Industry Risk Premia in Pakistan

Industry characteristics is one of the main factors that determines a firm’s business risk [Kale, Hakansson, and Platt (1991)], and a single information can affect more than one security price change, perhaps even the whole market. Lessard (1974, 1976) explains that industry plays an important role in explaining national market volatility. One of the reasons for stock index behaviour are attributed to industrial composition as some industries are internally more volatile than the other [Grinold, Rudd, and Stefek (1989)]. Moreover, some sectors show a high degree of global integration, for example, the finance sector [Roll (1992)]. Similarly, consumer goods, fuel and energy, and transportation sectors are extremely important for any country index. King (1966) suggests that if a significant difference in industry risk premia is observed, then we need to isolate the market risk premia and industry risk premia. He observed that the industry components of variance showed much less change from sub-period to sub-period. Significant differential impact of regulatory policy on cost of capital across various sectors was also observed [Isimbabi (1994); Prager (1989)].