Template-Type: ReDIF-Paper 1.0 Author-Name: Attiya Y. Javid Author-X-Name-First: Attiya Y. Author-X-Name-Last: Javid Author-Workplace-Name: Pakistan Institute of Development Economics, Islamabad Author-Name: Eatzaz Ahmad Author-X-Name-First: Eatzaz Author-X-Name-Last: Ahmad Author-Workplace-Name: Quaid-i-Azam University, Islamabad Title: Test of Multi-moment Capital Asset Pricing Model: Evidence from Karachi Stock Exchange Abstract: This study examines the Capital Asset Pricing Model of Sharpe (1964) Lintner (1965) and Black (1972) as the benchmark model in the asset pricing theory. The empirical findings indicate that the Sharpe-Lintner-Black CAPM inadequately, particularly the explains Pakistan’s equity market economically and statistically significant role of market risk for the determination of expected returns. Instead of identifying more risk factors, a detailed analysis of a single risk factor is undertaken. We have concentrated on two main extensions of the standard CAPM model. First, the standard model is extended by taking higher moments into account. Second, the risk factors are allowed to vary over time in the autoregressive process. The result of unconditional non-linear generalisation of the standard model reveals that in the higher-moment CAPM model the investors are rewarded for co-skewness risk. However, the test provides marginal support for rewards of the co-kurtosis risk. Finally, the empirical usefulness of conditional higher moments in explaining the cross-section of asset return is investigated. The results indicate that the conditional co-skewness is an important determinant of asset pricing, and the asset pricing relationship varies through time. The conditional covariance and the conditional co-kurtosis explain the asset price relationship in a limited way. It is concluded that Kraus and Litzenberger (1976) attempts to develop a modified form of the Sharpe- Lintner-Black CAPM and is more successful with KSE data. Length: 28 pages Creation-Date: 2008 File-URL: http://www.pide.org.pk/pdf/Working%20Paper/WorkingPaper-49.pdf File-Format: Application/pdf File-Function: First Version, 2008 Number: 2008:49 Classification-JEL: C29, G12 Keywords: Covariance, Co-skewness, Co-kurtosis, Non-normal Return Distribution, Capital Asset Pricing Model, Time-varying Moments. Handle: RePEc:pid:wpaper:2008:49 Template-Type: ReDIF-Paper 1.0 Author-Name: Attiya Y. Javid Author-X-Name-First: Attiya Y. Author-X-Name-Last: Javid Author-Workplace-Name: Pakistan Institute of Development Economics, Islamabad Author-Name: Eatzaz Ahmad Author-X-Name-First: Eatzaz Author-X-Name-Last: Ahmad Author-Workplace-Name: Quaid-i-Azam University, Islamabad Title: The Conditional Capital Asset Pricing Model: Evidence from Karachi Stock Exchange Abstract: This is an attempt to empirically investigate the risk and return relationship of individual stocks traded at Karachi Stock Exchange (KSE), the main equity market in Pakistan. The analysis is based on daily as well as monthly data of 49 companies and KSE 100 index is used as market factor covering the period from July 1993 to December 2004. The natural startingpoint of this study is to test the adequacy of the standard Capital Asset Pricing Model (CAPM) of Sharpe (1964) and Lintner (1965). The empirical findings do not support the standard CAPM model as a model to explain assets pricing in Pakistani equity market. The critical condition of CAPM—that there is a positive trade-off between risk and return—is rejected and residual risk plays some role in pricing risky assets. This allows for the return distribution to vary over time. The empirical results of the conditional CAPM, with time variation in market risk and risk premium, are more supported by the KSE data, where lagged macroeconomic variables, mostly containing business cycle information, are used for conditioning information. The information set includes the first lag of the following business cycle variables: market return, call money rate, term structure, inflation rate, foreign exchange rate, growth in industrial production, growth in real consumption, and growth in oil prices. In a nutshell, the results confirm the hypothesis that risk premium is time-varying type in Pakistani stock market and it strengthens the notion that rational asset pricing is working, although inefficiencies are also present in unconditional and conditional settings. The observation is that the dynamic size and book-to-market value coefficient explain the cross-section of expected returns in a few sub-periods. The conditional approach to testing the CAPM and the three-factor CAPM shows that the asset prices relationship is better explained by accommodating business cycle variables as information set. The findings of