The Lahore Journal
of Business

The Lahore Journal
of Business

Lahore Journal of Business

(HEC recognized journal in “Y” category)

The Lahore Journal of Business is aimed at providing a specialized forum for dissemination of qualitative and quantitative research in various areas of business administration. The LJB invites researchers, policy makers and analysts to submit original theoretical and empirical papers that explore and contribute to the understanding of various areas in the business domain. The Journal aims at bringing together state-of-art research findings, particularly from emerging markets, in various business disciplines including (but not limited to) accounting, banking, management, marketing, finance, investments, human resource management and organizational behavior.

Amna Rehman and Nawazish Mirza

In this paper, we test a simple Merton-style (1973) intertemporal capital asset pricing model (ICAPM) by allowing for time variations in certain key state variables for a sample of firms listed on the Karachi Stock Exchange. We evaluate the model’s ability to account for returns on portfolios sorted by size, book-tomarket ratio, and momentum. Our findings provide evidence of an intertemporal asset pricing setting with significant coefficients for innovations in state variables. Innovations in dividend yield, term, and risk-free rates are systematically priced in time series of returns and should be considered when evaluating the risk premium for investments. We do not find the market premium to be a significant variable, which suggests that a traditional capital asset pricing model is unable to capture variations in stock returns for our sample period. These results favor the use of an ICAPM framework for optimal decision-making.