A TEST OF THE FAMA-FRENCH FIVE FACTOR MODEL IN COMPARISON TO THE CAPITAL ASSET PRICING MODEL AT THE LUSAKA SECURITIES EXCHANGE

Abstract

Purpose: The capital asset pricing model (CAPM)  is one of  the basic models in the security price analysis.Many asset pricing models have been developed to improve the CAPM.Among such models is the latest  Fama and French five factor model which is being  empirically tested in various stock markets. This study tested the five factor model in comparison to the capital asset pricing model. Testing the Fama and French Five factor model in comparison to the CAPM was important because the CAPM is widely taken to be the basic model in the security price analysis.

Methodology: The Fama and French methodology was used to test  the data from an emerging market, the Lusaka Securities Exchange. A deductive, quantitative research design and secondary data from the Lusaka Securities Exchange was used. Data was analyzed using multiple regression.

Results: The results indicate that the Five Factor model is better than the CAPM in capturing variation in the stock returns. The Adjusted R-squared for the five factor model from all individual portfolio sorting was 0.9, while that for the CAPM was 0.13

Unique contribution to theory, practice and policy: This study has contributed to theory in that it has added a voice to the ongoing debt on the suitability of  the new Fama and French Five Factor model which is at the cutting hedge in finance theory.Further the study is from developing capital market.

Keywords:, CAPM, Stock returns, Fama and French five factor model