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Size, Value and Business Cycle Variables. The Three-Factor Model and Future Economic Growth: Evidence from an Emerging Market

Author

Listed:
  • Fahad Ali

    (College of Economics, Zhejiang University, Hangzhou 310027, China)

  • RongRong He

    (School of Business, Hong Kong Baptist University, Kowloon 999077, Hong Kong, China)

  • YueXiang Jiang

    (College of Economics, Zhejiang University, Hangzhou 310027, China)

Abstract
The paper empirically investigates three different methods to construct factors and identifies some pitfalls that arise in the application of Fama-French’s three-factor model to the Pakistani stock returns. We find that the special features in Pakistan significantly affect size and value factors and also influence the explanatory power of the three-factor model. Additionally, the paper examines the ability of the three factors to predict the future growth of Pakistan’s economy. Using monthly data of both financial and non-financial companies between 2002 and 2016, the article empirically investigates and finds that: (1) size and book-to-market factors exist in the Pakistani stock market, two mimic portfolios SMB and HML generate a return of 9.15% and 12.27% per annum, respectively; (2) adding SMB and HML factors into the model meaningfully increases the explanatory power of the model; and (3) the model’s factors, except for value factor, predict future gross domestic product (GDP) growth of Pakistan and remain robust. Our results are robust across sub-periods, risk regimes, and under three different methods of constructing the factors.

Suggested Citation

  • Fahad Ali & RongRong He & YueXiang Jiang, 2018. "Size, Value and Business Cycle Variables. The Three-Factor Model and Future Economic Growth: Evidence from an Emerging Market," Economies, MDPI, vol. 6(1), pages 1-24, February.
    • Handle: RePEc:gam:jecomi:v:6:y:2018:i:1:p:14-:d:134024
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    References listed on IDEAS

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    5. Muhammad Ahmar & Fahad Ali & Yuexiang Jiang & Mamdooh Alwetaishi & Sherif S. M. Ghoneim, 2022. "Households’ Energy Choices in Rural Pakistan," Energies, MDPI, vol. 15(9), pages 1-23, April.
    6. Hana Stverkova & Michal Pohludka, 2018. "Business Organisational Structures of Global Companies: Use of the Territorial Model to Ensure Long-Term Growth," Social Sciences, MDPI, vol. 7(6), pages 1-9, June.
    7. José Clemente Jacinto Ferreira & Ana Paula Matias Gama & Luiz Paulo Fávero & Ricardo Goulart Serra & Patrícia Belfiore & Igor Pinheiro de Araújo Costa & Marcos dos Santos, 2022. "Economic Performance and Stock Market Integration in BRICS and G7 Countries: An Application with Quantile Panel Data and Random Coefficients Modeling," Mathematics, MDPI, vol. 10(21), pages 1-35, October.

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