Value Investment Strategies and Asset Pricing: A Case of Pakistan Stock Exchange (PSX)
DOI:
https://doi.org/10.31384/jisrmsse/2021.19.1.3Keywords:
Value Investment, Stock market, Anomaly, Asset Pricing, CAPM, PSXAbstract
The Capital Asset Pricing Model (CAPM) measures only a linear relationship between the Risk and the Return. However, market dynamics and anomalies calls for understanding the relationship in between risk and return from non-linear perspective. Thus, current study explores an opportunity to study asset value anomalies by Constructing Decile Portfolio for the period starting from 2001 to 2018 with 900 firms listed. GMM (Generalized method of moment and Wald test are applied to see the robustness of results. For further analysis, Risk Adjusted CAPM, Fama French 3 Factor (FF3) and 5 Factor (FF5) are applied. Empirical results indicate that value effect and debt to equity ratio are essential factors and genuinely explain what CAPM fails to explain. The findings from the study recommend that investing in High value and high leverage firm will generate abnormal returns to investors. Taking long position in high value firm and short position in low value firms and same with debt to equity anomaly. The results will help financial analyst develop investment strategies for well diversified and efficient portfolios. These results can also be helpful to financial firm and security analyst in the financial market where they can take appropriate capital budget decisions while investing.
Downloads
References
Ahmed, M., Mahmood, A. N., & Islam, M. R. (2016). A survey of anomaly detection techniques in financial domain. Future Generation Computer Systems, 55, 278-288. https://doi.org/10.1016/j.future.2015.01.001 DOI: https://doi.org/10.1016/j.future.2015.01.001
Al-Horani, A., Pope, P. F., & Stark, A. W. (2003). Research and development activity and expected returns in the United Kingdom. Review of Finance, 7(1), 27-46. https://doi.org/10.1023/a:1022504029943. DOI: https://doi.org/10.1023/A:1022504029943
Allen, F., & Michaely, R. (1995). Dividend policy. Handbooks in operations research and management science, 9, 793-837. https://doi.org/10.1016/s0927-0507(05)80069-6. DOI: https://doi.org/10.1016/S0927-0507(05)80069-6
Arslan, M., Zaman, R., & Phil, M. (2014). Impact of dividend yield and price earnings ratio on stock returns: A study non-financial listed firms of Pakistan. Research Journal of Finance and Accounting, 5(19), 68-74. https://doi.org/10.7176/rjfa/10-22-03. DOI: https://doi.org/10.7176/RJFA/10-22-03
Ball, R. (1978). Anomalies in relationships between securities’ yields and yield-surrogates. Journal of financial economics, 6(2-3), 103-126. https://doi.org/10.1016/0304-405x(78)90026-0. DOI: https://doi.org/10.1016/0304-405X(78)90026-0
Banz, R. W. (1981). The relationship between return and market value of common stocks. Journal of financial economics, 9(1), 3-18. https://doi.org/10.1016/0304-405x(81)90018-0. DOI: https://doi.org/10.1016/0304-405X(81)90018-0
Basu, S. (1983). The relationship between earnings’ yield, market value and return for NYSE common stocks: Further evidence. Journal of financial economics, 12(1), 129-156. https://doi.org/10.1016/0304-405x(83)90031-4. DOI: https://doi.org/10.1016/0304-405X(83)90031-4
Bhandari, L. C. (1988). Debt/equity ratio and expected common stock returns: Empirical evidence. The journal of finance, 43(2), 507-528. https://doi.org/10.1111/j.1540-6261.1988.tb03952.x. DOI: https://doi.org/10.1111/j.1540-6261.1988.tb03952.x
Brennan, M. J. (1970). Investor taxes, market equilibrium and corporate finance (Doctoral dissertation, Massachusetts Institute of Technology) https://doi.org/10.1086/ntj41792223. Brigham, E. F., & Houston, J. F. (2021). Fundamentals of financial management. Cengage Learning. https://doi.org/10.2307/2327254. DOI: https://doi.org/10.2307/2327254
