Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/197066 
Year of Publication: 
2018
Citation: 
[Journal:] Economies [ISSN:] 2227-7099 [Volume:] 6 [Issue:] 1 [Publisher:] MDPI [Place:] Basel [Year:] 2018 [Pages:] 1-24
Publisher: 
MDPI, Basel
Abstract: 
The paper empirically investigates three different methods to construct factors and identifies some pitfalls that arise in the application of Fama-French's three-factor model to the Pakistani stock returns. We find that the special features in Pakistan significantly affect size and value factors and also influence the explanatory power of the three-factor model. Additionally, the paper examines the ability of the three factors to predict the future growth of Pakistan's economy. Using monthly data of both financial and non-financial companies between 2002 and 2016, the article empirically investigates and finds that: (1) size and book-to-market factors exist in the Pakistani stock market, two mimic portfolios SMB and HML generate a return of 9.15% and 12.27% per annum, respectively; (2) adding SMB and HML factors into the model meaningfully increases the explanatory power of the model; and (3) the model's factors, except for value factor, predict future gross domestic product (GDP) growth of Pakistan and remain robust. Our results are robust across sub-periods, risk regimes, and under three different methods of constructing the factors.
Subjects: 
emerging markets
KSE Pakistan
three-factor model
size and value premiums
future economic growth
JEL: 
G11
G12
O10
Persistent Identifier of the first edition: 
Creative Commons License: 
cc-by Logo
Document Type: 
Article

Files in This Item:
File
Size
499.39 kB





Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.