Downsize Risk and Momentum Effect: a Case of Pakistan

Abstract

The aim of this current research is to analyze the downside risk and momentum effects for predicating the expected stock returns by taking into account the size effects (measured in term of market capitalization) and value effects (measured in term of book to market ratio) factors. The Study uses closing prices of stocks listed at the Karachi Stock Exchange (KSE) on monthly basis. The data period used in this study is from January 2000 to December 2015.Fama and Macbeth (1973) procedure is engage to investigate the association between the variables. The results of the momentum effect in this study support the null hypothesis for all the generated pools that stock returns for a portfolio which are previously performing well in the present market situations at lower risk has surpassed those which have lower returns at higher risk. It means investors can increase their earnings by investing in those stocks, that perform well and selling poorly performed stocks over the last 1-6 months. In this study, the outcomes for downside market risk are in favor for the null hypothesis for overall time period 2000-15. The key findings demonstrate that downside market risk indicate that the premium is associate with the downside risk and it will represent the relationship between risk and expected return in better way. The empirical results of the study are of great interest for investors which help them in designing the effective investment strategies. Specially, the findings of the study help investors to understand the appropriate measure of risk and develop well diversified portfolios. The findings of the study are also helpful for the firm manager during capital budgeting decision as they help them to cost the equities properly.