Camba Jr, A. C. (2020). Capturing the short-run and long-run causal behavior of Philippine stock market volatility under vector error correction environment. The Journal of Asian Finance, Economics and Business, 7(8), 41-49. https://doi.org/10.13106/jafeb.2020.vol7.qno8.041. DOI: https://doi.org/10.13106/jafeb.2020.vol7.no8.041
Campbell, J. Y., Lo, A., & MacKinlay, C. (1997). The econometrics of financial markets princeton University press Princeton. New Jersey: MacKinlay. https://doi.org/10.1515/9781400830213. DOI: https://doi.org/10.1515/9781400830213
Carhart, M. M. (1997). On persistence in mutual fund performance. The Journal of finance, 52(1), 57-82. https://doi.org/10.1111/j.1540-6261.1997.tb03808.x. DOI: https://doi.org/10.1111/j.1540-6261.1997.tb03808.x
Chan, K. C., & Chen, N. F. (1991). Structural and return characteristics of small and large firms. The Journal of Finance, 46(4), 1467-1484. https://doi.org/10.1111/j.1540-6261.1991.tb04626.x. DOI: https://doi.org/10.1111/j.1540-6261.1991.tb04626.x
Chordia, T., Goyal, A., Nozawa, Y., Subrahmanyam, A., & Tong, Q. (2017). Are capital market anomalies common to equity and corporate bond markets? An empirical investigation. Journal of Financial and Quantitative Analysis, 52(4), 1301-1342. https://doi.org/10.1017/s0022109017000515. DOI: https://doi.org/10.1017/S0022109017000515
Christie, W. G. (1990). Dividend yield and expected returns: The zero-dividend puzzle. Journal of Financial Economics, 28(1-2), 95-125 https://doi.org/10.1016/0304-405x(90)90049-6. DOI: https://doi.org/10.1016/0304-405X(90)90049-6
Close, L., & Kashef, R. (2020). Combining artificial immune system and clustering analysis: A stock market anomaly detection model. Journal of Intelligent Learning Systems and Applications, 12(04), 83. https://doi.org/10.4236/jilsa.2020.124005. DOI: https://doi.org/10.4236/jilsa.2020.124005
Connor, G., & Sehgal, S. (2001). Tests of the Fama and French Model in India, London School of Economics and Political Science. LSE Library. https://doi.org/10.1163/_afco_asc_1281. DOI: https://doi.org/10.1163/_afco_asc_1281
De Bondt, W. F., & Thaler, R. H. (1987). Further evidence on investor overreaction and stock market seasonality. The Journal of finance, 42(3), 557-581. https://doi.org/10.1111/j.1540-6261.1987.tb04569.x. DOI: https://doi.org/10.1111/j.1540-6261.1987.tb04569.x
Dieci, R., He, X. Z., & Hommes, C. (2014). Nonlinear economic dynamics and financial modelling. Springer, Berlin.https://doi.org/10.1007/978-3-319-07470-2. DOI: https://doi.org/10.1007/978-3-319-07470-2
Dimson, E., Nagel, S., & Quigley, G. (2003). Capturing the value premium in the United Kingdom. Financial Analysts Journal, 59(6), 35-45. https://doi.org/10.2469/faj.v59.n6.2573. DOI: https://doi.org/10.2469/faj.v59.n6.2573
Escavy, J. I., Herrero, M. J., Trigos, L., & Sanz-Pérez, E. (2020). Demographic vs economic variables in the modelling and forecasting of the demand of aggregates: The case of the Spanish market (1995–2016). Resources Policy, 65, 101537. https://doi.org/10.1016/j.resourpol.2019.101537. DOI: https://doi.org/10.1016/j.resourpol.2019.101537
Fama, E. F., & French, K. R. (1992). The cross‐section of expected stock returns. the Journal of Finance, 47(2), 427-465.https://doi.org/10.1111/j.1540-6261.1992.tb04398.x. DOI: https://doi.org/10.1111/j.1540-6261.1992.tb04398.x
Fama, E. F., & French, K. R. (1993). Common risk factors in the returns on stocks and bonds. Journal of financial economics, 33(1), 3-56. https://doi.org/10.1016/0304-405x(93)90023-5. DOI: https://doi.org/10.1016/0304-405X(93)90023-5
Fama, E. F., & French, K. R. (1995). Size and book‐to‐market factors in earnings and returns. The journal of finance, 50(1), 131-155. https://doi.org/10.1111/j.1540-6261.1995.tb05169.x. DOI: https://doi.org/10.1111/j.1540-6261.1995.tb05169.x
