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

Year 2018, , 14 - 17, 30.12.2018

Nesrin Ozkan

https://doi.org/10.17261/Pressacademia.2018.972

Abstract

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

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