Asset Pricing and the Size Effect: Empirical Evidence From Karachi Stock Exchange (KSE)

Muhammad Kashif, Aleena Ilyas,

Abstract

There is extensive international evidence that size effect yields positive abnormal returns for long-term periods. However, this topic has received scarce attention in Pakistan. This research study examines the Size anomaly on Karachi Stock Exchange (KSE) for a period of 2000-2015. The result shows that the partial difference between extreme decile portfolios (P1-P10) generates abnormal returns of 7.67% p.a. and is 11.81% p.a. for both the value-weighted (VW) and equally-weighted size-sorted portfolio respectively. Further, a system of equations based on Generalised Methods of Moments (GMM) showed that Capital Asset Pricing Model (CAPM) is misspecified in the case of KSE as it fails to explain the cross-sectional variation in portfolios returns based on market capitalization of companies but 3-factor and 5-factor Fama and French models (1996, 2015) provide evidence in favour of additional risk factors in CAPM framework to explain the risk-adjusted abnormal return of size-sorted portfolios.