The Systematic Risk and Leverage Effect in the Corporate Sector
      of Pakistan

Poor corporate financing policies, non-competitive role of institutional development, a tendency towards the underpricing of initial offering resulted in high levered stocks in Karachi stock market (KSE). The KSE is termed as high risk high return emerging market where investors seek high risk premium Nishat (1999). The leverage is the most important factor which determines the firms risk premium [Zimmer (1990)]. Hamada (1969) and Bowman (1979) have demonstrated the theoretical relationship between leverage and systematic risk. Systematic risk of the leverage firm is equal to the without leverage systematic risk of the firm times one plus the leverage ratio (debt equity). Bowman (1979) established that systematic risk is directly related to leverage and the accounting beta (covariability of a firms’ accounting earnings with the accounting earnings of the market portfolio). One explanation of time-varying stock volatility is that leverage changes as the relative price of stocks and bonds change. Schwert (1989) demonstrated how a change in the leverage of the firm causes a change in the volatility of stock returns. Haugen and Wichern (1975) analysed the relationship between leverage and relative stability of stock value based on actuarial science1 and found that the duration of the debt is an important attribute in assessing the effect of leverage on stock volatility. If the leverage is persistent, or changing over time due to the issuance of additional debt, or if the firms are trying to return back the debt, this will change the risk of holding common stock. Kane, Marcus, and McDonald (1985) argued that a well defined metric for the advantage of debt financing is the difference in rates of return earned by optimally levered and unlevered firms, net of a return premium to compensate for potential bankruptcy costs.

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Testing the Monthly Calendar Anomaly of Stock Returns in Pakistan: A Stochastic Dominance Approach

The Pakistan Development Review ◽

10.30541/v58i1pp.83-104 ◽

2019 ◽

Vol 58 (1) ◽

pp. 83-104 ◽

Cited By ~ 1

Author(s):

Abdul Rashid ◽

Saba Kausar

Keyword(s):

High Risk ◽

Stock Returns ◽

Stochastic Dominance ◽

Stock Prices ◽

Stock Exchange ◽

Abnormal Returns ◽

Systematic Risk ◽

January Effect ◽

Firm Level ◽

High Beta

In this paper, we first examine the presence of monthly calendar anomaly in Pakistan Stock Exchange (PSX) using aggregate and firm-level monthly stock returns. Secondly, we classify the sample firms into low-beta, medium-beta, and high-beta firms to examine the monthly anomaly of stock returns for firms having different level of systematic risk. By considering the stochastic dominance approach (SDA), we employ the simulation based method of Barrett and Donald (2003) to identify the dominant month over the period from January 2000 to December 2017. We find significant evidence of the existence of the January effect in both firm and market stock returns. We also find that the January effect exists more prominently in both low-risk and high-risk firms categorised based on their systematic risk. On the other end of the continuum, for moderately risky firms, there is strong evidence of the presence of the December effect. One of possible explanations of the January effect is the yearend bonus received in the month of January. Such bonuses are generally used to purchase stocks, causing the bullish trend of stock prices in January. However, the evidence of the January anomaly in both low-beta and high-beta portfolios returns is puzzling, suggesting that investors may invest in both low- and high-risk stocks when enthusiastically investing in stock market. The findings of the paper suggest that investors may get abnormal returns by forecasting stock return patterns and designing their investment strategies by taking into account the January and December effects and the level of systematic risk associated with the firms. JEL Classification: G02, G12, G14 Keywords: Behavioural Finance, Stochastic Dominance Approach, Monthly Anomaly, January Effect, December Effect, TOY Anomaly, Abnormal Returns, KS Type Test, PSX

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Industry Tax Planning and Stock Returns

The Accounting Review ◽

10.2308/accr-52361 ◽

2019 ◽

Vol 94 (5) ◽

pp. 219-246 ◽

Cited By ~ 4

Author(s):

Shane M. Heitzman ◽

Maria Ogneva

Keyword(s):

Stock Returns ◽

Risk Premium ◽

Systematic Risk ◽

Tax Planning ◽

Equity Returns ◽

Firm Level ◽

Industry Level ◽

Planning Strategies

ABSTRACT We find evidence that equity returns increase with the propensity for tax planning in a firm's industry. This risk premium is imposed on all firms in the industry, even those that are less aggressive than their peers. The industry-based risk premium coexists with a firm-specific discount associated with active tax planning strategies that carry low systematic risk. The discount on tax planning at the firm level, however, is dwarfed by the premium on tax planning at the industry level, and is concentrated in industries that are less likely to attract scrutiny from the tax authority.

