Asset Pricing and Evidence of Price Discovery in Sustainable Equity Portfolios

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.