Estimation of Expected Return: Application of FF Three & FF Five Factor model in a Developing Economy

This research study examined the implication of FF 3 and 5 factor model in Pakistan Stock Exchange. The data of population was used, after accounting for thin trading, for a time frame of 2010 to 2014. Data was extracted from the annual reports and the main PSX website. Pakistani six month t bills data is used for risk free assets and excess returnwas the dependent variable. The empirical findings of these two models are confirming the idea of FF 3 and 5 factor model however FF 5 factor model outperformed the FF 3 factor model. The results are approving that everyindependent factor is important to explain variation in excess returns, though not in equally weighted portfolios, only in value weighted portfolios. This difference in findings is attributed to economy factors, considering the selected country is a developing economy. The findings of this article will assist to the individual as well as institutional investors and fund managers about their future investment, particularly in developing economies.

کلیدواژه ها:

PSX (Pakistan Stock Exchange) ، T Bills (Treasury Bills of Pakistan) ، EW (Equal weight) ، SHRC (small companies with high B/M ، robust profitability and conservative investment behavior) ، Value strategy ، glamour strategy