Abstract:
The present study is an attempt to check the empirical validity of the traditional capital
asset pricing model (CAPM) and the downside risk based capital asset pricing model
(DAPM) in the emerging equity market of Pakistan. In addition to this the present study
also aims to examine the comparative performance of both the models to determine
which model has the better explanatory power in explaining the cross section of stock
returns in the developing equity market of Pakistan. The present study uses a sample of
98 stocks listed on the Karachi Stock Exchange for a sample period of eight years
beginning from January 2004 to December 2011. Monthly data of all the stocks were
available and used for the entire sample period. The six month treasury rate announced
by the State Bank of Pakistan is considered as the risk free rate. The present study uses
the Fama & MacBeth (Fama & MacBeth 1973) methodology for the empirical analysis.
In the last step t-tests statistics are implied to check the statistical significance. The
results of the present study fails to provide any empirical support in favor of both the
traditional capital asset pricing model and the downside risk based capital asset pricing
model in the emerging equity market of Pakistan i.e. Karachi Stock Exchange (KSE).
