65 The Gross Profitability Premium: An Empirical Examination in Pakistan Stock Exchange (PSX) Rita Tharwani 1 , Imran Umer Chhapra 2 , Sobia Shakeel 3 ,Salman Sarwat 4 Abstract: Profitability, which is estimated by the company’s gross profits to assets i.e. Revenue (R) less cost of good-sold (COGS) has approximately the same power as a book to market (B/M) in forecasting the stock’s average return in ‘cross-section’. Profitable companies engender significantly greater average returns as compared to unprofitable companies, even with the greater valuation ratios of the company. Thus, this study endeavors to explore either the gross profitability anomaly exists in the ‘Pakistan Stock Exchange (PSX)’ and examined through famous asset pricing models i.e. CAPM, FF (three-factor & five-factor) model in the (PSX). Data set of listed-delisted companies are gathered from the period (2000-2018) through “Thomson Reuters Data Stream” and (PSX). Decile portfolios of the companies are constructed for analysis of time- series techniques. Equally (EW) and value-weighted (VW) gross profitability based portfolios are developed to examine the robustness of the sorted portfolio. Generalized method of moments (GMM) and Wald Test are utilized. The empirical time series analysis depicts the findings with significant evidence that gross profitability anomaly exists and yields higher returns in (PSX). Therefore, it can be concluded from the results that all three asset pricing (CAPM, FF- three & five-factor) models are misspecified models in (PSX) and there are other factors such as gross profitability for the prediction of the stocks. Keywords: Gross profits, CAPM, PSX, Fama French three & five-factor 1.Introduction Asset pricing is the core area of research in the context of financial markets and is important for making investment decisions and forecasting asset prices. Assets are priced to earn the maximum return. Asset prices generally follow the law of demand and supply which means the asset price will increase with a decrease in the supply of an asset or surge in demand of an asset. To determine the asset price, numerous research studies have been carried out to examine the financial models. Markowitz (1952) developed a mean-variance model. Various portfolios have been generated in which investors were given the preferences for risk and return. The theory was initiated with the idea of a one-time model, in which the portfolio was formed at 1 Rita Tharwani, Shaheed Zulfiqar Ali Bhutto Institute of Science and Technology (SZABIST), Karachi 2 Imran Umer Chhapra, Shaheed Zulfiqar Ali Bhutto Institute of Science and Technology (SZABIST), Karachi 3 Sobia Shakeel, Shaheed Zulfiqar Ali Bhutto Institute of Science and Technology (SZABIST), Karachi 4 Salman Sarwat, Benazir Bhutto Shaheed University Lyari, Karachi GMJACS VOLUME 10 NUMBER 2 2020