Asset Pricing Model Conditional on Up and Down Market for Emerging Market: The Case of Pakistan

Abstract

This study proposes an asset pricing model conditional on up and down market for emerging market and tests its validity in Pakistan on individual stocks of Karachi Stock Exchange from July 2004 to December 2012. The basic capital asset pricing model is also tested. The results indicate that when emerging market undergoes negative market excess return, basic capital asset pricing model is inaccurate to predict stock returns. Although the conditional asset pricing model accurately predicts the risk-return trade off with beta as sole determinant of stock returns when there is up market, however yet it is significantly variant during down market where significant impact of residuals is evinced on stock returns.  The market excess returns of up and down markets are also found asymmetric. The study implies that conditional asset pricing model can be an adequate technique for investors and portfolio managers considering investments in emerging markets.

Keywords: Asset Pricing Model, Conditional, Pakistan, Emerging Market, Up Market, Down Market.

JEL Codes: C21, C22, G10, G12, G17