APPLICATION OF FAMA AND FRENCH FIVE FACTOR MODEL OF ASSET PRICING: EVIDENCE FROM PAKISTAN STOCK MARKET

Assets pricing is one of the most debated domains of finance as pricing of securities plays an important role in the investment strategies of stock market players. This study tests the applicability of the Fama and French (2015) five factor model in the Pakistani stock market to explain the time series variation in excess portfolio returns. For portfolio sorting, we use data from June 2000 to June 2013 for 120 firms on the basis of market capitalization listed on the Pakistan Stock Exchange. We formulate 16 portfolios on the basis of size, book to market ratio, operating profitability and investment i.e. small minus big (SMB), high minus low (HML), robust minus weak (RMW), and conservative minus aggressive (CMA) along with marker risk factor are considered as four risk factors. For empirics, we apply the Fama and Macbeth (1973) two pass regression technique with the finding that the five factor model is an appropriate model for assets pricing in explaining risk adjusted time series portfolio variations. These findings have implications for investments in the Pakistani stock market listed stocks.