Fama, E. F., & French, K. R. (2006). Profitability, investment and average returns. Journal of financial economics, 82(3), 491-518. https://doi.org/10.1016/j.jfineco.2005.09.009. DOI: https://doi.org/10.1016/j.jfineco.2005.09.009
Fama, E. F., & French, K. R. (2008). Dissecting anomalies. The Journal of Finance, 63(4),1653-1678. https://doi.org/10.1111/j.1540-6261.2008.01371.x. DOI: https://doi.org/10.1111/j.1540-6261.2008.01371.x
Fama, E. F., & French, K. R. (2015). A five-factor asset pricing model. Journal of financial economics, 116(1), 1-22. https://doi.org/10.1016/j.jfineco.2014.10.010. DOI: https://doi.org/10.1016/j.jfineco.2014.10.010
Fama, E. F., & MacBeth, J. D. (1973). Risk, return, and equilibrium: Empirical tests. Journal of political economy, 81(3), 607-636. https://doi.org/10.1086/260061. DOI: https://doi.org/10.1086/260061
Fletcher, J. (2001). An examination of alternative factor models in UK stock returns. Review of Quantitative Finance and Accounting, 16(2), 117-130. https://doi.org/10.1023/a:1011270907471. DOI: https://doi.org/10.1023/A:1011270907471
Frazzini, A., & Pedersen, L. H. (2014). Betting against beta. Journal of Financial Economics, 111(1), 1-25. https://doi.org/10.1016/j.jfineco.2013.10.005. DOI: https://doi.org/10.1016/j.jfineco.2013.10.005
Gao, X. S., & Wang, Y. (2021). Mining the Short Side: Institutional Investors and Stock Market Anomalies. Journal of Financial and Quantitative Analysis, Forthcoming https://doi.org/10.1016/j.irfa.2020.101648. DOI: https://doi.org/10.1017/S0022109022000527
Graham, B., & Dodd, D. (1940). Security Analysis: Principles and Technique (Columbus).
Green, J., Hand, J. R., & Zhang, X. F. (2017). The characteristics that provide independent information about average us monthly stock returns. The Review of Financial Studies, 30(12), 4389-4436 https://doi.org/10.1093/rfs/hhx019. DOI: https://doi.org/10.1093/rfs/hhx019
Gregory, A., Harris, R. D., & Michou, M. (2001). An analysis of contrarian investment strategies in the UK. Journal of Business Finance & Accounting, 28(9‐10), 1192-1228 https://doi.org/10.1111/1468-5957.00412. DOI: https://doi.org/10.1111/1468-5957.00412
Hakim, S. A., Hamid, Z., Meera, M., & Kameel, A. (2016). Capital Asset Pricing Model and pricing of Islamic financial instruments. Journal of King Abdulaziz University: Islamic Economics, 29(1) https://doi.org/10.4197/islec.29-1.2. DOI: https://doi.org/10.4197/Islec.29-1.2
Hamada, R. S. (1969). Portfolio analysis, market equilibrium and corporation finance. The Journal of Finance, 24(1), 13-31. DOI: https://doi.org/10.1111/j.1540-6261.1969.tb00339.x
Harvey, C. R., Liu, Y., & Zhu, H. (2016). … and the cross-section of expected returns. The Review of Financial Studies, 29(1), 5-68. https://doi.org/10.1093/rfs/hhv059. DOI: https://doi.org/10.1093/rfs/hhv059
Hens, T., & Naebi, F. (2021). Behavioral heterogeneity in the capital asset pricing model with an application to the low-beta anomaly. Applied Economics Letters, 28(6), 501-507. https://doi.org/10.1080/13504851.2020.1761529 DOI: https://doi.org/10.1080/13504851.2020.1761529
Hou, K., Xue, C., & Zhang, L. (2015). Digesting anomalies: An investment approach. The Review of Financial Studies, 28(3), 650-705. DOI: https://doi.org/10.1093/rfs/hhu068
Jebran, K., & Chen, S. (2017). Examining anomalies in Islamic equity market of Pakistan. Journal of Sustainable Finance & Investment, 7(3), 275-289. DOI: https://doi.org/10.1080/20430795.2017.1289455
Jensen, M. C. (1978). Some anomalous evidence regarding market efficiency. Journal of financial economics, 6(2/3), 95-101. DOI: https://doi.org/10.1016/0304-405X(78)90025-9
Kostakis, A., Kashif, M., & Siganos, A. (2011). Higher Co-Moments and Asset Pricing on London Stock Exchange. Journal of Banking & Finance.
