Comparing the Explanatory Power of the Fama–French Five-Factor and Carhart Four-Factor Models in a Frontier Equity Market: Evidence from the Lusaka Securities Exchange (LuSE)

Danicious Kalenga; Benjamin Kaira; Jackson Sishumba; Lukundo Willy Siwilanji

doi:10.59413/ajocs/v7.i3.56

Authors

Danicious Kalenga University of Zambia Author
Benjamin Kaira University of Zambia Author
Jackson Sishumba University of Zambia Author
Lukundo Willy Siwilanji University of Zambia Author

DOI:

https://doi.org/10.59413/ajocs/v7.i3.56

Keywords:

Frontier Markets, Asset Pricing, Lusaka Securities Exchange, Fama-French Five-Factor Model, Carhart Four-Factor Model, CAPM, Momentum Effect, Profitability Factor, Zambia

Abstract

Purpose: This study aims to test the explanatory power of the Carhart Four-Factor Model (C4FM) and the Fama-French Five-Factor Model (FF5FM) in the Lusaka Securities Exchange (LuSE), a frontier market that is characterized by low liquidity, thin trading, information asymmetry and market inefficiency where the CAPM has been found to perform poorly in explaining stock returns. The study uses standard Fama-French and Carhart portfolio formation procedures.

Methodology: This study employed a deductive quantitative research design and collected data on the return of the 20 LuSE listed firms (listed on the main board) on a monthly basis between January 2022 and December 2025 (48 months). Data are sourced from LuSE, company reports and Bank of Zambia. The explanatory power of the factors (market, size, value, profitability, investment and momentum) is tested using time series OLS regressions. The two factor models (FF5FM and C4FM) are compared based on regression intercepts, mean absolute price error, GR S tests and modified R-squared.

Results: The Fama French Five-Factor Model (FF5FM) exhibits better overall explanatory performance over the Carhart Four-Factor Model (C4FM) with a slightly higher average adjusted R-squared of 0.931, a minimum average absolute pricing error of 0.39% and a statistically non-significant intercept at the 5% level of significance for all types. The C4FM performed pretty well with a mean adjusted R-squared of 0.924 and a mean error of 0.44% which indicates that both frameworks have strong explanatory power in the setting of the LuSE frontier market.

Unique contribution: The unique contribution of this study is the investigation of asset pricing in frontier markets and being one of the few studies that directly compare the FF5FM and the C4FM, especially in the African market. Information and Policy Implications for Investors, Portfolio Managers and Development of Zambia’s Capital Markets.

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