Performance of factor models in explaining anomalous return patterns: Evidence from Pakistan

Abstract

ABSTRACT We compared classic and contemporary asset pricing factor models in explaining anomalous returns in the Pakistani stock market using a sample of 290 companies listed on the Pakistan Stock Exchange. We replicated 54 anomalies with a successful replication rate of 31.5%. We also replicated the factors of chosen factor models, including Fama and French's three-, five-, and six-factor models and an alternate six-factor model; Hou, Xue, and Zhang's q-factor model and an alternate q-factor model; and Stambaugh and Yuan's mispricing factor model and an alternate mispricing factor model. The performance of the factor models is tested using various time-series tests. We found that there is no clear winner in explaining anomalous returns, and we require other approaches to test the models’ abilities in explaining anomalies in Pakistan.