Does Fama-French Three Factor Model Outweigh the CAPM Model? Evidence from the Dhaka Stock Exchange

In this paper we compare the explanatory power of a single index model with the multifactor asset-pricing model of Fama and French (1996) for Dhaka stock exchange for the period of January 1, 2010 to December 31, 2012. We find that all the three factors have significant determining impact on stock returns. Moreover, the three factor model has higher explanatory power than the CAPM to account for time series variation of stock returns. Our findings show that firm size and book-to-market equity helps to explain the variation in average stock returns in a meaningful manner. In summary, our findings suggest that CAPM beta is not alone sufficient to explain the average expected stock returns in Bangladesh.

Keywords: Portfolio theory, capital asset pricing model, multifactor model, size, book-to-market equity.

JEL Classification: G110, G120, G150

Suggested Citation: Suggested Citation

Sayeed, Mohammad Abu and Khatun, Mahfuza and Chowdhury, Biplob, Does Fama-French Three Factor Model Outweigh the CAPM Model? Evidence from the Dhaka Stock Exchange (December 20, 2014). Available at SSRN: https://ssrn.com/abstract=2636131 or http://dx.doi.org/10.2139/ssrn.2636131