Size, P/E Ratio and Equity Stock Returns in Pakistan

Abstract

This study examine the impact of size and price earning ratio on equity returns by using Fama and French (1992, 1993).Results demonstrate that market premium exist in Pakistani equity market and size factor found positive related to portfolio returns. Size premium does not explain the big portfolios returns. In the period of 2002 to 2011 and 2007 to 2011 HML better explains the low price earning stocks and price earning is a negative proxy for book to market. In addition this study also confirms that Fama and French three factor model is a better approach to explain the returns in Pakistani equity market.

JEL Classification Number: G11, G12, C52

Keywords: CAPM, APT, Fama and French Three Factor, Equity Market