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Intertemporal Relation Between The Expected Return And Risk: An Evaluation Of Emerging Market

Journal of Applied Business Research (JABR) ◽

10.19030/jabr.v29i3.7782 ◽

2013 ◽

Vol 29 (3) ◽

pp. 809 ◽

Cited By ~ 2

Author(s):

Zhongyi Xiao ◽

Peng Zhao

Keyword(s):

Risk Premium ◽

Emerging Market ◽

Multivariate Garch ◽

Capital Asset Pricing ◽

Font Size ◽

Expected Return ◽

Cross Sectional ◽

Risky Assets ◽

Market Portfolio

This paper explores the intertemporal relationship between the expected return and risk in Chinese exchange market. We investigate the characterization of time-series variation in conditional variance and capture the cross-sectional correlation among equity portfolios by incorporating multivariate GARCH-M model with dynamic conditional covariance (DCC). Restricting the slope to be the same across risky assets, the risk-return coefficient is estimated to be positive and highly significant. In addition, the estimates of portfolio-specific slopes provide evidence to support the robustness across different portfolio formations. Our findings, in the Intertemporal Capital Asset Pricing Model (ICAPM) framework, reveal that the risk premium induced by the conditional covariation of equity portfolio with the market portfolio remain positive after controlling for risk premia induced by conditional covariation with Fama French benchmark factors (HML and SMB). The SMB factor might provide a significant predictive power to hedge against market risk. However, four indices of alternative investments are not consistently priced in the ICAPM framework.

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Cross-sectional Volatility and Stock Returns: Evidence for Emerging Markets

Vikalpa The Journal for Decision Makers ◽

10.1177/0256090916650951 ◽

2016 ◽

Vol 41 (3) ◽

pp. 234-246 ◽

Cited By ~ 3

Author(s):

Sanjay Sehgal ◽

Vidisha Garg

Keyword(s):

South Africa ◽

Asset Pricing ◽

South Korea ◽

Stock Returns ◽

Risk Premium ◽

Emerging Market ◽

Significant Risk ◽

Residual Variance ◽

Cross Sectional ◽

Risk Premiums

Executive Summary Cross-sectional volatility measures dispersion of security returns at a particular point of time. It has received very little focus in research. This article studies the cross-section of volatility in the context of economies of Brazil, Russia, India, Indonesia, China, South Korea, and South Africa (BRIICKS). The analysis is done in two parts. The first part deals with systematic volatility (SV), that is, cross-sectional variation of stock returns owing to their exposure to market volatility measure ( French, Schwert, & Stambaugh, 1987 ). The second part deals with unsystematic volatility (UV), measured by the residual variance of stocks in a given period by using error terms obtained from Fama–French model. The study finds that high SV portfolios exhibit low returns in case of Brazil, South Korea, and Russia. The risk premium is found to be statistically significantly negative for these countries. This finding is consistent with Ang et al. and is indicative of hedging motive of investors in these markets. Results for other sample countries are somewhat puzzling. No significant risk premiums are reported for India and China. Significantly positive risk premiums are observed for South Africa and Indonesia. Further, capital asset pricing model (CAPM) seems to be a poor descriptor of returns on systematic risk loading sorted portfolios while FF is able to explain returns on all portfolios except high SV loading portfolio (i.e., P1) in case of South Africa which seems to be an asset pricing anomaly. It is further observed that high UV portfolios exhibit high returns in all the sample countries except China. In the Chinese market, the estimated risk premium is statistically significantly negative. This negative risk premium is inconsistent with the theory that predicts that investors demand risk compensation for imperfect diversification. The remaining sample countries show significantly positive risk premium. CAPM does not seem to be a suitable descriptor for returns on UV sorted portfolios. The FF model does a better job but still fails to explain the returns on high UV sorted portfolio in case of Brazil and China and low UV sorted portfolio in South Africa. The findings are relevant for global fund managers who plan to develop emerging market strategies for asset allocation. The study contributes to portfolio management as well as market efficiency literature for emerging economies.

