A Comparison of New Factor Models: Evidence From Turkey

Year 2020, Volume: 20 Issue: 3, 193 - 207, 30.07.2020

Nesrin Özkan

https://doi.org/10.21121/eab.795963

Abstract

The purpose of this paper to compare the performances of new factor models with the former models in Turkey. In that aim, newly proposed q-factor model and Fama French five factor model are compared with Fama-French three factor, Carhart four factor and Pástor-Stambaugh factor models. The performance metric is chosen as maximum squared Sharpe ratio which gives a better understanding in comparison of two or more models accordance to Barillas and Shanken (2017). As per the measure of maximum squared Sharpe ratio, the q-factor model outperforms of all between July 2009 and June 2017. After that, Carhart four factor model follows as the second best performing model. It is considered that this result may be due to the portfolio formation frequency of profitability and momentum factors. Thus, it can be inferred that the higher the data frequency, the better the explanatory power of the model. Although Fama-French five factor model is similar to q-factor model, the considerable outperformance of q-factor model can be attributed to the way of factor construction and calculation. Consequently, it seems as though the performance
of the model is sensitive to the way of factor construction and calculation.

Keywords

q-factor model, Fama-French five factor model, Turkey

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