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Title THE RELATIONSHIP BETWEEN IDIOSYNCRATIC RISK AND RETURN IN PAKISTAN STOCK MARKET BY EMPLOYING QUANTILE REGRESSION ON THE BASIS OF PROSPECT THEORY

Author(s) Mehwish Jabeen

Abstract The idiosyncratic risk and stock return relationship had been debated across decades, this study reexamined this relation by applying the Quantile Regression Approach along with the prospect theory (which was given by Kahneman & Tversky in 1979) in Pakistani Stock market. The quantile regression approach permits the estimates of idiosyncratic risk to fluctuate over the entire distribution of the stock returns i.e., dependent variable. The standard deviation of regression residuals of Fama and French three factor model has been taken to measure Idiosyncratic risk in this study. Convenient sampling is used; sample includes 82 firms enlisted on KSE-100 index: 820 yearly observations from 82 firms for 10 years from 2008 to 2017. The Quantile Regression estimation results illustrates that idiosyncratic risk is positively associated with stock returns and this relationship is conditional with rise or fall in prices. The finding is consistent with the notion that stock investors lean towards avoiding risk when they face loss while when there is profit, they are more willing to seek risks, which is consistent with the prospect theory. The results of the Ordinary Least Square and LAD (Least sum of Absolute Deviation) regressions demonstrate that the method commonly used in previous researches do not describe the relationship between idiosyncratic risk and stock return at extreme points or over the entire distribution of stock return. Thus, these empirical results offer new insight into the relationship between idiosyncratic risk and stock return in the literature of Pakistani Stock Market.

Type Thesis/Dissertation MS

Faculty Management Sciences

Department Management Sciences

Language English

Publication Date 2020-05-13

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