This paper aims to identify how the inclusion of financial sector affects the ability of asset\npricing models to explain the average stock returns in the CSE. Most of the asset pricing\nresearches, the firms in the financial sector are excluded on the basis that their characteristics\nand the leverage are notably different than firms in other industries. Therefore the objective\nof this study is to identify the impact of the inclusion of financial sector on the ability of the\nCarhart four-factor model to explain the average stock returns in the CSE and to compare its\nperformance with the Capital Asset Pricing Model (CAPM) and the Fama and French\nthree-factor model. The study finds that the four-factor model; incorporating the market\npremium, size premium, value premium and momentum premium provides a satisfactory\nexplanation of the variation in the cross-section of average stock returns in the CSE, even\nwhen the financial sector is included. It is found that the Carhart four-factor model performs\nbetter than the CAPM in all scenarios; and that it performs notably better than the Fama and\nFrench three-factor model.However, there is no notable difference in the findings either the\nfinancial sector is included or not.
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