Volume 13 Issue 1 2017


Athar Iqbal
Assistant Professor, Iqra University.

Akhtiar Ali

Peter Xavier D’Abreo

Abstract This research has been carried out to test empirically the application of the Fama and French three factor model on the Pakistan Stock Exchange covering forty listed companies using annual data from 1984 to 2012. The author selected excess return as a dependent variable and three independent variables market risk, size of the firm, and the book to the market value of the firms in the portfolio. To test the hypotheses, the author used the panel least square method. The result shows that all independent variables are significant and have signed as predicted by theoretical understanding. From our result, we interpret that the three factors model explains returns in its simplified form on the long term horizon better than a single-factor model like CAPM. The findings of the research paper suggest that developing economies like Pakistan investors and portfolio managers can better understand by applying multiple variable models and their modified form rather than only relying on the CAMP covariance sensitivity model.
Keywords Modern portfolio theory, excess return, risk and return, three factors
Year 2017
Volume 13
Issue 1
Type Short Report
Recognized by Higher Education Commission of Pakistan, HEC
Category "Y"
Journal Name IBT Journal of Business Studies
Publisher Name ILMA University
Jel Classification G3, G11, G12, G20
DOI http://dx.doi.org/10.46745/ilma.jbs.2017.13.01.01
ISSN no (E, Electronic) 2409-6520
ISSN no (P, Print) 2416-8393
Country Pakistan
City Karachi
Institution Type University
Journal Type Open Access
Type of Review Double Blind Peer Reviewed
Format PDF
Paper Link http://ibtjbs.ilmauniversity.edu.pk/journal/jbs/13.1/1.pdf
Page 1-11
Reference Banz, R. W. (1981). The relationship between return and market value of common stocks. Journal of financial economics, 9(1), 3-18.

Baumol, W. J. (1963). An expected gain-confidence limit criterion for portfolio selection. Management science, 10(1), 174-182. .

Beaulieu, M.-C., Marie Helene, G., & Khalaf, L. (2009). A cross-section analysis of financial market integration in North America using a four factor model. International Journal of Managerial Finance , 5 (2), 248-267. .

Black, A. J. (2006). Macroeconomic risk and the Fama-French three-factor model. Journal of Managerial Finance , 32 (6), 505-517. .

Blazenko, G. W., & Fu, Y. (2012). Value versus growth in dynamic equity investiong. Journal of Managerial Finance , 39 (3), 272-305. .

Bondt, W. F., & Thaler, R. (1985). Does the stock market overreact?. The Journal of finance, 40(3), 793-805. .

Chen, A., Chen, L.-W., & Kao, L. (2010). Leverage, liquidity and IPO long-run performance: evidence from Taiwan IPO markets. International Journal of Accounting and Information Management , 18 (1), 31-38. .

Drew, M. E., Malin, M., Naughton, T., & Veeraraghavan, M. (2006). Idiosyncratic volatility and security returns: evidence from Germany and United Kingdom. Studies in Economics and Finance , 23 (2), 80-93. .

Fama, E. F. (1970). Multiperiod consumption-investment decisions. The American Economic Review, 60(1), 163-174. .

Fama, E. F., & French, K. R. (1997). Industry costs of equity. Journal of financial economics, 43(2), 153-193. .

Fama, E. F., & French, K. R. (1996). Multifactor explanations of asset pricing anomalies. The journal of finance, 51(1), 55-84. .

Elton, E. J., & Gruber, M. J. (1974). Portfolio theory when investment relatives are lognormally distributed. The Journal of Finance, 29(4), 1265-1273. .

Estrada, J. (2007). Mean-semivariance behavior: Downside risk and capital asset pricing. International Review of Economics & Finance, 16(2), 169-185. .

Gosnell, T., & Nejadmalayeri, A. (2010). Macroeconomic news and risk factor innovations. Journal of Managerial Finance , 36 (7), 566-582. .

Guan, L., Hansen, D. R., Leikam, S. L., & Shaw, J. Stable betas, size, earnings-to-price,book- to-market and the validity of the capital asset validity of the capital asset pricing model. Journal of Managerial Finance , 33 (8), 595-614. .

Hakansson, N. H. (1970). Optimal investment and consumption strategies under risk for a class of utility functions. Econometrica: Journal of the Econometric Society, 587-607. .

Hakansson, N. H. (1974). Convergence to isoelastic utility and policy in multiperiod portfolio choice. Journal of Financial Economics, 1(3), 201-224. .

Kim, D. (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, 32(04), 463-489. .

Kubota, K., & Takehara, H. (2010). Expected return, liquidity risk, and contrarian strategy: evidence from the Tokyo Stock Exchange. Journal of Managerial Finance , 36 (8), 655-679. .

La Porta, R. (1996). Expectations and the cross‐section of stock returns.The Journal of Finance, 51(5), 1715-1742. .

Lee, D. D., Faff, R. W., & Rekker, S. A. (2013). Do high and low-ranked sustainability stocks perform differently? International Journal of Accounting and Information Management , 21 (2), 116-132. .

Lee, C. F. (1977). Functional form, skewness effect, and the risk-return relationship. Journal of financial and quantitative analysis, 12(01), 55-72. .

Leshno, M., & Levy, H. (2002). Preferred by “all” and preferred by “most” decision makers: Almost stochastic dominance. Management Science,48(8), 1074-1085. .

Merton, R. C. (1969). Lifetime portfolio selection under uncertainty: The continuous-time case. The review of Economics and Statistics, 247-257. .

Mossin, J. (1968). Optimal multiperiod portfolio policies. The Journal of Business, 41(2), 215-229. .

Nartea, G. V., Ward, B. D., & Djajadikerta, H. G. (2009). Size, BM, and momentum effects and the robustness of the Fama-French three-factor model Evidence from New Zealand. International Journal of Managerial Finance , 5 (2), 179-200. .

Pyo, U. H., & Shin, Y. J. Momentum profits and idiosyncratic volatility: the Korean evidence. Review of Accounting and Finance , 12 (2), 180-200. .

Ross, S. A. (1976). The arbitrage theory of capital asset pricing. Journal of economic theory, 13(3), 341-360. .

Sehgal, S., & Jain, S. Long-term prior return patterns in stock and sector returns in India. Journal of Advances in Management Research , 11 (2), 192-210. .

Simlai, P. (2009). Stock returns, size, and book-to-market equity. Studies in Economics and Finance , 26 (3), 198-212. .

Tobin, J. (1958). Liquidity preference as behavior towards risk. The review of economic studies, 25(2), 65-86. .

Trimech, A., Kortas, H., Benammou, S., & Benammou, S. (2009). Multiscale Fama-French model: application to the French market. The Journal of Risk Finance , 10 (2), 179- 192. .

Verma, R. (2011). Testing forecasting power of the conditional relationship between beta and return. The Journal of Risk Finance , 12 (1), 69-77. .

Zaretzky, K., & Zumwalt, J. K. (2007). Relation between distress risk, Relation between distress risk, premium. Journal of Managerial Finance , 33 (10), 788-797.