A Test of Fama and French Three Factor Model in Pakistan Equity Market

Abstract

here is a view that investor who want to make investment in stock exchange should make a decision maximize their wealth. For this purpose the investor not only want to know which factor will impact the return but also want to understand the relative weight of various factors level, and which sub factor will impact more for giving factors. So they analyze all relevant factors while making decision that affect the return from investment in future. Variation in stock market return was determined by various theories. It was started with Sharp (1964), Linter (1965), Black (1972) who present Capital Asset Pricing Model (CAPM) which shows how to be related between the average return of stock and market risk factor. Other researcher did not agree because there is other factor more than one factor. Many anomalies have been identified in CAPM. Base (1977) finds high earning to price (E/P) ratio companies having higher return than low earning to price ratio. Bans (1981) told small stock outperform than large stock. Stuntman (1980) argued that company with high book to market value outperforms companies with low book to market value.