Estimation of Fama and French Model with Augmented Risk Factors: Case of KSE-Pakistan

Abstract

This paper finds the empirical evidence on the applicability of Fama and French model on Pakistan Stock exchange. The emerging markets have different traits or characteristics as compare to the developed markets. There is lack of evidence that whether the size and book-to-market equity affect the emerging markets or not. The Fama and French took two extreme points to form the portfolios SMB (small minus big) and HML (high minus low), as risk is not static there can be number of numerous factors which effect the stock returns. We will take three points for both factors namely; small, medium and big for SMB and high, medium and low for HML. In addition, wants to see the effect of medium capitalize firms and medium book-to-market firms. The main purpose behind this to address the Pakistan market and find the applicability of fama and french model for the emerging market, along with this find out whether the CAPM, Traditional Fama & French or Modified Fama & French provide the more appropriate information for risk return relationship, on monthly data for this purpose. As Iqbal and Brooks (2007) found that daily, data provide more reliable and informative risk return relationship as compare to the monthly and weekly for both beta and for Fama and French factors.