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The Influence of Financial Distress Using Altman Z-Score, The Beta of Stocks and Inflation To The Stock Return

Summer - GATR Journal of Finance and Banking Review ◽

10.35609/jfbr.2017.2.2(4) ◽

2017 ◽

Vol 2 (2) ◽

pp. 21-27

Author(s):

Mathius Tandiontong ◽

Margaretha Sitompul

Keyword(s):

High Risk ◽

Stock Returns ◽

Financial Distress ◽

Stock Return ◽

Stock Exchange ◽

Systematic Risk ◽

Sampling Technique ◽

Jel Classification ◽

Z Score ◽

Panel Data Regression

Objective - Stock is one securities among other securities, as a high risk instrument. Stock classified as high risk due to reflection in the uncertainty of the rate of return to be received by investors in the future. The purpose of this research is to examine of financial distress as measured by the Altman Z-Score, systematic risk as measured by beta stocks and macroeconomic measured by inflation on stock returns Manufacturing Company listed on the Stock Exchange 2008-2012 period Methodology/Technique - From 133 companies listed, 75 companies are taken as sample by using purposive sampling technique. Panel data regression analysis shows that the overall effect of variables is equal to 28.7%. Findings - Partially, the variables that affect the stock returns are financial distress with Altman Z-Score, beta stocks and inflation. Novelty - Financial distress with the measurement using the Altman Z-Score. Type of Paper: Empirical Keywords: Stock return; Financial distress; Altman Z-Score; Systematic risk; Beta stocks and Inflation JEL Classification: E44, F14, G01.

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Ex-ante equity risk premia: Expectational estimates using stock market returns forecasts in the emerging equity market

Panoeconomicus ◽

10.2298/pan130925004n ◽

2018 ◽

Vol 65 (4) ◽

pp. 479-507 ◽

Cited By ~ 1

Author(s):

Aleksandar Naumoski ◽

Metodija Nestorovski

Keyword(s):

Stock Market ◽

Risk Premium ◽

Goodness Of Fit ◽

Emerging Market ◽

Stock Market Index ◽

Stock Market Returns ◽

Goodness Of Fit Tests ◽

Equity Risk ◽

Market Portfolio ◽

Ex Ante

We estimated the ex-ante equity risk premium for the Republic of Macedonia, which is a young, small and open emerging market. We polled academics and practitioners for their expectations on the stock market index MBI10 as a proxy for market portfolio. The risk premium is the expected MBI10 return relative to a government bond yield. Using the Kolmogorov-Smirnov and Anderson- Darling goodness-of-fit tests we determined the best fitted statistical distribution, and consequently estimated the short-term ERP of 8.55 and long-term average ERP for the next 10 years of 7.76. The estimated ex-ante ERP is higher and similar as it is in the other emerging markets.

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EU Banking Directives: risk and wealth effects on the Greek financial sector

The Journal of Risk Finance ◽

10.1108/15265940810842384 ◽

2008 ◽

Vol 9 (1) ◽

pp. 9-19

Author(s):

Themis D. Pantos

Keyword(s):

