All Theses and Dissertations

Degree

Master of Science in Economics

Faculty / School

Faculty of Business Administration (FBA)

Department

Department of Economics

Date of Award

Fall 2017

Advisor

Dr. Mohammad Nishat

Committee Member 1

Dr. Mohammad Nishat, Institute of Business Administration, Karachi

Project Type

Thesis

Access Type

Restricted Access

Pages

x, 53

Abstract

This study investigates predictability of returns in Pakistan stock market. The first essay investigates the profitability of momentum strategies in Pakistan stock market over the period 2001 to 2015 and over a sub-period 2007 to 2015. By constructing equally weighted winner- loser portfolios using partial rebalancing technique, the study finds that momentum profits are highly significant in all investment horizons for the complete period as well as for the sub-period. The most successful zero cost strategy is selecting the stocks based on their returns of past 6 months, and holding the portfolio for 6 months. Furthermore, the portfolios are sorted on the basis of risk factors to find the effect of liquidity and size on strength of momentum profits. We find that momentum returns are significant for all investment horizons in both high and low volume portfolios. However, the momentum returns of low volume portfolios are on average 0.2 percent higher than those of high volume portfolios. Finally, when stocks are sorted on the basis of size of firm, results indicate that the returns are significant for all investment horizons in both large and small size portfolios. Furthermore, the momentum profits are stronger for small rather than large size portfolios. Therefore, it is possible to earn super normal profits in Pakistan stock market by using momentum strategies.The second essay examines the predictability of returns through assessing the lead-lag relationship between stock returns in Pakistan Stock Market. It investigates the existence of cross-autocorrelations and lead-lag relationships between stock returns in Pakistan stock market. By using cross-autocorrelations and vector auto-regressions, our research finds that given the firms have low volume of trading, lagged returns of large cap portfolios significantly impact current returns on small cap portfolios, while the opposite is not true. In the high volume category, lagged returns of large (small) cap portfolios do not affect the current returns on small (large) cap portfolios. Also, the ability of lagged returns of low volume portfolios to predict current returns of high volume portfolios is better than the ability of lagged returns of high volume portfolios to predict current returns of low volume portfolios. This result is contrary to the existing theory on lead-lag effects which suggests that high volume portfolios lead the returns on low volume portfolios, as heavily traded stocks quickly absorb market information. The study is important in understanding the return irregularities which exist in Pakistan stock market. Investors can make use of this study to formulate such trading strategies which help them to earn abnormal profits. The research is of particular importance to regulators, as they can examine the inefficiencies in the market and formulate policies to reduce them. Academicians can also make use of this study to explore directions for further research.

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