Asset Pricing Puzzles: A Comparison of India and Pakistan

Abstract

This study spotlights the price fluctuations between risk-factors and portfolio returns, which motivates the study to scrutinize multifactor asset pricing models in India and Pakistan equity markets during January 2003 to December 2022. The study sample included monthly data from 250 non-financial enrolled enterprises in each market. The data was evaluated using the time-series Ordinary Least Square regression estimate approach.

We find that the market-factor performs a significant contribution independently, though augmenting the liquidity-factor, which resultantly enhances an insignificant and tenuous impact in the Pakistan equity market. Meanwhile, the investment-factor shows an insignificant contribution independently, though augmenting the liquidity-factor, which resultantly enhances the impact positively in the Indian equity market. Moreover, the value-factor is not redundant for both markets.

However, based on the absolute mean alpha test, the four-factor model for the Indian equity market, and the seven-factor model for the Pakistani equity market, outperform other asset pricing models.