The validity of Fama French Five-Factor Asset Pricing Model: Turkey case

Analysis of stock returns is one of the important topics in finance literature since 1950s. The Capital Asset Pricing Model, developed in this regard, was inadequate in explaining stock returns due to a number of deficiencies in its assumptions. Thereafter the academicians studied on multi-factor models. The Three-Factor Model, developed by Fama and French in 1993, has been tested in several countries and provided successful results. Thereupon, a new model called Five-Factor Asset Pricing was introduced by Fama and French in 2015. This model was tested in various developed country markets, especially in the United States, and achieved successful results. However, it was not yet clear whether the model is valid for developing country markets with different Dynamics. The aim of this study is to investigate the validity of the Fama French Five-Factor Asset Pricing Model in Borsa Istanbul. For this purpose, the excess returns of the shares traded in Borsa Istanbul between 2006 and 2018 were analyzed. The independent variables were the market risk premium, market capitalisation, book – to – market value ratio, profitability and investment factors. Panel Data Analysis was used as a statistical analysis method to test the generated model. According the findings of the study, there is a statistically significant relationship between excess returns and stock risk premium, market capitalization, book – to – market value ratio and investment factors. Contrary to the findings of Fama and French (2015), there is a positive relationship between market value and investment factor and returns, while the relationship is found to be negative for book – to – market value ratio factor. The profitability factor is statistically meaningless in explaining the excess returns. On the other hand, the risk premium factor still remains important in terms of its effect on excess returns. The findings do not provide sufficient evidence that the Fama French Five-Factor Asset Pricing Model is valid for Borsa Istanbul during the relevant period. The results of the research and the lack of sufficient evidence on the validity of the Five-Factor Model in Turkey are parallel by many studies in the literature.