Vol. 1, Issue 9 (2016)
Capital asset pricing model (CAPM) verses Fama and French three-factor model: An empirical comparison in Pakistani equity market
Author(s): Hayat Khan, Itbar Khan, Hassan Ali Raza, Rashid Jan, Amir Sohail
Abstract: The objective of this paper is to test empirically and statistically the performance and efficiency of two stock-pricing models: CAPM (one-factor model) and Fama & French (three-factor model) by using three variables (size premium, market premium and book-to-market premium) in Karachi Stock Exchange for the period from January 2003 till December 2012. The CAPM relates the expected return on a stock/ portfolio to a single factor or the excess return on a market portfolio. Fama & French (1993, 1996) proved that three-factor model is better than CAPM because of its ability to capture returns due to anomalies such as size (SMB) and book-to-market equity (HML). Fama & French amended CAPM by adding two more variable size premium (SMB) and book to market equity premium (HML) to capture variation in average stock returns. Our study recommended that Fama & French three-factor model has the same descriptive power with that of the CAPM.
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