Author details

Yaşar Erdinç

coefficients are significant at the 5% level, showing that three-factor model leaves a high

One of the main messages of the results of the 5F-FF model is that as the size of the companies under investigation increases, the explanatory power of the model rises. It seems from the results of both Tables 6 and 7 that the best explanatory factor for the monthly excess returns of

As the size of the companies in portfolios that have been sorted by size and profitability gets smaller, RMW and CMA become ineffective in determining the monthly excess returns of these portfolios (see the coefficients of RMW and CMA in the first six rows of Table 7). However,

Table 8 gives the results of CAPM, 3F-FF model and 5F-FF model for portfolios that are sorted by size and investment. The CAPM has no power in explaining the returns of portfolios, while the coefficients of the factors in 3F-FF model seem powerful, 8 of the 16 alpha values are significant at the 5% level. This result indicates that the CAPM and 3F-FF model are not the true definition of a model to explain the variations in monthly excess returns of portfolios. However, as in the results of the previous tables (Tables 6 and 7), the 5F-FF model in general has statistically significant coefficients for the Fama-French factors, namely, SMB, HML, RMW and CMA. Also, only 2 of the 16 coefficients of intercepts (alphas) are significant at the 5% level

Variations of the monthly returns of portfolios constructed by big-sized companies are best explained by the 5F-FF model. However, CMA factor turns out to be insignificant when

This study adds to the asset pricing literature using the Turkish data. One of the main findings is that CAPM and 3F-FF model cannot explain cross-sectional variations in portfolio returns

As seen elsewhere [17, 19–23], as the number of explanatory variables increases in the regression portfolios, explanatory power of the equation increases, and the R2 rises. In the Turkish case, although 3F-FF model has high R<sup>2</sup> compared to the CAPM, more than half of the intercepts of the 3F-FF model are significant at the 5% level, and this shows that SMB and

Besides testing all intercepts individually, we also tested whether all the pricing errors were jointly equal to zero. Gibbons et al. [24] suggested GRS test statistic to test whether all pricing errors are zero. A GRS test on the joint set of all tested portfolios clearly rejects all tested models as complete descriptions of average returns. The CAPM model elicits the lowest average absolute alpha values of the three tested models throughout all tests but shows a statistically insignificant fGRS value compared to other models. The 5F-FF model shows the

properly. The best suited model (but not perfect) for the Turkish case is 5F-FF model.

HML factors alone do not explain the cross-sectional variations of portfolio returns.

strongest performance out of the three models for the sample.

estimating the model for portfolios with relatively small-sized companies.

percentage of unexplained part of cross-sectional variance of expected returns.

bigger size portfolios have significant RMW and CMA coefficients.

portfolios is the size factor.

90 Financial Management from an Emerging Market Perspective

of significance.

9. Conclusion

Address all correspondence to: yerdinc65@gmail.com

Bosphorus University, Istanbul, Turkey
