Application of Fama and French Five Factor Model of Asset Pricing: Evidence From Pakistan Stock Market

  • Hassan Zada Shaheed Zulfikar Ali Bhutto Institute of Science and Technology, Pakistan
  • Mobeen Ur Rehman Shaheed Zulfikar Ali Bhutto Institute of Science and Technology, Pakistan
  • Muddasar Ghani Khwaja Shaheed Zulfikar Ali Bhutto Institute of Science and Technology, Pakistan
Keywords: Asset pricing, Fama and French five-factor model, Pakistan Stock Exchange, Portfolio returns, Portfolio sorting


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.


Altman, E.I. “Financial Ratios, Discriminant Analysis and the Prediction of Corporate Bankruptcy.” The Journal of Finance 23, no. 4 (1968): 589-609.

Benz, R.W. “The Relationship Between Return and Market Value of Common Stocks.” Journal of Financial Economics 9 (1981): 3-18.

Basu, S. “Investment Performance of Common Stocks in Relation to Their Price-Earnings Ratios: A Test of the Efficient Market Hypothesis.” The Journal of Finance 32, no. 3 (1977): 663-82.

Basu, S. “The Relationship Between Earnings' Yield, Market Value and Return for NYSE Common Stocks: Further Evidence.” Journal of Financial Economics 12, no. 1 (1983): 129-56.

Bhatti, U., and M. Hanif. “Validity of Capital Assets Pricing Model: Evidence from KSE-Pakistan.” European Journal of Economics, Finance and Administrative Sciences, 20 (2010).

Bhandari, L.C. “Debt/equity Ratio and Expected Common Stock Returns: Empirical Evidence.” The Journal of Finance 43, no. 2 (1988): 507-28.

Carhart, M.M. “On Persistance in Mutual Funds Performance.” Journal of Finance 52, No. 1 (1997): 57-82.

Chen, L.R. Novy-Marx, and L. Zhang. “An Alternative Three-Factor Model.” Working Paper (2010).

Chiah, M.D. Chai, and A. Zhong. “A Better Model? An Empirical Investigation of the Fama-French Five-factor Model in Australia.” Working Paper (2015).

Connor, Gregory. “A Unified Beta Pricing Theory.” Journal of Economic Theory 34, no. 1 (1984): 13-31.

Fama, E. F. “Efficient Capital Markets: A Review of Theory and Empirical Work.” The Journal of Finance 25, no. 2 (1970): 383-417.

Fama, E.F., and K.R. French. “The Cross-Section of Expected Stock Returns.” The Journal of Finance 47, no. 2 (1992): 427-65.

______. “Common Risk Factors in the Returns on Stocks and Bonds.” Journal of Financial Economics 33, no. 1 (1993): 3-56.

______. “Size and Book-to-Market Factors in Earnings and Returns.” The Journal of Finance 50, no. 1 (1995): 131-55.

______. “Multifactor Explanations of Asset Pricing Anomalies.” The Journal of Finance 51, no. 1 (1996): 55-84.

______. “Value versus Growth: The International Evidence.” The Journal of Finance 53, no. 6 (1998): 1975-99.

______. “Dissecting Anomalies.” The Journal of Finance 63, no. 4 (2008): 1653-78.

______. “Size, Value and Momentum in International Stock Returns.” Journal of Financial Economics 105, no. 3 (2012): 457–72.

______. “A Five Factor Asset Pricing Model.” The Journal of Financial Economics 116, no. 1 (2015): 1-22.

Fama, E.F., and J.D. MacBeth. “Risk, Return, and Equilibrium: Empirical Tests.” Journal of Political Economy 81, no. 3 (1973): 607-36.

Galagedera, D.U. “A Review of Capital Asset Pricing Models.” Managerial Finance 33, no. 10 (2007): 821-32.

Guo, B., W. Zhang, Y. Zhang, and H. Zhang. “The Five-factor Asset Pricing Model Tests for the Chinese Stock Market.” Pacific-Basin Finance Journal 43 (2017): 84-106.

Hakim, S.A., Hamid, Z., and Meera, A.K.M. “Capital Asset Pricing Model and Pricing of Islamic Financial Instruments.” Journal of King Abdulaziz University: Islamic Economics 29, no. 1 (2016): 21-39.

______. “Combining local and global markets in asset pricing in emerging markets: Evidence from three BRICS nations.” The Journal of Developing Areas 49, no. 3 (2015), 365-78.

Hassan, A., and M.T. Javed. “Size and Value Premium in Pakistani Equity Market.” African Journal of Business Management 5, no. 16 (2011): 6747-55.

Jegadeesh, N., and S. Titman. “Returns to Buying Winners and Selling Losers: Implications for Stock Market Efficiency.” The Journal of Finance 48, no. 1 (1993): 65-91.

Khan, M.I., M. Gul, N.M. Khan, B. Nawaz, and Sanaullah. “Assessing and Testing the Capital Asset Pricing Model (CAPM): A Study Involving KSE-Pakistan.” Global Journal of Management and Business Research 12, no. 10 (2012): 32-7.

Lintner, J. “Security Prices, Risk, and Maximal Gains from Diversification.” The Journal of Finance 20, no. 4 (1965): 587-615.

Markowitz, H. “Portfolio Selection.” The Journal of Finance 7, no. 1 (1952): 77-91.

Mirza, N., and S. Shahid. “Size and Value Premium in Karachi Stock Exchange.” The Lahore Journal of Economics 13, no. 2 (2008): 1-26.

Mossin, J. “Equilibrium in a Capital Asset Market.” Econometrica 34, no. 4 (1966): 768-83.

Nichol, E., and M. Dowling. “Profitability and Investment Factors for UK Asset Pricing Models.” Economics Letters 125 (2014): 364–6.

Ohlson, J.A. “Financial Ratios and the Probabilistic Prediction of Bankruptcy.” Journal of Accounting Research 18, no. 1 (1980): 109-31.

Rehman, Mobeen Ur, and Syed Jawad Hussain Shahzad. "Heterogeneous Panel Analysis among Equity Returns for Portfolio Diversification: Evidence from Emerging and Frontier Asian Equity Markets." South Asian Journal of Management Sciences 11, no. 2 (2017): 109-23.

Rehman, Mobeen Ur, and Syed Muhammad Amir Shah. "Factors Influencing Co-movement of Diversified Portfolio between Pakistan and India." International Journal of Economics, Management and Accounting 24, no. 2 (2016): 189-207.

Rosenberg, B., K. Reid, and R. Lanstein. “Persuasive Evidence of Market Inefficiency.” The Journal of Portfolio Management 11, no. 3 (1985): 9-16.

Ross, S.A. “The Arbitrage Theory of Capital Asset Pricing.” Journal of Economic Theory 13 (1976): 341-60.

Shamim, M.A., A. Yousaf, and E.A. Shaikh. “Validity of Capital Asset Pricing Model in Pakistan’s Capital Market.” Journal of Emerging Issues in Economics, Finance and Banking 3, no. 4 (2014).

Sharpe, W.F.A. “Theory of Market Equilibrium Under Conditions of Risk.” The Journal of Finance 19, no. 3 (1964): 425-42.

Wei, K.J. “An Asset‐Pricing Theory Unifying the CAPM and APT.” The Journal of Finance 43, no. 4 (1988): 881-92.

How to Cite
Zada, H., Rehman, M., & Khwaja, M. (2018). Application of Fama and French Five Factor Model of Asset Pricing: Evidence From Pakistan Stock Market. International Journal of Economics, Management and Accounting, 26(1), 1-23. Retrieved from