Estimation of Expected Return: Application of FF Three & FF Five Factor Model in a Developing Economy
DOI:
https://doi.org/10.55737/qjssh.139679451Keywords:
PSX (Pakistan Stock Exchange), T Bills (Treasury Bills of Pakistan), EW (Equal weight), (Small Companies with High B/M, Robust Profitability and Conservative Investment Behavior), Value Strategy, Glamour StrategyAbstract
This study effort aimed to examine the consequences of the FF 3 and 5-factor models in the context of the Pakistan Stock Exchange. Considering the impact of low trading activity, the demographic data was employed for the time frame between 2018 and 2022. The data was extracted by thoroughly examining the annual reports and the PSX's main website. In this study, the excess return was the dependent variable, and Pakistani six-month Treasury bills were used as risk-free assets. In addition, the FF 5 factor model performed better than the FF 3 factor model, even if the empirical data of both models support the notion of the FF 3 and 5 component models. The findings indicate that every independent component plays a major role in explaining the diversity in excess returns. However, this is only true for portfolios that are value-weighted, not equally weighted. The gap in findings may be attributed to economic factors, particularly considering that the country in question is a developing economy. The conclusions of this essay will provide valuable guidance to individual investors, institutional investors, and fund managers in making future investment decisions, especially in nations that are now undergoing development.
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