A Comparison of the Performance of Fama-French Multifactor Asset Pricing Models: An Application on Borsa Istanbul

Abstract

Exploring the factors that explain changes in stock returns is one of the most important research topics in finance literature. Recently, Fama and French have developed the five-factor asset-pricing model (FF5F) by adding profitability and investment factors on the three-factor model (FF3F), which consists of market, size and value factors. This model has been tested in various developed countries, especially in the USA, and has proved its success in explaining the changes in stock returns. However, there are deficiencies in the researches on whether this model is valid for developing countries with different dynamics from developed countries. In this paper, it is aimed to examine whether the FF5F is valid for Turkish stock market and to test how successful the FF5F is in comparison with the CAPM, FF3F and other alternative models. For this purpose, returns of 18 different intersection portfolios have been analyzed during the period of 150-months between January 2005 and June 2017. According to the regression results of mean absolute values of intercept terms, mean adjusted R-squared values, GRS-F test statistics and its p-values, it has been found that FF5F performs better than the other alternative models in the Turkish stock market.