Keywords: Carhart Four-Factor Model, Fama-French Three-Factor Model, CAPM, GRS F-Test, Dhaka Stock Exchange.


For determining the expected return, and asset pricing, CAPM (Capital asset pricing model) is being used dominantly grounded on only the market (systematic) risk-factor though several anomalies have been revealed in this model. Fama and French (1993) have addressed those anomalies and developed the Three-factor model by combining size and value factors besides market factors. Over time, Carhart (1997) has further developed a model addressing momentum factor besides the three factors of Fama and French (1993) which is known as the Carhart four-factor model. Though several kinds of research have been conducted on the CAPM and three-factor model, little works have been accompanied by the Carhart four-factor model in an evolving market like Bangladesh. The goal of this work is to examine the validity of the Carhart four-factor model and examine the loftier explanatory power in Dhaka Stock Exchange (DSE). From the regression analysis of the Carhart model, we have found that market, size, value, and momentum explain the excess stock return. This study indicates that the Carhart model has the lowest GRS F-statistic, highest adjusted R-squared, and lowest Sharpe ratio in contrast to the CAPM and three-factor model which indicates the superior explanatory power and statistical validity of the Carhart model.

JEL Classification Codes: G12, G13, G14.

Author Biographies

Muhammad Saifuddin Khan, DU

Associate Professor, Department of Finance, Faculty of Business Studies, University of Dhaka, Dhaka-1000, Bangladesh

Md. Miad Uddin Fahim, DU

Postgraduate Student, Department of Finance, Faculty of Business Studies, University of Dhaka, Dhaka-1000, Bangladesh


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How to Cite
Khan, M. S., & Fahim, M. M. U. (2021). THE FOUR-FACTOR MODEL AND STOCK RETURNS IN BANGLADESH. International Journal of Accounting & Finance Review, 6(2), 133-149.
Regular Research Article/ Short Communication Article