Incorporation of Foreign Exchange Risk to Fama-French Factor Model: A Study on Borsa İstanbul

Download

Tez_PDF_format_v8.pdf

Date

2022-2-10

Author

Höçük, Furkan

Metadata

Show full item record

This work is licensed under a Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License.

Item Usage Stats

863
views

344
downloads

This empirical study compares the relative performances of the Fama-French five-factor model without foreign exchange risk and the five-factor model incorporating foreign exchange risk on capturing portfolio returns in Borsa İstanbul. The main contribution of our study to the asset pricing literature is the incorporation of FX risk to the Fama-French five-factor model. We propose an additional factor as a proxy for FX risk. Another contribution of this study is implementing a machine learning technique, support vector regression (SVR), to estimate portfolio returns through the FF5F model without FX risk and FF5F model incorporating FX risk for Borsa İstanbul stocks. Although there are numerous researches investigated on Borsa İstanbul, any other study did not implement SVR via CAPM or Fama French multi-factor models to the best of our knowledge. There are empirical studies that confirm the efficiency of SVR. Some studies also compare the performance of the linear factor regression method with alternative statistical tools, including machine learning methods. Our study stands out in combining predictions of simple linear regression and SVR methods. Optimal weights obtained from linear combinations imply more precise estimations through SVR. In 28 out of 36 combinations, we observed that optimal weights assigned to SVR estimations were greater than those assigned to SLR estimations. Linear regression methods may be too restrictive to reflect the non-linearity of factor exposures under the Fama-French multi-factor model scheme. Asset pricing models, which take nonlinear aspects of the stock markets into consideration, might generate more precise estimations.

Subject Keywords

Fama-French, Foreign Exchange Risk, Multi-Factor Models, Borsa İstanbul, Support Vector Regression, Forecasts Combinations

URI

https://hdl.handle.net/11511/96720

Collections

Graduate School of Applied Mathematics, Thesis

Suggestions

OpenMETU
Core

Forecasting direction of exchange rate fluctuations with two dimensional patterns and currency strength Özorhan, Mustafa Onur; Toroslu, İsmail Hakkı; Department of Computer Engineering (2017) This thesis presents a method to predict the direction and magnitude of movement of currency pairs in the foreign exchange market. The method uses clustering and classification methods with a combination of two dimensional chart patterns, processed price data and technical indicator data. The input data is adapted to each trading day with a moving time-frame. The accuracy of the prediction models are tested across several different currency pairs. The experimental results suggest that using two dimensional ...
EFFECTS OF EXCHANGE RATE VOLATILITY AND FIRM-SPECIFIC FEATURES ON THE RATES OF RETURNS OF THE MANUFACTURING FIRMS LISTED IN BORSA İSTANBUL: A CAPM APPROACH Aslan, Mustafa; Gaygısız Lajunen, Esma; Department of Financial Mathematics (2021-8-04) This study examines the effects of the exchange rate volatility and the firm-specific features representing the liquidity, profitability, and leverage performance of firms on excess stock returns for the manufacturing firms listed in Borsa İstanbul (BIST) using dynamic panel data model. The exchange rate volatility is modeled by single regime generalized autoregressive conditional heteroscedasticity (GARCH) models and Markov-switching GARCH (MSGARCH) models. The MSGARCH models show evidence that the evoluti...
The role of foreign investors in the İstanbul Stock Exchange Usta, Murat; Güner, Zehra Nuray; Department of Business Administration (2003) This master thesis examines the role of foreign investors in the Istanbul Stock Exchange in three dimensions: differences among sectors and subsectors in terms of foreign trading activity, the effect of November 2000 ا February 2001 crisis on returns and foreign trading activity, and the relationship between return and foreign trading activity. Data used in this thesis covers 72 months between January 1997 and December 2002. Significant differences among sectors and subsectors in terms of foreign trading ac...
Managing financial instability in emerging markets: A Keynesian perspective Akyüz, Yılmaz (Orta Doğu Teknik Üniversitesi (Ankara, Turkey), 2008-6) The Keynesian analysis of financial instability as developed by Hyman Minsky provides considerable insights into understanding the nature and dynamics of boom-bust cycles driven by international capital flows in emerging markets. Its main policy conclusion that financial control rather than macroeconomic policy holds the key to financial stability is equally valid. There is, however, need to develop a new approach to financial control and place greater emphasis on managing capital inflows than has hitherto ...
Cross sectional determinants of Turkish stock market returns Çeliker, Umut; Rhoades, Seza; Department of Business Administration (2004) This thesis analyzes the relationship between stock returns and firm-specific characteristics including market beta, size, book-to-market ratio, leverage, earnings yield, net sales-to-price ratio and prior return performance in Istanbul Stock Exchange during the period 1993-2003. Moreover, the predictability of some macroeconomic variables based on the stock market return behavior is investigated.

Citation Formats

F. Höçük, “Incorporation of Foreign Exchange Risk to Fama-French Factor Model: A Study on Borsa İstanbul,” M.S. - Master of Science, Middle East Technical University, 2022.