Unveiling the black swan of the Inflation-Adjusted Real Excess Returns-Risk Nexus: Evidence from Pakistan

The risk-free rates are widely used as benchmark to measure excess stocks returns or excess market returns and contribute a significant role in Asset Pricing Models. The purpose of this study is to scrutinize the risk and real excess portfolio returns using inflation adjusted risk-free rates, a unique measuring technique with a primary focus on the momentum augmented Fama-French five-factor model, utilising monthly data for 1994-2022 from the Pakistan Stock Exchange. Using OLS regression technique, the findings reveal that except profitability, the market, size, value, momentum and investment move largely correlated with excess portfolio stocks returns. The Gibbons, Ross & Shanken test confirms that the momentum augmented Fama-French five-factor model outperforms in the market.