Risk vs Upside uncertainty: application of quantile regression in investment analysis

ABSTRACT

This paper examines the implications for risk taking in an emerging stock market, namely, Pakistan Stock Exchange (PSX), using tools that specifically account for the asymmetries. We perform sectoral level price data analysis to infer how investors behaved during various states of stock market such as bullish, bearish, stable etc. Using monthly data over 2005–2020, we estimate the Capital Asset Pricing Model (CAPM) using quantile regression framework, which is robust to distributional assumptions and can estimate the elasticities across the risk spectrum. The empirical findings suggest that the elasticities, namely, betas, are significant across quantiles. It implies that the risk-return relationship behaves differently across the market states and that the investors and policymakers, therefore, should calibrate their decisions accordingly.

KEYWORDS:

• Quantile regression
• ordinary least squares regression
• heteroscedasticity
• asymmetric
• CAPM

JEL:

• G12
• C14
• C21

Acknowledgments

The authors thank the Editor and anonymous referee for their insightful comments that helped in improving the quality of the paper. Any remaining errors are ours alone.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Additional information

Notes on contributors

Seema Rehman

Seema Rehman, a PhD Scholar, has been working in asset pricing using tick by tick data for the first time on emerging stock market of Pakistan. She has publications in internationally renowned journals, including Romanian Journal of Economic Forecasting. She is working as a lecturer at Department of Management Sciences, Indus University, ST-2D, Block-17, Gulshan-e-Iqbal Adjacent to National Stadium, Karachi, Pakistan.

Jameel Ahmed Khilji

Dr. Jameel Ahmed Khilji is a PhD in Economics and Finance from Maastricht University, Netherlands. He is working as a Senior Joint Director, Division Head, Macro prudential Surveillance Division, Financial Stability Department at State Bank of Pakistan. He teaches Applied Econometrics, Financial Time Series and Financial Markets at Shaheed Zulfiqar Ali Bhutto Institute of Science and Technology as an Adjunct Assistant Professor. He has publications in internationally renowned journals including Economics Letters.

Saqib Sharif

Dr. Saqib Sharif is a PhD in Finance from Massey University, New Zealand. He has more than 10-year of central banking experience. He has published in internationally respected journals, including Accounting & Finance and International Journal of Managerial Finance. He is currently ranked in the top 10% of authors on the international working paper website SSRN (based on downloads of his papers). Research Interests • Asset Pricing • Financial Regulation • Microstructure Data • Islamic Finance. His personal research goal is to conduct and publish quality academic research. He is working as an associate professor at Department of Finance, Institute of Business Administration (IBA), University Road, Karachi-75270, Pakistan.