The Validity of Fama-French Four Factor Model in Istanbul Stock Exchange /

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2014

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Bereket, Taylan

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The aim of this thesis is to investigate the size, book-to-market ratio (B/M), and profitability patterns in average returns and testing the viability of Fama-French four factor model in Istanbul Stock Exchange (ISE) over the period between July 2004-June 2013. The comparative performances of capital asset pricing model (CAPM), Fama-French three factor model, and Fama-French four factor model will be examined. Each of these three models is regressed on two different sets of portfolios. That is, monthly excess returns of six size-B/M and eighteen size-B/M-profitability portfolios are used as dependent variables in time-series regressions following Fama-French methodology. Confronted with the excess returns of six portfolios, the three factor model outperforms both CAPM and four factor model based on the results of adjusted R-squared values, GRS-F test of Gibbons, Ross, and Shanken (1989) and mean absolute value of intercept terms. Confronted with the excess returns of eighteen portfolios, based on R-squared value and GRS, four factor model is superior to both models. However, regarding the mean absolute value of alphas, three factor model fares slightly better than four factor model. Thus, in the light of the statistical results, although four factor model is not rejected and proves its viability in ISE, it does not show a strong superiority to three factor model, which is in line with Fama and French results.

Subject Keywords

Stock exchanges., Portfolio management.

URI

http://etd.lib.metu.edu.tr/upload/12618117/index.pdf
https://hdl.handle.net/11511/24052

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Graduate School of Social Sciences, Thesis

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Citation Formats

T. Bereket, “The Validity of Fama-French Four Factor Model in Istanbul Stock Exchange /,” M.S. - Master of Science, Middle East Technical University, 2014.