IDEAS home Printed from https://ideas.repec.org/a/aib/ibtjbs/v13y2017i1p1-11.html
   My bibliography  Save this article

Fama And French Three Factor Model Application In The Pakistan Stock Exchange (Pse)

Author

Listed:
  • Athar Iqbal

    (Assistant Professor, Iqra University)

  • Akhtiar Ali
  • Peter Xavier D’Abreo

Abstract

Purpose This research has been carried out to test empirically the application of Fama and French three factor model on Pakistan Stock Exchange covering forty listed companies using annual data from 1984 to 2012.Methodology Author selected excess return as dependent variable and three independent variables market risk, size of the firm and the book to market value of the firms in the portfolio.To test the hypotheses, author used panel least square method.Findings Result shows that all independent variables are significant and have sign as predicted by theoretical understanding.From our result we interpret that three factors model explain returns in its simplified form on long term horizon better than single factor model like CAPM.Implication The findings of the research paper suggest that developing economy like Pakistan investor and portfolio manager can better understand by applying multiple variable models and its modified form rather than only relying on CAMP covariance sensitivity model.

Suggested Citation

  • Athar Iqbal & Akhtiar Ali & Peter Xavier D’Abreo, 2017. "Fama And French Three Factor Model Application In The Pakistan Stock Exchange (Pse)," IBT Journal of Business Studies (JBS), Ilma University, Faculty of Management Science, vol. 13(1), pages 1-11.
    • Handle: RePEc:aib:ibtjbs:v:13:y:2017:i:1:p:1-11
    DOI: https://doi.org/10.46745/ilma.ibtjbs.2017.131.1
    as

