Abstract:
Using the Fama-French three factor method, the size sorted liquidity-based
three factor method, and the Fama-French five factor model, this study explores the
dynamics of price discovery and asset pricing in sustainable equity portfolios.
Based on the findings of the study, we propose the liquidity based three factor model
as a significant explanatory model for the pricing of sustainable equity portfolios
in Pakistan. However, all the five factors i.e., market premium, size premium,
value premium, operating profitability, and the investment factors from the FamaFrench five factor regression for small conservative and small stocks with high
Book-to-Market were observed to be significant. Furthermore, we found evidence
of the price discovery variable in some portfolio classes that were constructed from
the asset pricing models. The findings of this study suggest that in Pakistan,
liquidity is a critical pricing factor, and should not be overlooked while making
investment decisions. Furthermore, portfolios where price discovery were found
may be useful for further portfolio optimization and profit maximization.
