Pakistan Institute of Development Economics

THE PAKISTAN DEVELOPMENT REVIEW 

Information Efficiency Premium can also Explain Expected Stock Returns: Evidence from Karachi Stock Exchange

This study explores the impact of market premium, size premium, value premium and information efficiency premium on average equity returns of Pakistani equity market from June 2002 to June 2012 for 152 stocks using the methodology proposed by Fama and French (1992, 1993). Result indicates that market premium, size premium, value premium and information efficiency premium are priced by the market. These premiums significantly explain equity returns in single factor, three factor and four factor model. Capital asset pricing model (CAPM) is valid for explaining average equity returns but multifactor model captures additional information. Therefore, it can be concluded that size premium, value premium and information efficiency premium are considered as systematic risk and priced by the market. As Size premium, Value premium and information efficiency premium exists in Pakistani equity market investors and portfolio managers should consider these premiums along with market premium for selecting and valuation of their portfolios.

Ahmad Fraz And Arshad Hassan

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