Kostakis, A., Muhammad, K., & Siganos, A. (2012). Higher co-moments and asset pricing on London Stock Exchange. Journal of Banking & Finance, 36(3), 913-922 https://doi.org/10.1016/j.jbankfin.2011.10.002. DOI: https://doi.org/10.1016/j.jbankfin.2011.10.002
Li, Z., Li, Q., & Zeng, Y. (2020). Contraction flexibility, operating leverage, and financial leverage. Journal of Management Science and Engineering, 5(1), 43-56 https://doi.org/10.2307/1924119. DOI: https://doi.org/10.1016/j.jmse.2020.02.002
Linter, J. (1965). The Valuation of Risk Assets and The Selection of Risk Investements. https://doi.org/10.2307/1924119.
Lintner, J. February 1965, The Valuation of Risk Assets and the Selection of Risky Investments in Stock Portfolios and Capital Budgets. Review of Economics and Statistics, 47. https://doi.org/10.2307/1924119 DOI: https://doi.org/10.2307/1924119
Liyanapathirana, B. J., & Ranasinghe, R. P. K. C. M. (2020). Stock Market Measures and Market Performance. Journal of Economic Science Research| Volume, 3(02). https://doi.org/10.30564/jesr.v3i2.1672. DOI: https://doi.org/10.30564/jesr.v3i2.1672
Malkiel, B. G., & Fama, E. F. (1970). Efficient capital markets: A review of theory and empirical work. The journal of Finance, 25(2), 383-417. DOI: https://doi.org/10.1111/j.1540-6261.1970.tb00518.x
Marisetty, N. (2020). Dividend Signaling Hypothesis, Semi-strong form of Hypothesis and Market Capitalization Anomaly in Indian Stock Market. Pensee International Journal, 50, 12. https://doi.org/10.2139/ssrn.3773372. DOI: https://doi.org/10.2139/ssrn.3773372
Markowitz, H. (1952). Portfolio selection. The journal of finance, 7(1), 77-91. https://doi.org/10.1111/j.1540-6261.1952.tb01525.x. DOI: https://doi.org/10.1111/j.1540-6261.1952.tb01525.x
Markowitz, H., Guerard, J., Xu, G., & Beheshti, B. (2021). Financial Anomalies in Portfolio Construction and Management. The Journal of Portfolio Management, 47(6), 51-64. https://doi.org/10.3905/jpm.2021.1.242. DOI: https://doi.org/10.3905/jpm.2021.1.242
Modigliani, F., & Miller, M. H. (1958). The cost of capital, corporation finance and the theory of investment. The American, 1, 3.
Mossin, J. (1966). Equilibrium in a capital asset market. Econometrica: Journal of the econometric society, 768-783. https://doi.org/10.2307/1910098. DOI: https://doi.org/10.2307/1910098
Muns, S. (2019). The size anomaly in European financial stock returns. International Finance, 22(2), 155-170. https://doi.org/10.1111/infi.12330. DOI: https://doi.org/10.1111/infi.12330
Nakano, M., Takahashi, A., & Takahashi, S. (2017). Fuzzy logic-based portfolio selection with particle filtering and anomaly detection. Knowledge-Based Systems, 131, 113-124. https://doi.org/10.1016/j.knosys.2017.06.006. DOI: https://doi.org/10.1016/j.knosys.2017.06.006
Nartea, G., Gan, C., & Wu, J. G. (2008). Persistence of Size and Value Premia and the Robustness of the Fama-French Three Factor Model in the Hong Kong Stock Market. Investment Management and Financial Innovations, 5, 39-49. DOI: https://doi.org/10.2139/ssrn.2303617
Novy-Marx, R. (2013). The other side of value: The gross profitability premium. Journal of Financial Economics, 108(1), 1-28 https://doi.org/10.1016/j.jfineco.2013.01.003. DOI: https://doi.org/10.1016/j.jfineco.2013.01.003
Nurwulandari, A. (2021). Analysis Of The Relationship Between Risk And Return Using The Capital Asset Pricing Model (Capm) Method At Kompas 100. Enrichment: Journal of Management, 11(2), 528-534. https://www.enrichment.iocspublisher.org/index.php/enrichment/article/view/137.
Pandey, A., & Joshi, R. (2021). Examining Asset Pricing Anomalies: Evidence from Europe. Business Perspectives and Research. https://doi.org/10.1177/22785337211025712. DOI: https://doi.org/10.1177/22785337211025712
Racicot, F. E., & Rentz, W. F. (2016). Testing Fama–French’s new five-factor asset pricing model: evidence from robust instruments. Applied Economics Letters, 23(6), 444-448.
