9. Conclusion

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

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

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 strongest performance out of the three models for the sample.

When I compare the R<sup>2</sup> s of all my models (the highest 56%) to the earlier studies done for other countries [15, 16, 19–22] (the R2 s change between 70 and 90%), in general, it is the case that R<sup>2</sup> s found in my study are much lower than other R2 s found in other studies. This might be due to the fact that RMW and CMA factors add little in explaining the cross-sectional variations of portfolio returns in Turkey. It is clear that, in the Turkish case, both SMB and HML factors have significant effect on monthly excess returns of portfolios, but further research may be carried on by employing new factors other than RMW and CMA.

Readers should be aware that correlation between explanatory variables, which are created from return differences (as in the case of definition of Fama-French factors), and dependent variables has to be highly correlated. Hence, R2 s in the equations become stronger and true.

Consequently, our empirical results are reasonably consistent with [19–22] findings, and the 5F-FF model was found viable and superior to CAPM and 3F-FF model for the Turkish stock market.
