Summary
The past is a good source of guidance on how securities markets might perform in the future. Investors face critical choices about which method to use when extrapolating from the past. Fama-French Three Factor Model attempts to explain the stock returns by using more than one risk factor (market risk factor). The current study evaluates the performance of Fama and French Three Factor model in Karachi Stock Exchange (KSE), by considering KSE-100 index companies as the sample representative of the overall Karachi stock exchange market. Twenty stocks were selected from Karachi Stock Exchange. Sample contains monthly stock returns of four years. The annualized six month Pakistan's T Bill rate was used as risk free rate to determine the excess returns. These excess returns were then divided in to bull, neutral and bear time periods and were regressed on market, size and value factors. T- Test and F- Test statistics were employed in order to test the validity of Fama and French three factor model. The results have supported the validity of three factor model during bullish time period in the sample, as the intercept is insignificant and market, size and value premium factors are significant.
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Extract
Value, Size and Market Risk Premium in Karachi Stock Exchange (Pakistan) During Bull, Neutral and Bear Market Trends
1. Introduction
Financial economics as a discipline revolves around a rational investor aiming for maximum returns by assuming minimum possible risk. However, according to the efficient market hypothesis, it is not possible to consistently outperform the market as all the information is already reflected in prices. Therefore, the only way to get higher returns is to take higher levels of risk. This phenomenon has been extensively discussed in the financial theory as well as practice. Fama-French Three Factor Model has been the most successful among mult...See the full content of this document
(Copyright 2011)
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