Validity of Fama and French Five Factor Model in Pakistan Stock Exchange
Author: Muhammad Salik

This dissertation is aimed to provide an insight about Fama and French (2015) recently proposed Asset Pricing Model which is un-addressed or yet not explained in emerging market of Pakistan . The model extends their previous proposed three-factor model (Fama & French, 1992) by adding two new factors i.e. profitability and investment factors. This thesis utilizes the stocks listed on the Karachi Stock Exchange from July 2005 to June 2015. The findings provide an insight to develop a new theoretical framework and give an updated perspective into the mystifying empirical linkage documented in existing literature regarding explanatory power of and asset mispricing. The thesis also investigates whether the value factor becomes redundant when the five-factor model is used in the explanation of stock or portfolio returns. Daily stock returns of actively traded non-financial listed companies are used. Our findings indicate that the performance of the five-factor model is improved over the three-factor model. Lastly, we did not find value factor to be redundant in explaining portfolio return when the new factors are included in the three-factor model. Our results will help financial managers in determining cost of equity and price risks for their investments in an efficient way. Our study will also help researchers to understand the role of profitability and investment factors in an emerging market like Karachi Stock Exchange. Supervisor:- Dr. Attiya Yasmeen Javid

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Keywords : Asset Pricing, Emerging Markets, Fama and French, Five-factor Model, Pakistan
Supervisor: Attiya Yasmin Javid

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