STOCK RETURNS BEHAVIOR AND LINKAGES: AN EMPIRICAL INVESTIGATION

Abstract

The primary objective of this study is to examine the behavior and linkages of stock price indices and stock returns of different sectors with each other as well as with the market rate of return on the Karachi stock Exchange. We compute descriptive statistics and the correlation coefficients for stock price indices and return indices over a span of about 10 years, which is divided into two sub periods. Our findings suggest that all the said industry indices are modestly volatile relative to the market index during both the examined periods. During the second sub period, the weekly average rates of return for nine out of the eighteen industry indices as well as for the KSE-100 index are significantly greater than zero. This finding implies that an investor can get a positive return on averageby trading of stocks. In addition to this, our results provide evidence that the Pakistani stock market may go up gradually but goes down sharply. Finally, we found that there is weaker short-run co-movement among the rates of return of the examined industry indices relatively during the second sub period. This finding suggests that an investor may hedge his/her loss by investing in more than one industry stock.