FAMA-FRENCH FIVE FACTOR MODEL AND THE NECESSITY 0F VALUE FACTOR: EVIDENCE FROM ISTANBUL STOCK EXCHANGE

Purpose- The objective of this paper is to test the validity of Fama and French (2015) five factor model in Istanbul Stock Exchange (ISE) and to determine whether the value factor is redundant in the model.Methodology – To that end, Fama-French five factor model is primarily tested, which is composed of market, firm size, value, profitability and investment factors. Afterwards, the value factor is excluded from the model and the empirical performance of two models are compared. Multiple regression analysis is carried out by using time series data from July 2009 to June 2015. Besides that, GRS-F test is applied to determine the pricing errors in models.Findings- The results show that Fama-French five factor model can be used in ISE in explaining the variation of returns, although the factor returns are lower in comparison with Fama and French (2015) findings. Specifically, the size premium is considerably lower attained. On the other hand, GRS-F test proves there is no pricing error in the model.Conclusion- Finally, the model is found viable in ISE between the period of July 2009 and June 2015. It is further found that the value factor is not redundant in the Fama-French five factor model.

Keywords:

Fama-French five factor model, asset pricing, returns, time series regression ISE,

PDF

___

Acaravci, K.S. & Karaomer, Y .(2017). Fama-French five factor model: evidence from Turkey. International Journal of Economics and Financial Issues, Econjournals. 7(6): 130-137.
Aragon, G. O., Mehra, R., & Wahal, S. (2018). Do Properly Anticipated Prices Fluctuate Randomly? Evidence from VIX Futures Markets (No. w24575). National Bureau of Economic Research.
Cakıcı, N. (2015).The five-factor Fama-French Model: international evidence. Working Paper, Fordham University. DOI: http://dx.doi.org/10.2139/ssrn.2601662
Chiah, M., Chai, D., Zhong, A., & Li, S. (2016). A Better Model? An empirical investigation of the Fama–French five‐factor model in Australia. International Review of Finance, 16(4), 595-638.
Fama, E. F., & French K. R. (1993). Common risk factors in the returns on stocks and bonds, Journal of Financial Economics, 33 (1): 3-56. DOI: https://doi.org/10.1016/0304-405X(93)90023-5.
Fama, E. F., & French K. R. (1996). Multifactor explanations of asset pricing anomalies.The Journal of Finance, 51 (1): 55-84. DOI: https://doi.org/10.1111/j.1540-6261.1996.tb05202.x
Fama, E. F., & French K. R. (2013). A four-factor model for the size, value, and profitability patterns in stock returns. Fama-Miller Working Paper, University of Chicago.
Fama, E. F., & French K. R. (2015). A five-factor asset pricing model. Journal of Financial Economics, 116 (1): 1-22.
Fama, E. F., & French K. R. (2016). Dissecting anomalies with a five factor model. The Review of Financial Studies, 29 (1): 69–103.DOI: https://doi.org/10.1093/rfs/hhv043
Fama, E. F., & French K. R. (2017). International tests of a five-factor asset pricing model. Journal of Financial Economics, 123 (3): 441-463. DOI: https://doi.org/10.1016/j.jfineco.2016.11.004
Foye, J. (2018). A comprehensive test of the Fama-French five-factor model in emerging markets. Emerging Markets Review.
Gibbons, M.R., Ross, S.A., Shanken, J. (1989), A test of the efficiency of a given portfolio. Econometrica, 57: 1121-1152. DOI: 10.2307/1913625
Lin, Q., (2017). Noisy prices and the Fama–French five-factor asset pricing model in China. Emerg. Mark. Rev., 31: 141–163.
Nguyen, D. M. (2016). Fama-French Five-factor model: Evidence from Vietnam. https://www.nzfc.ac.nz/archives/2016/papers/updated/49.pdf (02.12.2018)
White H. (1990). A heteroscedasticity consistent covariance matrix estimator and a direct test of heteroscedasticity. Econometrica, 48: 817-838. DOI: 10.2307/1912934
Yang, Q., Li, L., Zhu, Q., & Mizrach, B. (2017). Analysis of US Sector of Services with a New Fama-French 5-Factor Model. Applied Mathematics, 8 (09), 1307.