the conditional three-factor CAPM also give support to the fact that time-varying firm attributes have only a limited role in Pakistani market to explain the asset price behaviour. Length: 50 pages Creation-Date: 2008 File-URL: http://www.pide.org.pk/pdf/Working%20Paper/WorkingPaper-48.pdf File-Format: Application/pdf File-Function: First Version, 2008 Number: 2008:48 Classification-JEL: C53, E44, G11 Keywords: Capital Asset Pricing Model, Fama-French Three Factor Model, Market Risk, Residual Risk, Size, Book-to-market Value, Information Set, Business Cycle Variables Handle: RePEc:pid:wpaper:2008:48 Template-Type: ReDIF-Paper 1.0 Author-Name: Abdul Qayyum Author-X-Name-First: Abdul Author-X-Name-Last: Qayyum Author-Workplace-Name: Pakistan Institute of Development Economics, Islamabad Author-Name: Idrees Khawaja Author-X-Name-First: Idrees Author-X-Name-Last: Khawaja Author-Workplace-Name: Pakistan Institute of Development Economics, Islamabad Author-Name: Asma Hyder Author-X-Name-First: Asma Author-X-Name-Last: Hyder Author-Workplace-Name: NUST Business School, Rawalpindi Title: Growth Diagnostics in Pakistan Abstract: Following the Hausmann, et al. (2005) methodology, we attempt to identify the constraints to growth in Pakistan. We argue that governance failure and institutional shortcomings are the heart of the matter: corruption is rampant, judicial independence is low, educational institutions do not furnish the right kind of labour force, legal institutions do not protect the lenders against loan defaults, ambiguous land titles constrain mortgage financing and construction activity, labour market institutions restrict hiring/firing, State Bank of Pakistan (SBP) has not done its duty to contain the rising interest spread, and SECP/stock market has not played its due role in the transfer of funds from savers to investors. We identify three binding constraints to growth in Pakistan. These are (i) poor state of governance, (ii) poor state of institutions, and (iii) lack of competitive environment (that restricts innovation and hence growth). Without improving the state of governance and that of institutions, sustainable growth cannot occur even if other factors, like a reasonable savings rate, are put in place. Length: 24 pages Creation-Date: 2008 File-URL: http://www.pide.org.pk/pdf/Working%20Paper/WorkingPaper-47.pdf File-Format: Application/pdf File-Function: First Version, 2008 Number: 2008:47 Classification-JEL: O40, O43, O11, O12 Keywords: Economic Growth, Institutions and Growth Handle: RePEc:pid:wpaper:2008:47 Template-Type: ReDIF-Paper 1.0 Author-Name: Lubna Hasan Author-X-Name-First: Lubna Author-X-Name-Last: Hasan Author-Workplace-Name: Pakistan Institute of Development Economics, Islamabad Title: On Measuring the Complexity of Urban Living Abstract: This paper explores the concept of city ranking as a way to measure the dynamics and complexities of urban life. These rankings have various dimensions and uses. Both the context in which these rankings are done and their nature have changed considerably over time. These rankings face many methodological and measurement problems. A review of major city rankings and the related literature is carried out to suggest a framework for the ranking of Pakistani cities. Length: 30 pages Creation-Date: 2008 File-URL: http://www.pide.org.pk/pdf/Working%20Paper/WorkingPaper-46.pdf File-Format: Application/pdf File-Function: First Version, 2008 Number: 2008:46 Classification-JEL: R12, O18, R23 Keywords: Quality of Life, Cities, Urbanisation Handle: RePEc:pid:wpaper:2008:46 Template-Type: ReDIF-Paper 1.0 Author-Name: Zehra Aftab Author-X-Name-First: Zehra Author-X-Name-Last: Aftab Author-Workplace-Name: Pakistan Institute of Development Economics, Islamabad Author-Name: Sajawal Khan Author-X-Name-First: Sajawal Author-X-Name-Last: Khan Author-Workplace-Name: Pakistan Institute of Development Economics, Islamabad Title: Bilateral J-Curves between Pakistan and Her Trading Partners Abstract: Earlier studies that investigated the J-Curve phenomenon for Pakistan employed aggregate trade data. These studies suffered from the “aggregation bias” problem. In order to overcome this constraint, this paper tests the effects of real exchange rate depreciation in the Pakistani Rupee on the bilateral trade balance between Pakistan and her 12 respective trade partners. These countries, together, account for almost half of Pakistan’s total trade. In order to differentiate between the long-run equilibrium and short-run disequilibrium dynamics, and also to deal with non-stationary data, the ARDL approach is used. The results do not provide any support for the standard J-curve phenomenon. Length: 11 pages Creation-Date: 2008 File-URL: