The Impact of Deregulation on Size and Value Premiums in Pakistan Stock Exchange

Abstract

The emerging markets like Pakistan stock exchange experience high volatility and high return after introducing liberalization policies and deregulation. The paper tries to explore the impact of deregulation on size and value premiums in the Pakistan Stock Exchange (PSX) using daily stock price data of 305 companies from 2004 to 2018 listed at Pakistan Stock Exchange.  The main aim is to probe the time-varying behaviour of stock returns after the deregulation in the Pakistan Stock Exchange (PSX). From the policy makers view point, the study is significant to perceive cost-benefit analysis of deregulation and different liberalization policies while contributing in pricing risk in the context of an emerging market of Pakistan. The findings show that various effects including size, value, and market are significant. The GARCH-in-Mean model exhibits significant relation of return and risk. As a result of deregulation, volatility in returns appears persistently significant. The coefficient of the dummy variable appears significant indicating the significant impact of regulatory developments in the PSX. The implications of deregulation in the PSX are to open up the stock market of Pakistan to foreign investors, protecting investors and relaxing regulations for investment, banking/financial as well as non-financial sectors.

           Keywords: volatility, reforms, emerging market, deregulation, institutional development, asset pricing models