Testing assets pricing models on Africa’s mutual fund industry

Abstract

This paper concentrates on testing various asset pricing models on mutual fund returns in six African countries. The various asset pricing models include the CAPM, the Fama-French threefactor model, the Carhart four-factor model, the Fama-French five-factor model and the FamaFrench six-factor model. The models performances were evaluated using a range of performance measures and the best performing asset pricing model was identified in each country as well as across the African mutual fund industry as a whole. With the CAPM being deemed as unable to fully explain returns, it led to the development of new models including more factors that were thought to be vital in explaining returns. The top performing asset pricing model across the African mutual fund industry is the FamaFrench five-factor model as it outperforms both the CAPM and the Fama-French three-factor model. Diving deeper and looking at the performances of the models in each country, the results tend to differ. For South Africa, different models outperform the others across the different metrics, however, for the remaining sample countries, the Fama-French five-factor model outperforms the other models across most performance measures. Across all countries, except South Africa, the profitability factor, RMW, is the only nonredundant factor. All the other factors jointly explain one another. For South Africa, the momentum factor is non-redundant for both the Carhart four-factor model and the FamaFrench six-factor model.