Open Access
American Research Journal of Business and Management
ISSN (Online): 2379-1047
DOI: 10.46568/arjbm
Capital Asset Pricing Model (CAPM) Versus FF Three Factor Model: The Choice of Asset Pricing Model for Bank Stocks at Nairobi Securities Exchange
Masinde Muliro University of Science & Technology, Department of Accounting and Finance, Kakamega, Kenya.
Dennis M. Bulla, “Capital Asset Pricing Model (CAPM) Versus FF Three Factor Model: The Choice of Asset
Pricing Model for Bank Stocks at Nairobi Securities Exchange”, American Research Journal of Business and Management,
Vol 8, no. 1, 2022, pp. 76-84.
Abstract
The paper discusses efficiency tests of two popular asset pricing models; Sharpe-Lintner (CAPM) and Fama-French 3
factor model using banking stock data at the Nairobi Securities Exchange. The purpose is to propose a more efficient
model between the two based on end year returns for 10 banks over the study period 2010-2015.
Design: Comparative analysis: Fitting data on stock returns, market returns, size and value factors to the two asset
pricing models to find their statistical power measured by R2 and significance of the coefficient alpha.
Results: Fama-French 3 factor model has better fit (R2 =77.5%) compared to CAPM (R2=57%) when the bank stock data
is analysed and fitted into the two models. However value factor is irrelevant in the 3 factor model. The coefficient alpha is
observed not to be different from zero signifying better efficiency for the FF model. Stock return is positively related with
market risk(r=0.775, p=0.000) but negatively associated with size (r= -0.841, p=000).
Originality: The paper makes unique contribution by validating asset pricing models using bank stock prices at the Nairobi
Securities Exchange. It uses end year stock data (low frequency) which can then be compared with higher frequency data
models. Lastly a shortened version of Fama-French (1993) is proposed for pricing bank stocks that captures only market
risk and size effects as explanatory factors at the NSE.
