Quality minus junk factor: A study on asset pricing dynamics in the equity market of Pakistan

Abstract

This study examines the role of quality minus junk factor in explaining cross-sectional differences in stock returns for the equity market of Pakistan. A new factor quality minus junk has been added to the existing Fama & French three factor model (1993) as a fourth factor to check whether it is priced as a risk factor. The study also compares the explanatory power of the newly proposed model with the existing single-factor Capital Asset Pricing Model (CAPM) and Fama & French three factor model (1993). A high quality data set of 70 non-financial firms listed on the PSX is employed as a sample for the period 2008- 2016. Results show that quality minus junk factor is priced in the equity market of Pakistan and this newly proposed four factor model has significantly higher explanatory power than the existing three factor model.

Keywords

• asset pricing
• quality minus junk factor
• capital asset pricing model
• fama & french three factor model