Narrow Results

This study empirically analyzes the three models of CAPM in order to get the best determinants, and superlative model of CAPM in the context of Pakistan’s Financial Sector. This study used fixed Effect model and Hausman test are used in this study to investigate the single-, three- and five-factor CAPM. First we analyzed the single factor CAPM, and results explain 52% variations in the dependent variable — stock returns. Next, the three-factors CAPM is analyzed, which elucidates 69% variations in the dependent variable — stock returns — on the addition of two more factors (size and value). Lastly, five factor CAPM is estimated, which provides 76% variations in the dependent variable — stock returns — by adding two more factors (investment and profitability) in the three factor CAPM. This shows that the addition of more factors in the CAPM bestows suitable results in the financial sector of Pakistan.

This study attempts to compare the performance of Fama–French three-factor model (FFTFM) and Fama and French six-factor model (FFSFM) in predicting the variations in expected returns of Nifty-100 listed stocks. Only 5/6 of the total listed companies are chosen, while the remaining 1/6 are ignored because they are not listed for the whole study period. The stocks are divided into two size groups and three groups based on B/M, OP, Inv and MOM using independent sorts to create 24 portfolios. The monthly average returns of the MC-MOM portfolios increase as momentum increases, in contrast to MC-B/M and MC-Inv portfolios. Almost all the portfolios with high returns are paired with significant risk, apart from the BM portfolio in size and profitability group. The findings prove that the FFSFM outperforms FFTFM on all the GRS test parameters. However, there is no significant improvement in explanatory power over the FFTFM.