ARTICLE

TESTING LIQUIDITY AUGMENTED FAMAFRENCH FIVEFACTOR MODEL IN PAKISTAN STOCK EXCHANGE

  1. HOME
  2. ARTICLE

21 Pages : 255-265

http://dx.doi.org/10.31703/ger.2020(V-I).21      10.31703/ger.2020(V-I).21      Published : Mar 2020

Testing Liquidity Augmented Fama-French Five-Factor Model in Pakistan Stock Exchange

Abstract

    This study examines the empirical evaluation of the six-factor asset pricing model that augments the Fama-French (2015) five-factor asset pricing model with liquidity factor. Using data from July 2010 to June 2017 of non-financial firms listed on PSX, a 2x3 sort approach is used to construct six left-hand side portfolios, and a 2x2 approach is used to construct right-hand side factors namely, SMB, HML, RMW, CMA, and IML. Time series regression is used to analyze the data to obtained results. The empirical evidence illustrates that in PSX the six-factor model has efficient and better outcomes. Furthermore, the liquidity factor has a strong role in improving the performance of the asset pricing model.

    PSX, LHS Portfolios, RHS Factors, Liquidity.

    (1) Kanwal Haqqani
    Ph.D. Scholar, Department of Management Sciences, Sarhad University of Science and Information Technology, Peshawar, KP, Pakistan.
    (2) Muhammad Aleem
    Ph.D. Scholar, Department of Management Sciences, Qurtaba University of Science and Information Technology, Peshawar, KP, Pakistan.
Fulltext PDF

References

  • Ali, F., He, R., & Jiang, Y. (2018). Size, value, and business cycle variables. The threefactor model and future economic growth: evidence from an emerging market. Economies, 6(14), 1-24.
  • Amihud, Y. (2002). Illiquidity and stock return: cross-section and time-series effects. Journal of Financial Markets, 5(1), 31-56.
  • Amihud, Y., & Mendelson, H. (1986). Asset pricing and the bid-ask spread. Journal of Financial Economics, 17(2), 223-249.
  • Amihud, Y., Mendelson, H., & Pedersen, L. H. (2005). Liquidity and asset prices. Foundations and Trends in Finance, 1(4), 269-364.
  • Bali, T. G., Engle, R. F., & Murray, S. (2016). Empirical asset pricing: the cross-section of stock returns. John Wiley & Sons.
  • Bekaert, G., Harvey, C. R., & Lundblad, C. (2007). Liquidity and expected returns: lessons from emerging markets. The Review of Financial Studies, 20(6), 1783- 1831.
  • Black, F., Jensen, M. C., & Scholes, M. (1972). The capital asset pricing model: some empirical tests. Studies in the Theory of Capital Markets, 81(3), 79-121.
  • Brennan, M. J., & Subrahmanyam, A. (1996). Market microstructure and asset pricing: on the compensation for illiquidity in stock returns. Journal of Financial Economics, 41, 441-464.
  • Chiah, M., Chai, D., Zhong, A., & Li, S. (2016). A better model? An empirical investigation of the Fama-French five-factor model in Australia. International Review of Finance, 16(4), 595-638.
  • Chung, S., & Wei, P. (2005). The relationship between bid-ask spreads and holding periods: The case of Chinese A and B shares. Global Finance Journal, 15(3), 239-249.
  • Datar, V. T., Y. Naik, N., & Radcliffe, R. (1998). Liquidity and stock return: an alternative test. Journal of Financial Markets, 1(2), 203-219.
  • Eleswarapu, V. R., & Reinganum, M. R. (1993). The seasonal behavior of the liquidity premium in asset pricing. Journal of Financial Economics, 34(3), 373-386.
  • Fama, E. F., & French, K. R. (1992). The cross-section of expected stock returns. The Journal of Finance, 47(2), 427-466.
  • Fama, E. F., & French, K. R. (1993). Common risk factors in the returns on stocks and bonds. Journal of Financial Economics, 33(1), 3-56.
  • Fama, E. F., & French, K. R. (2015). A five-factor asset pricing model. Journal of Financial Economics, 116(1), 1-22.
  • Gibbons, M. R., Ross, S. A., & Shanken, J. (1989). A test of the efficiency of a given portfolio. Econometrica: Journal of the Econometric Society, 57(5), 1121-1152.
  • Jiao, W. (2017). Whether profitability and investment factors have additional explanatory power comparing with the Fama-French three-factor model: empirical evidence on the Chinese A-share stock market. China Finance and Economic Review, 5(7), 1-19.
  • Keene, M., & Peterson, D. (2007). The importance of liquidity as a factor in asset pricing. Journal of Financial Research, 30, 91-109.
  • Kubota, K., & Takehara, H. (2018). Does the Fama and French five-factor model work well in Japan? International Review of Finance, 17(4), 137-146.
  • Lee, K.-H. (2011). The world price of liquidity risk. Journal of Financial Economics, 99(1), 136-161.
  • Lin, Q. (2017). Noisy prices and the Fama-French five-factor asset pricing model in China. Emerging Markets Review, 31(2016), 141-163.
  • Linter, J. (1965). Security prices, risk, and maximal gains from diversification. Journal of Finance, 20(4), 587-615.
  • Mossin, J. (1966). Equilibrium in a capital asset market. Econometrica: Journal of the Econometric Society, 34(4), 768-783.
  • Pástor, Ľ., & Stambaugh, R. F. (2003). Liquidity risk and expected stock returns. Journal of Political Economy, 111(3), 642-685.
  • Sharpe, W. F. (1964). Capital asset prices: a theory of market equilibrium under conditions of risk. The Journal of Finance, 19(3), 425-442.

Cite this article

APA

    APA : Haqqani, K., & Aleem, M. (2020). Testing Liquidity Augmented Fama-French Five-Factor Model in Pakistan Stock Exchange. Global Economics Review, V(I), 255-265. https://doi.org/10.31703/ger.2020(V-I).21

CHICAGO

    CHICAGO : Haqqani, Kanwal, and Muhammad Aleem. 2020. "Testing Liquidity Augmented Fama-French Five-Factor Model in Pakistan Stock Exchange." Global Economics Review, V (I): 255-265 doi: 10.31703/ger.2020(V-I).21

HARVARD

    HARVARD : HAQQANI, K. & ALEEM, M. 2020. Testing Liquidity Augmented Fama-French Five-Factor Model in Pakistan Stock Exchange. Global Economics Review, V, 255-265.

MHRA

    MHRA : Haqqani, Kanwal, and Muhammad Aleem. 2020. "Testing Liquidity Augmented Fama-French Five-Factor Model in Pakistan Stock Exchange." Global Economics Review, V: 255-265

MLA

    MLA : Haqqani, Kanwal, and Muhammad Aleem. "Testing Liquidity Augmented Fama-French Five-Factor Model in Pakistan Stock Exchange." Global Economics Review, V.I (2020): 255-265 Print.

OXFORD

    OXFORD : Haqqani, Kanwal and Aleem, Muhammad (2020), "Testing Liquidity Augmented Fama-French Five-Factor Model in Pakistan Stock Exchange", Global Economics Review, V (I), 255-265

TURABIAN

    TURABIAN : Haqqani, Kanwal, and Muhammad Aleem. "Testing Liquidity Augmented Fama-French Five-Factor Model in Pakistan Stock Exchange." Global Economics Review V, no. I (2020): 255-265. https://doi.org/10.31703/ger.2020(V-I).21