Do factors matter for predicting high-risk stock returns? Comparison of single-, three- and five-factor CAPM

Muhammad Adnan Arshad (), Saira Munir (), Bashir Ahmad and Muhammad Waseem ()
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Muhammad Adnan Arshad: Lyallpur Business School, Government College University, Faisalabad, Pakistan
Saira Munir: #x2020;COMSATS University Islamabad, Vehari Campus, Pakistan
Bashir Ahmad: Lyallpur Business School, Government College University, Faisalabad, Pakistan
Muhammad Waseem: #x2021;National Bank of Pakistan, Jinnah Colony Branch, Faisalabad, Pakistan

International Journal of Financial Engineering (IJFE), 2019, vol. 06, issue 02, 1-16

Abstract: This study empirically analyzes the three models of CAPM in order to get the best determinants, and superlative model of CAPM in the context of Pakistan’s Financial Sector. This study used fixed Effect model and Hausman test are used in this study to investigate the single-, three- and five-factor CAPM. First we analyzed the single factor CAPM, and results explain 52% variations in the dependent variable — stock returns. Next, the three-factors CAPM is analyzed, which elucidates 69% variations in the dependent variable — stock returns — on the addition of two more factors (size and value). Lastly, five factor CAPM is estimated, which provides 76% variations in the dependent variable — stock returns — by adding two more factors (investment and profitability) in the three factor CAPM. This shows that the addition of more factors in the CAPM bestows suitable results in the financial sector of Pakistan.

Keywords: CAPM; size; value; investment; profitability (search for similar items in EconPapers)
Date: 2019
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DOI: 10.1142/S2424786319500154

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