Asset Pricing and Stylized Facts for a Multi-Factor World: A Model beyond Conventional Anomalies.
This dissertation is aimed to provide an insight about analysing and testing various asset pricing anomalies in stock returns which either are un-addressed or not yet well explained in the existing asset pricing literature. Moreover, two-pass regression methodology is used to explore the relationship between equity returns, market premium, size premium, value premium, institutional ownership premium, quality of financial reporting premium and liquidity premium for the period June 2002 to June 2012 by using data of 189 companies listed at Karachi Stock Exchange (KSE).
The findings provide an insight to develop a new theoretical framework and give fresh perspective into the puzzling empirical linkages documented in the existing literature between equity market returns and firm-specific-characteristics, such as size, value, ownership structure, financial reporting quality, and liquidity. The results suggest that Fama and French three-factor model (1992) produces significant loadings when tested for Pakistan’s equity market and is helpful in explaining portfolio returns but the explanatory is lower as compared to the four-, five-, and, six factor models. Likewise, the four factor model based on institutional ownership concentration further explains the relationship between equity returns and risk factors. The suggested five factor and six factor models based on the quality of financial reporting and liquidity premium are also found equally good in explaining asset returns. On the contrary, results indicate that the above cited models failed to explain the relationship between future returns and factor betas in second pass regression indicating, models’ invalidity for testing period. Further, two approaches are used for testing asset pricing models i.e. time-series regression (TSR) & cross-sectional regression (CSR) to check the robustness. The results of both approaches are found consistent.
The study also tests the model in two extreme economic regimes named as bull and bear in finance literature. The findings of bull and bear market test give same results in two economic regimes. The results imply that institutional ownership concentration increases information availability and the findings are in line with monitoring hypothesis that states that institutional investors create value by effective monitoring that ultimately translates into equity market returns. In addition, quality financial reporting helps to improve information environment and is an important consideration for investors while making their investment decisions. Moreover, liquidity premium has been found as a critical factor in explaining asset returns and excess returns account for liquidity premium. The study reports that significant market, size, value, ownership, quality of financial reporting and liquidity premium exists for stocks traded at Karachi Stock Exchange.