In the early 1990s, one of the most influential researches was by Fama and French. Therefore, researchers concentrated on finding better models for the behaviour of stock returns and added more explanatory variables into CAPM. While the CAPM is still the most widely accepted description for security pricing, empirical studies found contradicting evidence (see ). R it − R ft = α i + β i R Mt − R ft + e it E3 William Sharpe’s market model is as follows: Because of input drawback, new models have been developed to simplify the inputs to portfolio analysis.
Markowitz’s model requires large data inputs. For example, defines the expected return and variance of returns on a portfolio as the basic criteria for portfolio selection. However, I would like to briefly state that all the asset pricing models developed so far have included risk as the most important determinant. Since the literature on asset pricing model (APM) is very well known and can be reached easily in finance textbooks, I do not go into a detailed explanation of evolution of APM.
Earlier studies in this area are by Markowitz, Sharpe, Ross, Fama and French. One can find enormous number of studies on this issue. The main determinants of asset prices and risk factors that affect the demand for assets and asset prices have been an important issue in finance theory and practice. What kinds of factors determine the price of an asset? Since Markowitz formulated a model of asset pricing, the debate on this question continues. Section 9 concludes and presents the main findings of the study. Section 8 is devoted to the detailed analysis of regressions, and the main messages of these regressions are presented.
In this section, I conduct Gibbons-Ross-Shanken (GRS) test for the regression portfolios and give preliminary results of the performance of the CAPM, the 3F-FF and the 5F-FF models for the Turkish case. Having estimated and tested factor spanning regressions, I go on testing of hypothesis of joint significance of portfolio regressions’ alphas in Section 7. Section 6 defines and estimates factor spanning regressions, which are important to see if an explanatory factor can be explained by a combination of other factors. In Section 5, I give regression portfolio statistics to see patterns in the behaviour of portfolios. Then, regression portfolios are constructed by sorting the stocks by their size, book-to-market ratios (B/M), profitability (OP) and investment (INV). First of all, Fama-French factors are constructed. In this section, explanatory variables and dependent variables are defined. Section 4 explains the methodology to apply the CAPM and Fama-French factor models to the Turkish stock market. In Section 3, data selection, variable definitions, return periods and filtering data issues are given. In Section 2, I give a literature review on asset pricing models and applications. 5F-FF model portfolios capture the common variation in stock returns and can explain the cross section in returns. (c) I test all the models (CAPM, 3F-FF and 5F-FF) with 48 different market portfolios. The main result is that the 5F-FF model explains better the common variation and the cross section of stock returns than the 3F-FF model and the CAPM. (b) It expands the test of the 3F-FF model to the Turkish market for a longer period, and this is the first study that covers 17 years of the Turkish data. This study extends the asset pricing tests in three ways: (a) this study is the first application of the 5F-FF Fama-French model for the Turkish stock market. This study tests the capital asset pricing model (CAPM hereafter), the three-factor Fama-French model (3F-FF hereafter) and the five-factor Fama-French model (5F-FF hereafter) in the case of the Turkish stock market. As elsewhere, obviously for all investors (institutional or individual), the main goal is to get the highest possible return in a stock market.
Acceptance of BIST as a full member to the World Federation of Exchanges (WFE) was in 1992. Borsa Istanbul (BIST) stock exchange was established in 1985 and commenced stock trading on 3 January 1986.