Validity of Fama and French Five Factors Model (Market, Size, Value, Profitability & Investment” (A case of KSE 100 Index).

Abstract

This study is carried out in order to examine the factors such as Market return (RM), Size (SMB), Value (HML), Profitability (RMW) and Investment (CMA) which together as whole forms the Fama and French Five Factors Model (2015), that is used to predict the pricing of the securities. The researcher investigated this model for the Pakistan Stock Exchange as to check the validity of this model that whether the model performs better at this Market or not. In addition, the data span for the study were considered for the period from (2009 – 2019). The researcher has taken the population for the five factors from Business recorder, Open door for finance, Financial Statement Report (FSA) and from the companies’ annual reports, for financial data. Moreover, the population of this study is all the listed companies at PSX of 100 index. Entire 100 index companies were incorporated in the study. Furthermore, the researcher accounted analysis for both the time series as well as cross section approach. The researcher utilized different estimators for analyzing the data, as suggested by different scholars in past, such as GMM estimator, SURE estimator and OLS estimator. The results were found that the times series approach over PSX were somewhat ambiguous that’s why researcher came up with the conclusion was not in support to the model valid for Pakistan Stock Exchange. However, based on cross section approach when applied over PSX data, the results were found that the model works best for pricing the securities which are listed at Pakistan Stock Exchange (PSX).