Abstract

In this study, I try to test the capital asset pricing model (CAPM), three-factor Fama-French (3F-FF) model and five-factor Fama-French (5F-FF) model for the Turkish stock market. The sample is from June 2000 to May 2017. My results show that the five-factor model explains better the common variation in stock returns than the three-factor model and capital asset pricing model. Moreover, the CAPM has no power in explaining monthly excess returns of sorted portfolios. Although three-factor model seems to have significant coefficients, intercepts in this model have significant t-values indicating that the model has problems in explaining the portfolio returns. I use equal weight market portfolio for all the models in order to explain the cross-sectional variations in the stock returns.

Highlights

  • Borsa Istanbul (BIST) stock exchange was established in 1985 and commenced stock trading on 3 January 1986

  • This study extends the asset pricing tests in three ways: (a) this study is the first application of the 5F-FF Fama-French model for the Turkish stock market. (b) It expands the test of the 3F-FF model to the Turkish market for a longer period, and this is the first study that covers 17 years of the Turkish data

  • Where Rit is the return of portfolio i at time t; Rft is the risk-free rate approximated by 3-month TRY Libor rate at time t; RitÀRft is the excess return of portfolio i at time t; RMt is the monthly market return approximated by natural log difference of BIST-100 Index at time t; SMBt, HMLt, RMWt and CMAt are defined in details in the following topic; ai is the intercept; βi is the coefficient of RMtÀRft for portfolio i; si is the coefficient of SMBt for portfolio i; hi is the coefficient of HMLt for portfolio i; ri is the coefficient of RMWt for portfolio i; and ci is the coefficient of RMWt for portfolio i

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Summary

Introduction

Borsa Istanbul (BIST) stock exchange was established in 1985 and commenced stock trading on 3 January 1986. Acceptance of BIST as a full member to the World Federation of Exchanges (WFE) was in 1992. Obviously for all investors (institutional or individual), the main goal is to get the highest possible return in a stock market. This study tests the capital asset pricing model (CAPM hereafter), the three-factor FamaFrench model (3F-FF hereafter) and the five-factor Fama-French model (5F-FF hereafter) in the case of the Turkish stock market. This study extends the asset pricing tests in three ways: (a) this study is the first application of the 5F-FF Fama-French model for the Turkish stock market. (b) It expands the test of the 3F-FF model to the Turkish market for a longer period, and this is the first study that covers 17 years of the Turkish data.

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