Size Effect And Macroeconomic Factors: Evidences From Pakistan Stock Exchange

Abstract

This study analyzes the size effect of stock market predictability in the presence of macroeconomic factors in the Pakistan Stock Exchange (PSX) for 16 years, from January 2001 to December 2016. Arbitrage pricing theory tested using various macroeconomic factors and the size impact of the stocks in the Pakistan Stock Exchange. VECM is applied to test the short and long run association among size based portfolios and macroeconomic variables. The outcomes show that large companies perform better than small companies. Besides, it is also observed that selected macroeconomic variables are not an accurate predictor of stock return in the context of Pakistan. As a result of regression analysis and granger causality, two macroeconomic variables (Exchange Rate and Interbank Rate) out of six are significant, and extensive-size portfolios are more affected by the change in macroeconomic variables than small portfolios.