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Abstract:
The current study evaluates the performance of Fama and French Three Factor model in Karachi Stock Exchange. We employed multivariate regression approach after sorting six portfolios on size and book to market. The constituent stocks were selected to represent each and every sector of KSE. Daily returns were employed for a period of five years starting from January 2003 to December 2007. The six month Pakistan's T Bill yield was used as proxy for risk free rate to determine excess returns. The excess returns for each portfolio were regressed on market, size and value factors. The results were encouraging for the three factor model. The three factor model was able to explain the variations in returns for most of the portfolios and the results remain consistent when the sample was reduced to control for size effect. Our findings are consistent with most of the studies that suggested the validity of three factor model in emerging markets.

Size and Value Premium, CAPM, Asset Pricing. Emerging Stock Markets, Karachi Stock Exchange

Abstract:
The fair price of a stock represents discounted claims on the future profitability of a firm. If markets are perfect, prevailing price level should exhibit a stable relationship with these claims. Dividends are a medium to share firm's profits with shareholders and consequently they form an integral input for most of the valuation models. Such valuation models warrant a long run relation between stock prices and dividends and a divergence of prices from related dividends is a possible indication of a speculative bubble. Karachi Stock Exchange has witnessed a tremendous growth during the last decade. This paper analyzes the presence of a speculative component in the extra ordinary upsurge in the leading stock exchange of Pakistan. We implement cointegration tests, between 1997 and 2008, on price and dividends of various market level indices including KSE 100, FTSE Pakistan, DataStream Pakistan and sector indices of DataStream Bank, DataStream Oil and Gas, DataStream Telecom and DataStream Tobacco. Based on the results from unit root and cointegration, we could not reject a no bubble hypothesis for the sample period for the market level index. The Banking sector also depicted a speculative component, however, the price level of Oil and Gas sector did not diverge from the related dividends.

Karachi Stock Exchange, Speculative Bubbles, Dividend Discount Model, Cointegration, Unit Root, Dividend Yield

Abstract:
This study evaluates the systematic risk of banking stocks in three geographic regions namely United States, Western Europe and East Asia. In order to account for the South East Asian Crisis we divided our sample into pre crisis and post crisis periods. The results reveal that banking stocks of East Asia are most sensitive to market risk. The Western Europe stocks are relatively less risky followed by the banking stocks of United States.

systematic risk, banking stocks, sleeping stocks

Abstract:
Banking firms exhibit unique business and financial dynamics that are priced in their stock returns. This paper compares traditional empirical asset pricing models on portfolio of banking firms from fourteen European countries and proposes some additional risk factors. We compared a single factor CAPM with three factors Fama and French model on exchange rate adjusted returns and found substantial support for firm specific factors of size and value, while there was no evidence of CAPM specific market premium for portfolios sorted on size and book to market. We extend the three factor model by including some macro variables including yield curve (term factor), innovations to yield curve and risk free rate. Due to interest rate sensitive firm characteristics, these factors are expected to be priced in stock returns and our subsequent results demonstrated significant improvement in explained variation. Lastly, we propose that asset quality premium (proportion of non-performing loans to total advances and measured as GMB - good minus bad) constitutes an important asset pricing factor for banking stocks. The portfolios sorted on size and asset quality explained the maximum variation in returns depicting asset quality as a critical investment factor for banking stocks. The results remained robust with inclusion of term factor and innovations in term and risk free rate. These results have considerable implications for investment appraisals, cost of capital and risk management in financial stocks.

Asset Pricing, Banking Stocks, Size Premium, Value Premium, Asset Quality.