies mainly ignore the human capital to include in models (asset-pricing).…”

Pakistan: a study of market's returns and anomalies

“…Cheung et al (2015), for example, reported size and value premiums in the Chinese market, Rugwiro and Choi (2019), for the Korean market and Aziz and Ansari (2014) confirmed the same for the Indian market. Mirza and Shahid (2008) conducted the earliest study testing the FF three-factor model in Pakistan and confirmed significant size and value premiums that is confirmed by Rashid et al (2018). However, Haque and Sarwar (2013) found an insignificant size effect and a significant but negative BM effect.…”

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