Stock Returns ◽

Systematic Risk ◽

Financial Sector ◽

Capital Adequacy ◽

Wealth Effects ◽

Insurance Companies ◽

Capital Movement ◽

Content Type ◽

Market Portfolio ◽

The Eu

PurposeThe paper seeks to examine whether or not wealth effects and changes in the systematic risk associated with the return structure of the Greek commercial chartered banks, investment firms and insurance companies resulted from the passage of the European Union Banking Directives over the period 1988‐1997.Design/methodology/approachUsing monthly stock returns from the DataStream database for the period January 1988 to December 1997, the separate effects of each of the EU Banking Directives on Greek commercial chartered banks, investment firms and insurance companies are tested. The “seemingly unrelated regression” methodology is utilized to test three portfolios consisting of an equally weighted banking, investment and insurance index made up of major Greek banks, investment firms and insurance companies respectively. The Greek Market Index serves as a proxy for the market portfolio. All the aforementioned indices were converted to returns using the log difference method.FindingsEmpirical results indicate that the systematic risk dramatically increased for Greek insurance and investment firms and moderately increased for Greek commercial chartered banks through the tabling of the Free Capital Movement Directive in the Greek Parliament. After controlling for systematic risk, the results suggest that the passage of the Free Capital Movement Directive did not create wealth effects for the shareholders of commercial chartered banks, investment firms and insurance companies. Conversely, the results demonstrate that the Second Banking, Investment Services and Capital Adequacy Directives produced no wealth effects for the investment firms and insurance companies, but not for commercial chartered banks' shareholders. The whole wealth effect on the Greek financial sector was neutral.Originality/valueThis article will be of value to academics, bankers, bank regulators, practitioners, and economic policy makers who are interested in the regulatory evolution of the EU banking industry.

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Value Risk Premium and Stock Returns in Kenya: Exploring the Moderating Effect of Investor Sentiment

Journal of Accounting and Finance in Emerging Economies ◽

10.26710/jafee.v7i3.1992 ◽

2021 ◽

Vol 7 (3) ◽

Author(s):

Nebat Galo Mugenda ◽

Tobias Olweny ◽

Joshua M. Wepukhulu

Keyword(s):

Time Series ◽

Asset Pricing ◽

Stock Returns ◽

Portfolio Management ◽

Risk Premium ◽

Emerging Market ◽

Investor Sentiment ◽

Small Sample ◽

Moderating Effect ◽

Series Data

Purpose:Prior literature has focused on the direct effect of firm level fundamental characteristics on stock returns while ignoring the likely effect of investor irrationality on asset pricing decisions. The purpose of this study is to investigate the role of investor sentiment in the relationship between value risk premium and stock returns in Kenya. Design/methodology/approach: The study utilized monthly time series data for 60 companies listed at the NSE over the recent 9 years from 2011-2019. The study employed time series regression using ARDL and VEC estimation techniques to examine whether the effect of value risk on stock returns will vary with level of investor sentiment. Findings: Results show weak evidence for existence of value risk premium at the NSE using the main effects model. The pricing effect of value risk premium is however enhanced in the interaction model. The interaction though not significant implying that there is no moderating effect of sentiment. Research limitations: The shorter nine-year period considered by the study could be a source of small sample bias in the estimation. Sample periods for studies in mature markets span for over decades. In this light, making comparison of the findings in this thesis with those of other related studies may not be feasible. Originality/Value: This study is first of its kind to analyze the moderating effect of investor behavior on asset pricing for an emerging market. The paper contributes to portfolio management and asset pricing literature for emerging markets.

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Liquidity and Asset Pricing: Evidence from Indian Stock Market

Indian Journal of Finance and Banking ◽

10.46281/ijfb.v4i1.604 ◽

2020 ◽

Vol 4 (1) ◽

pp. 109-116

Author(s):

Sharad Nath Bhattacharya ◽

Mousumi Bhattacharya ◽

Sumit Kumar Jha

Keyword(s):

Asset Pricing ◽

Stock Market ◽

Stock Returns ◽

Risk Premium ◽

Negative Impact ◽

Stock Exchange ◽

Systematic Risk ◽

Liquidity Premium ◽

Significant Negative Impact ◽

Indian Stock Market

In this research article, we present a liquidity premium based asset pricing model and test it in the Indian stock market. Using high-frequency data of stocks listed in the National Stock Exchange, we show that observed illiquidity has a significant negative impact on realized stock returns even after controlling for the up and down market, volatility, and effects of derivatives trading. The illiquidity measure is modified for its time variations, and then the modified measure is used to assess its impact on returns. Using a cross-section of stocks, we show the year wise results of the model and extend it to show that it has some role in explaining returns across industries. Findings show that the down market has contemporaneous systematic risk at higher levels, and the market risk premium is higher in down markets. Finance, utility and real estate sector companies have higher systematic risk in both up and down market and investors of these sectors has relatively higher expected higher returns in comparison to companies from the rest of the segments.

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