Fama and French (2015) five-factor model using SEM with a Mediating Role of Liquidity: Evidence from Pakistan

Abstract

Liquidity is one of the intricate phenomena that cannot be assessed in a single dimension due to its multidimensional structure, which is still contentious among researchers and must be explored from several perspectives. This study thus analyses the multidimensional liquidity as mediating variable to empirically investigate whether liquidity influence the nexus between risk-premiums and portfolio stock returns using Structural Equation Modeling. Using liquidity as factor is employed using time-series OLS regression technique. The sample used in this study comprised of monthly returns of 286 non-financial firms enlisted on PSX for time span from January 2006 through June 2022. The findings of the study reveal that liquidity as mediating variable performs statistically highly significant while as independent risk-factor also performs statistically highly significant using Fama and French (2015) five-factor model. The market risk-premium exhibits statistically insignificant results for PSX while size, profitability and investment also show significant findings in the market. The potential investors and portfolio managers need to consider liquidity as benchmark criteria prior to make decision regarding investing in PSX.

Tobin-Q, Liquidity and Momentum risk-premia: A Demonstration of Weighted Least Squares Regression Approach

“…More recently, Azam (2023) used 286 non-financial firms' data from PSX employing various augmented APMs between 2006-2022. The findings observed statistically significant results for multidimensional Liu (2006) liquidity as independent as well as mediating variable in the market.…”