Deciphering equity style returns: An analysis of size and value anomalies in the Pakistani stock exchange

This study aims to identify the underlying causes of variation in the time series and cross-sectional equity style returns in the emerging stock market of Pakistan. We use asset pricing models and incorporate variables reflecting business cycle fluctuations to assess the time-varying size and value premiums. The methodology of this paper involves constructing style portfolios based on firm-specific characteristics such as market capitalization, price to earnings ratio, book-to-market equity ratio, momentum, and asset growth. We find that the style portfolios earn abnormal returns consistently which cannot be explained either through asset pricing models or business cycles variables. However, the size and value premiums are found to be subsided during the troughs of economic cycles. The results suggest that the abnormal returns for style portfolios are likely driven by firm-specific characteristics rather than macroeconomic factors. Overall, this study contributes to the literature on style investing by providing insights into the profitability of equity style portfolios in the Pakistani equity market. Our findings have implications for stock picking, investment management and risk factor analysis.