Abstract
Asset pricing models are attempt to pricing the different risks associated with the return on securities or other financial assets. Recently, Fama and French (2015) develop a five-factor asset pricing model which covers the limitations of Fama-French (1993) three factor model and Capital asset pricing model in terms of capturing the return behavior of portfolios related to the four firm characteristics: Market Capitalization, Book-to-Market ratio, Profitability and Investment. In this study, researcher applied both Fama-French three factor and five factor models in the Pakistan stock market which is an emerging stock market to suggest best model to pricing the Pakistani stocks. The study based on sample of KSE-100 index companies for the period 2007 to 2015. The regression results declared that Fama-French five factor model is better than three factor model to capture the portfolio return patterns related to the size, value, profitability and investment in the Pakistan stock market. The findings reveals that the five factors model capture the risk levels associated with firms' characteristics and market portfolio returns fluctuations in pricing the stocks. Therefore, this model is useful to apply in security selection for portfolio formation, pricing the financial assets, to check the performance of the fund management industry and to calculate the required rate of return on investment.