Effects of Financial Risks on Portfolio Stock Returns: An Evidence from Pakistan Stock Exchange

Abstract

The present study has investigated various asset pricing models for firms listed in Pakistan Stock Exchange with a time period of eleven years from 2009 to 2019 using monthly data of firms and capital market. As Pakistan is a developing economy, present study has investigated validity of various asset pricing models in scenario of such economies. The initial sample of study has consisted of all listed firms of Pakistan Stock Exchange while after filtering firms’ final sample has become 346 listed companies using monthly data of eleven years from Jan, 2009 to Dec, 2019. Different portfolios have constructed on basis of financial distress, liquidity, size and value. Various risk factors have taken in models including financial distress, liquidity, market, size, value and momentum. Data of portfolios have investigated by using statistical tools of descriptive statistics, correlation matrix and regression. Results have shown augmented Fama-French model has best explain portfolio stock returns. Market and momentum factor have positive significant impact on all portfolios. Financial distress factor has significant impact on portfolio of financial distress. One can use different risk factors or build portfolios based on different factors model in scenario of Pakistan in future studies. Investors and portfolio managers must keep in mind stated risk factors while making any investment in portfolio or stocks.