Nature of the Pakistani Equity Premium and Conditional Heteroscedasticity

Abstract

The Pakistani equity premium over the period 1998:07 to 2013:12: (i) followed a stationary trendless process with a break date of December1999, (ii) adjusted around its estimated threshold value symmetrically in the long run. When the short-run dynamic components are introduced to the model :(i) the return on the market portfolio asymmetrically responded to both the widening and the narrowing of the equity premium, (ii) the deposit rate as a proxy risk-free rate responded to the widening but not to the narrowing of the equity premium. Finally, the GARCH (1, 4) effect was present on the Pakistani monthly equity returns and their variance.