Rakhyani, S. (2021). An empirical examination of beta anomaly in India. DECISION, 1-16. https://doi.org/10.1007/s40622-021-00278-6. DOI: https://doi.org/10.1007/s40622-021-00278-6
Rojo‐Suárez, J., Alonso‐Conde, A. B., & Ferrero‐Pozo, R. (2020). Liquidity, time‐varying betas and anomalies: Is the high trading activity enhancing the validity of the CAPM in the UK equity market? International Journal of Finance & Economics. https://doi.org/10.1002/ijfe.2136. DOI: https://doi.org/10.1002/ijfe.2136
Rosenberg, B., Reid, K., & Lanstein, R. (1985). Persuasive evidence of market inefficiency. The Journal of Portfolio Management, 11(3), 9-16. https://doi.org/10.3905/jpm.1985.409007. DOI: https://doi.org/10.3905/jpm.1985.409007
Rossi, M., & Fattoruso, G. (2017). The EMH and the market anomalies: an empirical analysis on Italian stock market. International Journal of Managerial and Financial Accounting, 9(3), 222-241. https://doi.org/10.1504/ijmfa.2017.086689. DOI: https://doi.org/10.1504/IJMFA.2017.10007756
Rossi, M., & Gunardi, A. (2018). Efficient market hypothesis and stock market anomalies: Empirical evidence in four European countries. Journal of Applied Business Research (JABR), 34(1), 183-192. https://doi.org/10.19030/jabr.v34i1.10111. DOI: https://doi.org/10.19030/jabr.v34i1.10111
Shaikh, A. J., & Kashif, M. (2017). Asset Growth Anomaly and Stock Returns: An Evidence of Karachi Stock Exchange (KSE) Market. Journal of Independent. https://doi.org/10.31384/jisrmsse/2017.15.2.10. DOI: https://doi.org/10.31384/jisrmsse/2017.15.2.10
Sharpe, W. F. (1964). Capital asset prices: A theory of market equilibrium under conditions of risk. The journal of finance, 19(3), 425-442. https://doi.org/10.1111/j.1540-6261.1964.tb02865.x. DOI: https://doi.org/10.1111/j.1540-6261.1964.tb02865.x
Singh, J. E., Babshetti, V., & Shivaprasad, H. N. (2021). Efficient Market Hypothesis to Behavioral Finance: A Review of Rationality to Irrationality. Materials Today: Proceedings. https://doi.org/10.1016/j.matpr.2021.03.318. DOI: https://doi.org/10.1016/j.matpr.2021.03.318
Singh, S., & Yadav, S. S. (2015). Indian stock market and the asset pricing models. Procedia Economics and Finance, 30, 294-304 https://doi.org/10.1016/s2212-5671(15)01297-6. DOI: https://doi.org/10.1016/S2212-5671(15)01297-6
Timmer, Y. (2018). Cyclical investment behavior across financial institutions. Journal of Financial Economics, 129(2), 268-286. https://doi.org/10.1016/j.jfineco.2018.04.012. DOI: https://doi.org/10.1016/j.jfineco.2018.04.012
Titman, S., Wei, K. J., & Xie, F. (2013). Market development and the asset growth effect: International evidence. Journal of Financial and Quantitative Analysis, 48(5), 1405- 1432. https://doi.org/10.1017/s0022109013000495. DOI: https://doi.org/10.1017/S0022109013000495
Treynor, J. L. (1961). Toward a theory of market value of risky assets https://doi.org/10.1002/9781119196679.ch6. DOI: https://doi.org/10.1002/9781119196679.ch6
Vassalou, M., & Xing, Y. (2004). Default risk in equity returns. The journal of finance, 59(2), 831-868 https://doi.org/10.1111/j.1540-6261.2004.00650.x. DOI: https://doi.org/10.1111/j.1540-6261.2004.00650.x
Vincent, K., Hsu, Y. C., & Lin, H. W. (2020). Investment styles and the multiple testing of cross-sectional stock return predictability. Journal of Financial Markets, 100598. https://doi.org/10.1016/j.finmar.2020.100598. DOI: https://doi.org/10.1016/j.finmar.2020.100598
Wandera, R. O. (2014). Change management in financial institutions: A case study of Kenyan banks (Doctoral dissertation, United States International University-Africa). http://erepo.usiu.ac.ke/11732/168.
Downloads
Published
How to Cite
Issue
Section
License
Copyright (c) 2021 Author
This work is licensed under a Creative Commons Attribution 4.0 International License.
Copyright: The Authors
