The impact of Fama French factors and coskewness in ISE

Asset pricing is always an attractive topic for investors and finance scholars. The Capital Asset Pricing Model (CAPM) has an important place in the concept of asset pricing and it has attracted a great deal of attention by the finance world since it was developed. It is still widely used in academic research and applications, such as portfolio management and estimation of the cost of capital. The CAPM has taken a large number of criticism because of its unrealistic assumptions and from the time of the creation of the model to the present, different versions of the model have emergedIn this dissertation, the CAPM, the Fama French Three Factor model and the Four Factor Model which incorporates co-skewness ? third order co-moment- into the Fama French Three Factor model are implemented. The impact of coskewness on the variation of portfolios that are formed according to industry, size, book to market ratio and momentum for ISE over the period July 2002 to June 2010 are investigated by using a similar methodology to Harvey and Siddique (2000). Then by performing multivariate testing procedure of Gibbons?Ross?Shanken (1989), these models are tested to reveal whether there is an incremetal effect of coskewness and Fama French factors to the market factor in explaining the variations of excess returns. Lastly, the explanatory power of factors in the analysed asset pricing models are tested by means of the Fama- MacBeth and Full Information Maximum Likelihood (FIML) methods.