http://www.pide.org.pk/pdf/Working%20Paper/WorkingPaper-45.pdf File-Format: Application/pdf File-Function: First Version, 2008 Number: 2008:45 Classification-JEL: F12, F14, F31 Keywords: J-Curve, Trade Balance, Marshall-Lerner Condition Handle: RePEc:pid:wpaper:2008:45 Template-Type: ReDIF-Paper 1.0 Author-Name: Wasim Shahid Malik Author-X-Name-First: Wasim Shahid Author-X-Name-Last: Malik Author-Workplace-Name: Pakistan Institute of Development Economics, Islamabad Author-Name: Musleh-ud Din Author-X-Name-First: Musleh-ud Author-X-Name-Last: Din Author-Workplace-Name: Pakistan Institute of Development Economics, Islamabad Title: Monetary Policy Transparency in Pakistan: An Independent Analysis Abstract: This paper analyses monetary policy transparency of the central bank (SBP) using the Eijffinger and Geraats (2006) index. The results show that the SBP scores 4.5 out of 15, which is lower than any of the central banks’ score in Eijffinger and Geraats (2006). The SBP is completely opaque on the procedural issues, whereas it is the least transparent in the policy transparency. On the political and the economic matters, the SBP is partially transparent. An area where the SBP is quite transparent, with moderate score, is operational transparency. In comparison with the other central banks, the SBP is at par with some of the central banks in political and operational transparency but ranks behind in all other respects. Length: 26 pages Creation-Date: 2008 File-URL: http://www.pide.org.pk/pdf/Working%20Paper/WorkingPaper-44.pdf File-Format: Application/pdf File-Function: First Version, 2008 Number: 2008:44 Classification-JEL: E52, E58 Keywords: Monetary Policy Transparency, State Bank of Pakistan, Developing Countries Handle: RePEc:pid:wpaper:2008:44 Template-Type: ReDIF-Paper 1.0 Author-Name: Rizwana Siddiqui Author-X-Name-First: Rizwana Author-X-Name-Last: Siddiqui Author-Workplace-Name: Pakistan Institute of Development Economics, Islamabad Title: Income, Public Social Services, and Capability Development: A Cross-district Analysis of Pakistan Abstract: Is household income enough for human development or should government direct resources towards the provision of social services to improve capabilities of individuals? The former is emphasised by the World Bank, and the latter by the United Nation Development Programme (UNDP). This paper tests both sides of the question by estimating a basic needs policy model for Pakistan, using cross-district data for the year 1998-99. The results are consistent with the view that government provision of social services affects human capabilities significantly. However, the ultimate constraints on the sustainable capability development are the availability of material resources. Length: 24 pages Creation-Date: 2008 File-URL: http://www.pide.org.pk/pdf/Working%20Paper/WorkingPaper-43.pdf File-Format: Application/pdf File-Function: First Version, 2008 Number: 2008:43 Classification-JEL: I31, I32, I38, D31 Keywords: Basic Needs, Capabilities and Income Poverty, Public Provision of Social Services and Household Income Handle: RePEc:pid:wpaper:2008:43 Template-Type: ReDIF-Paper 1.0 Author-Name: Naushin Mahmood Author-X-Name-First: Naushin Author-X-Name-Last: Mahmood Author-Workplace-Name: Pakistan Institute of Development Economics, Islamabad Author-Name: Zafar Mueen Nasir Author-X-Name-First: Zafar Mueen Author-X-Name-Last: Nasir Author-Workplace-Name: Policy Planning Cell, Labour and Manpower Division, Islamabad Title: Pension and Social Security Schemes in Pakistan: Some Policy Options Abstract: An examination of the public pension and social security schemes in Pakistan reveals that the provision of regular pensions is limited to formal sector employees only. A number of social security schemes that are operational in the public and private sectors cover a small proportion of old-age population, whereas a significant proportion of the elderly population working in the informal sector remains largely unprotected by social security schemes. As such, the challenge of meeting the needs of the increasing elderly population demands an improvement of the support base and social security system in Pakistan that emphasises the need to implement reforms of public pensions and programmes of social protection. Efficient deployment of resources and improvement of the governance structure are needed for effective welfare of the eligible sub-group of the elderly and the economically disadvantaged population. Length: 33 pages Creation-Date: 2008 File-URL: http://www.pide.org.pk/pdf/Working%20Paper/WorkingPaper-42.pdf File-Format: Application/pdf File-Function: First Version, 2008 Number: 2008:42 Classification-JEL: H55 Keywords: Social Security, Pensions, Pakistan Handle: RePEc:pid:wpaper:2008:42