    Download full text from publisher

    File URL: http://ibtjbs.ilmauniversity.edu.pk/journal/jbs/13.1/1.pdf
    Download Restriction: no
    File URL: https://libkey.io/https://doi.org/10.46745/ilma.ibtjbs.2017.131.1?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. J. Tobin, 1958. "Liquidity Preference as Behavior Towards Risk," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 25(2), pages 65-86.
    2. Stephen A. Ross, 2013. "The Arbitrage Theory of Capital Asset Pricing," World Scientific Book Chapters, in: Leonard C MacLean & William T Ziemba (ed.), HANDBOOK OF THE FUNDAMENTALS OF FINANCIAL DECISION MAKING Part I, chapter 1, pages 11-30, World Scientific Publishing Co. Pte. Ltd..
    3. Pradosh Simlai, 2009. "Stock returns, size, and book‐to‐market equity," Studies in Economics and Finance, Emerald Group Publishing Limited, vol. 26(3), pages 198-212, July.
    4. Marie‐Claude Beaulieu & Marie‐Hélène Gagnon & Lynda Khalaf, 2009. "A cross‐section analysis of financial market integration in North America using a four factor model," International Journal of Managerial Finance, Emerald Group Publishing Limited, vol. 5(3), pages 248-267, June.
    5. Kim, Dongcheol, 1997. "A Reexamination of Firm Size, Book-to-Market, and Earnings Price in the Cross-Section of Expected Stock Returns," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 32(4), pages 463-489, December.
    6. William J. Baumol, 1963. "An Expected Gain-Confidence Limit Criterion for Portfolio Selection," Management Science, INFORMS, vol. 10(1), pages 174-182, October.
    7. MOSSIN, Jan, 1968. "Optimal multiperiod portfolio policies," LIDAM Reprints CORE 19, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    8. Fama, Eugene F & French, Kenneth R, 1996. "Multifactor Explanations of Asset Pricing Anomalies," Journal of Finance, American Finance Association, vol. 51(1), pages 55-84, March.
    9. De Bondt, Werner F M & Thaler, Richard, 1985. "Does the Stock Market Overreact?," Journal of Finance, American Finance Association, vol. 40(3), pages 793-805, July.
    10. Estrada, Javier, 2007. "Mean-semivariance behavior: Downside risk and capital asset pricing," International Review of Economics & Finance, Elsevier, vol. 16(2), pages 169-185.
    11. Anyssa Trimech & Hedi Kortas & Salwa Benammou & Samir Benammou, 2009. "Multiscale Fama-French model: application to the French market," Journal of Risk Finance, Emerald Group Publishing, vol. 10(2), pages 179-192, February.
    12. Michael E. Drew & Mirela Malin & Tony Naughton & Madhu Veeraraghavan, 2006. "Idiosyncratic volatility and security returns: evidence from Germany and United Kingdom," Studies in Economics and Finance, Emerald Group Publishing, vol. 23(2), pages 80-93, June.
    13. Hakansson, Nils H, 1970. "Optimal Investment and Consumption Strategies Under Risk for a Class of Utility Functions," Econometrica, Econometric Society, vol. 38(5), pages 587-607, September.
    14. Hakansson, Nils H., 1974. "Convergence to isoelastic utility and policy in multiperiod portfolio choice," Journal of Financial Economics, Elsevier, vol. 1(3), pages 201-224, September.
    15. Lee, Cheng F., 1977. "Functional Form, Skewness Effect, and the Risk-Return Relationship," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 12(1), pages 55-72, March.
    16. Fama, Eugene F, 1970. "Multiperiod Consumption-Investment Decisions," American Economic Review, American Economic Association, vol. 60(1), pages 163-174, March.
    17. Banz, Rolf W., 1981. "The relationship between return and market value of common stocks," Journal of Financial Economics, Elsevier, vol. 9(1), pages 3-18, March.
    18. Gilbert V. Nartea & Bert D. Ward & Hadrian G. Djajadikerta, 2009. "Size, BM, and momentum effects and the robustness of the Fama‐French three‐factor model," International Journal of Managerial Finance, Emerald Group Publishing Limited, vol. 5(2), pages 179-200, April.
    19. Rahul Verma, 2011. "Testing forecasting power of the conditional relationship between beta and return," Journal of Risk Finance, Emerald Group Publishing, vol. 12(1), pages 69-77, January.
    20. Fama, Eugene F. & French, Kenneth R., 1997. "Industry costs of equity," Journal of Financial Economics, Elsevier, vol. 43(2), pages 153-193, February.
    21. Merton, Robert C, 1969. "Lifetime Portfolio Selection under Uncertainty: The Continuous-Time Case," The Review of Economics and Statistics, MIT Press, vol. 51(3), pages 247-257, August.
    22. Elton, Edwin J & Gruber, Martin J, 1974. "Portfolio Theory when Investment Relatives are Lognormally Distributed," Journal of Finance, American Finance Association, vol. 29(4), pages 1265-1273, September.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Athar Iqbal & Akhtiar Ali & Peter Xavier D’Abreo, 2017. "Fama And French Three Factor Model Application In The Pakistan Stock Exchange (Pse)," IBT Journal of Business Studies (JBS), Ilma University, Faculty of Management Science, vol. 13(1), pages 13-11.
    2. John H. Cochrane, 1999. "New facts in finance," Economic Perspectives, Federal Reserve Bank of Chicago, vol. 23(Q III), pages 36-58.
    3. John Y. Campbell, 2000. "Asset Pricing at the Millennium," Journal of Finance, American Finance Association, vol. 55(4), pages 1515-1567, August.
    4. Martin Wallmeier, 2000. "Determinanten erwarteter Renditen am deutschen Aktienmarkt — Eine empirische Untersuchung anhand ausgewählter Kennzahlen," Schmalenbach Journal of Business Research, Springer, vol. 52(1), pages 27-57, February.
    5. Elton, Edwin J. & Gruber, Martin J., 1997. "Modern portfolio theory, 1950 to date," Journal of Banking & Finance, Elsevier, vol. 21(11-12), pages 1743-1759, December.
    6. Sonntag, Dominik, 2018. "Die Theorie der fairen geometrischen Rendite [The Theory of Fair Geometric Returns]," MPRA Paper 87082, University Library of Munich, Germany.
    7. Michael Dempsey, 2015. "Stock Markets, Investments and Corporate Behavior:A Conceptual Framework of Understanding," World Scientific Books, World Scientific Publishing Co. Pte. Ltd., number p1007, August.
    8. Kim, Soon-Ho & Kim, Dongcheol & Shin, Hyun-Soo, 2012. "Evaluating asset pricing models in the Korean stock market," Pacific-Basin Finance Journal, Elsevier, vol. 20(2), pages 198-227.
    9. Zura Kakushadze, 2014. "4-Factor Model for Overnight Returns," Papers 1410.5513, arXiv.org, revised Jun 2015.
    10. Linnenluecke, Martina K. & Chen, Xiaoyan & Ling, Xin & Smith, Tom & Zhu, Yushu, 2017. "Research in finance: A review of influential publications and a research agenda," Pacific-Basin Finance Journal, Elsevier, vol. 43(C), pages 188-199.
    11. Adam Zaremba & Jacob Koby Shemer, 2018. "Price-Based Investment Strategies," Springer Books, Springer, number 978-3-319-91530-2, June.
    12. Kent Daniel & Sheridan Titman & K.C. John Wei, 2001. "Explaining the Cross‐Section of Stock Returns in Japan: Factors or Characteristics?," Journal of Finance, American Finance Association, vol. 56(2), pages 743-766, April.
    13. Paul Handro & Bogdan Dima, 2024. "Analyzing Financial Markets Efficiency: Insights from a Bibliometric and Content Review," Journal of Financial Studies, Institute of Financial Studies, vol. 16(9), pages 119-175, May.
    14. Fama, Eugene F. & French, Kenneth R., 2012. "Size, value, and momentum in international stock returns," Journal of Financial Economics, Elsevier, vol. 105(3), pages 457-472.
    15. Abhakorn, Pongrapeeporn & Smith, Peter N. & Wickens, Michael R., 2013. "What do the Fama–French factors add to C-CAPM?," Journal of Empirical Finance, Elsevier, vol. 22(C), pages 113-127.
    16. Trabelsi, Mohamed Ali, 2010. "Choix de portefeuille: comparaison des différentes stratégies [Portfolio selection: comparison of different strategies]," MPRA Paper 82946, University Library of Munich, Germany, revised 01 Dec 2010.
    17. Zura Kakushadze & Willie Yu, 2016. "Multifactor Risk Models and Heterotic CAPM," Papers 1602.04902, arXiv.org, revised Mar 2016.
    18. Benjamin M. Friedman, 1980. "The Effect of Shifting Wealth Ownership on the Term Structure of Interest Rates," NBER Working Papers 0239, National Bureau of Economic Research, Inc.
    19. Kothari, S. P., 2001. "Capital markets research in accounting," Journal of Accounting and Economics, Elsevier, vol. 31(1-3), pages 105-231, September.
    20. Gabriel Hawawini & Donald B. Keim, "undated". "The Cross Section of Common Stock Returns: A Review of the Evidence and Some New Findings," Rodney L. White Center for Financial Research Working Papers 08-99, Wharton School Rodney L. White Center for Financial Research.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:aib:ibtjbs:v:13:y:2017:i:1:p:1-11. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Syed Kashif Rafi (email available below). General contact details of provider: https://edirc.repec.org/data/fmilmpk.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.