The Applicability of Four Moments in the Carhart Model in Pakistan: The Case study of the Karachi Stock Exchange

Abstract

One of the major challenges in modern finance is to measure risk in context to stock market which is one of the essential key topics for the regulators and investors in the recent times yet, there is controversy of what risk factors need to be used in order to determine the cost of capital. Besides, stock market has a major role in the economic development of any country. As a result, to understand the factors that affect the stock market returns in Pakistan .The sensitivity of returns of assets were compared with equity market value i.e. size , market returns or beta , ratio of book to market value ,also known as value and returns of stock for the short term interval or momentum . In the recent research paper it attempts to eradicate any ambiguity in all the variables taken on hand. Sample consists of monthly stock returns and trade volume from Karachi Stock Exchange all sectors, though the data sample consists of 102 firms listed on the Karachi Stock Exchange. The (KSE102) top companies from January 2005 to December 2012 for a eight year period are gathered by secondary means.KSE102 comprises of companies from all industrial segment of Pakistan, which eradicates old-fashioned approach in estimating data. Least Squares (OLS) is used to help investors understand the relationship. As an ending result, we came to know that all of the variables had a significant effect on returns which is delightful news as how they have an influence over Pakistani market. This is further clarified by the historical data affiliation had been dependent on time and data sample. Thus, the study will give an insight view of the empirical study of the four factors of Carhart model in Pakistan and the significance of results with the sample on hand.