The CAPM Revisited Using Structural Equation Model: Mediating Role of GDP-Growth in Pakistan Stock Exchange

Abstract

In emerging equity markets, the Capital Asset Pricing Model (CAPM) continues to produce significant results. The CAPM is investigated in this study using time-series OLS regression and the Structural Equation Model (SEM), with GDP-Growth acting as a moderator. Using monthly data from January 2002 to December 2020 and a comprehensive sample of 522 financial and non-financial firms listed on PSX, the study's findings reveal a statistically significant nexus between market excess returns and portfolio excess returns. Based on four portfolios constructed as small, big, value, and growth stock portfolios, the results show a positive and statistically significant relationship between market excess returns and GDP-growth, as well as a negative relationship between market excess returns and GDP-growth. Furthermore, the CAPM is still used to explain average stock portfolio returns in PSX.

         Keywords: CAPM, SEM, GDP-growth, Pakistan Stock Exchange