Factor Premiums in Developing Stock Markets: Evidence from Nairobi Securities Exchange

Abstract: This study tests the Fama-French 5-factor asset pricing model in a developing stock market. The purpose is to investigate whether the size, value, profitability, and investment factor premiums exist in the Nairobi Securities Exchange (NSE). The test results of the Fama-French 5-factor model are compared with those of the Capital Asset Pricing Model (CAPM). Using monthly stock data for July 2009 to June 2019, value and profitability factors explain some variations in stock returns and improve the CAPM. Due to data insufficiency and limitations on the variables that affect the model, the existence of factor premiums in this market is inconclusive.