Comparing CAPM and FAMA French for Predicting Stock Returns: New Evidence from Pakistan Stock Exchange

Abstract

The aim of this study is to investigate return differences, accuracy and reliability of Capital Asset Pricing Mode (CAPM) and Fama-French Model for Pakistan Stock Exchange. A time series data set from January 3, 2014 to December 31, 2018 were used to analyze the yield spread estimates for 50 listed companies from KSE-100 list.. Most companies provide important evidence that demonstrates the impact of size factor and book value on earnings forecasts. According to the analysis, companies with lower book value ratios have better returns than companies with higher ratios.In addition, size factor shows that large companies' portfolios offer higher returns than small one. The additional factors of Fama-French model (size and value) provide more significant results than the single factor
model. The study analyzedthat Fama French provides more accurate results for the Pakistan Stock Exchange as compare to CAPM. Therefore, Fama French model is suggested for yield measurement particularly forPakistan Stock Exchange.