Comparing the Explanatory Power of the Fama–French Five-Factor and Carhart Four-Factor Models in a Frontier Equity Market: Evidence from the Lusaka Securities Exchange (LuSE)

Danicious Kalenga, Benjamin Kaira, Jackson Sishumba and Lukundo Willy Siwilanji
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Danicious Kalenga: University of Zambia
Benjamin Kaira: University of Zambia
Jackson Sishumba: University of Zambia
Lukundo Willy Siwilanji: University of Zambia

African Journal of Commercial Studies, 2026, vol. 7, issue 3

Abstract: This study compares the explanatory power of the Carhart Four-Factor Model (C4FM) and the Fama–French Five-Factor Model (FF5FM) in the Lusaka Securities Exchange (LuSE), a frontier market characterized by low liquidity, thin trading, information asymmetry, and market inefficiency, where the CAPM has been found to perform poorly in explaining stock returns. The study employs a deductive quantitative research design using monthly data for 20 listed firms on the LuSE main board over the period January 2022 to December 2025 (48 months), sourced from LuSE, company reports, and the Bank of Zambia. Standard Fama–French and Carhart portfolio formation procedures are applied. The explanatory power of market, size, value, profitability, investment, and momentum factors is evaluated using time-series OLS regressions. Model performance is assessed using intercept significance, mean absolute pricing error, GRS tests, and adjusted R-squared. The results show that the Fama–French Five-Factor Model outperforms the Carhart Four-Factor Model with a slightly higher average adjusted R-squared of 0.931 compared to 0.924, and a lower mean absolute pricing error of 0.39% versus 0.44%. Both models exhibit strong explanatory power in the LuSE context, with statistically insignificant intercepts at the 5% level, indicating limited pricing errors. The study concludes that while both models are robust in frontier markets, the inclusion of profitability and investment factors enhances explanatory accuracy. The study contributes to the literature on asset pricing in African frontier markets and provides implications for investors, portfolio managers, and capital market development in Zambia.

Keywords: Frontier Markets; Asset Pricing; Lusaka Securities Exchange; Fama–French Five-Factor Model; Carhart Four-Factor Model; CAPM; Momentum Effect; Profitability Factor; Zambia (search for similar items in EconPapers)
JEL-codes: C58 G12 G14 (search for similar items in EconPapers)
Date: 2026
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Persistent link: https://EconPapers.repec.org/RePEc:cwk:ajocsl:2026-027

DOI: 10.59413/ajocs/v7.i3.56

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