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BUSINESS AND ECONOMICS RESEARCH JOURNAL

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Article Information

Journal:
Business and Economics Research Journal
Title of Article:Validity of Fama-French Three-Factor Model In Asset Pricing: An Application In Istanbul Stock Exchange
Author(s): Harun Guzeldere, Serra Eren Sarioglu
Volume: 3
Number: 2
Year: 2012
Page:1 – 19
ISSN:1309-2448
Abstract

The traditional Capital Asset Pricing Model stating that the risk premium of a financial asset is positively related to its market risk, was found to be insufficient in explaining the expected returns of stocks. Fama and French (1993) introduced the “Three-Factor Asset Pricing Model” via inserting the size and book-to-market factors to the standard Capital Asset Pricing Model. In this study, the validity of the Three-Factor Model in Istanbul Stock Exchange within 1999-2011 period is investigated. The model is tested on ISE-100 Index non-financial companies monthly data by utilizing panel data analysis. The findings reveal that Three-Factor Model gives statistically significant results in Istanbul Stock Exchange. In the forecast of the cost of capital, Three-Factor Model can be used instead of one-factor Capital Asset Pricing Model by the investors in Turkey. Our findings are consistent with most of the studies that suggested the validity of the Three-Factor Model in developed and emerging markets.

Keywords:Three-Factor Model, Fama and French, Asset Pricing, Panel Data Analysis, ISE

JEL Classification:C19, D53, G14

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