Comparison of CAPM, Three-Factor Fama-French Model and Five-Factor Fama-French Model for the Turkish Stock Market
Financial Management from an Emerging Market Perspective
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
... eems 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. Recent studies have found additional factors that seem to exhibit a strong relationship with average returns. Novy-Marx  finds that firms with high profitability generate significantly higher returns than unprofitable firms. Aharoni et al.  find that a statistically significant relation exists between an investment proxy and average returns. In the wake of these findings, Fama and French  expanded the 3F-FF model with profitability and investment. They reveal that the 5F-FF model performs better than the 3F-FF model in explaining average returns for their sample. The same model was tested using international data [20, 21] , and they have found similar results. This study adds to research conducted on CAPM, three-factor model and the new 5F-FF model by testing all these models on the Turkish stock market. Comparison of CAPM, Three-Factor Fama-French Model and Five-Factor Fama-French Model for the Turkish Stock... http://dx.doi.org/10.5772/intechopen.70867 71 Comparison of CAPM, Three-Factor Fama-French Model and Five-Factor Fama-French Model for the Turkish Stock... http://dx.doi.org/10.5772/intechopen.70867 Comparison of CAPM, Three-Factor Fama-French Model and Five-Factor Fama-French Model for the Turkish Stock...