The Cross-sectional Performance of the Fama-French Three-Factor Model in the Turkish Equity Market
The Cross-sectional Performance of the Fama-French Three-Factor Model in the Turkish Equity Market

Summary/Abstract: This study examines whether the Fama-French Three-Factor Model can explain cross-sectional differences in stock returns in the Turkish equity market, addressing a gap in existing asset pricing research. The methodology involves two main components: timeseries regressions to evaluate the model’s explanatory power for portfolio returns, and Fama-MacBeth cross-sectional regressions to assess the pricing of individual stocks. The sample consists of monthly data from February 2009 to December 2024 for stocks listed on Borsa Istanbul, with portfolios constructed based on firm size and book-to-market equity ratios. The time-series results demonstrate strong explanatory power, with values ranging from 0.80 to 0.89 and statistically significant positive loadings for the market and size factors. The value factor shows positive and significant effects in high book-to-market portfolios, consistent with the theoretical value premium, but displays negative loadings in other portfolios, indicating a relatively weak or inverted value effect during the sample period. In cross-sectional tests, none of the factor risk premia (market, size, value) are statistically significant, suggesting that the Fama-French model does not adequately capture cross-sectional differences in individual stock returns. The findings suggest that while the model is useful for time-series analysis, its cross-sectional limitations necessitate the inclusion of additional risk factors.

• Details
• Contents