Understanding Cross-Sectional Variability in Equity Returns Using a Conditional Asset Pricing Model

Abstract

A common practice in the literature examining Turkish equity premia involves the application of time-invariant models that assume the constancy of parameters across time. The present study examines whether the cross-sectional variability among equity returns can be explained by market, size, value and momentum factors and whether the parameters are time varying, utilizing a conditional asset pricing model formulated by Ferson and Harvey (1999). The study yields four main findings. Firstly, I find that the market dividend yield has a positive and significant effect on portfolio returns over the period from July 1989 to May 2021. Secondly, I reject the time-invariance in betas, while not rejecting it for alpha. Thirdly, none of the factors I examined have been priced, indicating that the four-asset pricing model is not sufficient to explain time-varying premia. Finally, the results are sensitive to the methodology employed for portfolio construction.