Capm Application in an Emerging Market: A case of Pakistan

Abstract

The CAPM conveys the notion that securities are priced so that the expected returns will compensate investors for the expected risks. This research paper shows the applicability of CAPM in explaining and predicting variations in Karachi Stock Exchange-100 index stock returns for the time period of January 2004 to October 2007. This study accounts for the intervalling effect by using three data frequencies i.e. daily, weekly and monthly data. This research has two perspectives; Qualitative survey and Quantitative analysis. The survey evaluated that the brokerage houses, heavy investors and CEOs and managers of financial institution don’t believe in the authenticity of CAPM, due to the black holes it has in its literature, and that CAPM is not applicable on KSE. The Quantitative analysis is based on the Sharp-Lintner-Black version of CAPM. It concludes that, unlike earlier studies on emerging markets, and especially Asian Emerging markets, the premium for beta risk has the expected signs, i.e., if the beta is positive, there is more significance in CAPM returns. It is due to the market performance, consumer sentiment, backed by the high level of liquidity and trading activity in recent years