5. Regression portfolio statistics

In this section, I give descriptive statistics for the regression portfolios and explanatory factors used in the regressions.

The main aim of this research is to see if well-targeted regression models can explain average monthly excess returns on portfolios with large differences in constituent size, B/M, profitability and investment. In Table 3, the standard deviations of monthly excess return of portfolios seem to be very high. One of the explanations is that portfolio groups include small numbers of stocks. The second explanation could be the economic crisis experienced in 2001 in Turkey. This crisis created very high volatility in the financial markets, and the daily change in stock market index (viz. BIST-100) reached to 30%. When I exclude data covering the years from 2000 to 2003, standard deviations decrease by 35% on average. On the other hand, it should also be noted that global crisis in 2008 and Greece's haircut in 2010–2011 created very high


Table 3. Average monthly excess returns and standard deviations (for definitions of variables, see Section 4.3).

equal-weighted portfolios were created from independent 4 4 sorts with 25th, 50th and 75th yearly sample percentiles as breakpoints for both sorting variables. Table 1 shows the

Panel C INV1 (conservative) INV2 INV3 INV4 (aggressive)

Panel A BM1 (low) BM2 BM3 BM4 (high)

Panel B OP1 (robust) OP2 OP3 OP4 (weak)

S1 (small) 7 12 14 19 S2 10 11 14 19 S3 8 887 S4 (big) 21 15 12 6

S1 (small) 10 9 13 22 S2 11 12 16 15 S3 12 15 12 11 S4 (big) 14 15 11 3

S1 (small) 17 12 12 12 S2 15 15 12 12 S3 14 14 13 12 S4 (big) 8 14 17 14

Panels A through C in Table 2 show the average number of stocks in each of the regression portfolios. It is evident from Panel A that high B/M companies are often smaller companies, while low B/M is tilted towards bigger companies. A similar phenomenon can be observed in Panel B, where low operating profitability is a feature of smaller companies and high operating

In this section, I give descriptive statistics for the regression portfolios and explanatory factors

The main aim of this research is to see if well-targeted regression models can explain average monthly excess returns on portfolios with large differences in constituent size, B/M, profitability and investment. In Table 3, the standard deviations of monthly excess return of portfolios seem to be very high. One of the explanations is that portfolio groups include small numbers of stocks. The second explanation could be the economic crisis experienced in 2001 in Turkey. This crisis created very high volatility in the financial markets, and the daily change in stock market index (viz. BIST-100) reached to 30%. When I exclude data covering the years from 2000 to 2003, standard deviations decrease by 35% on average. On the other hand, it should also be noted that global crisis in 2008 and Greece's haircut in 2010–2011 created very high

profitability is more often found in stocks with higher market capitalisations.

constructed dependent variables.

Table 2. Average number of stocks in regression portfolios.

76 Financial Management from an Emerging Market Perspective

5. Regression portfolio statistics

used in the regressions.

volatility in many stock markets. In normal circumstances, I would expect the standard deviations to be half of the figures in Table 3.

Table 3 shows that big-sized portfolios tend to benefit from high book-to-market ratios. On the other hand, small portfolios tend to benefit from high profitability, while the effect is weak on big portfolios. In Panel A, we see size and book-to-market (B/M hereafter) pairs of portfolios. The highest average monthly excess return portfolios are S3BM4 and S4BM4 with 1.12% and 1.09%, respectively. The Turkish data reveals that big-sized companies (in groups S3 and S4) with high B/M ratios have the highest monthly excess returns. Worst performers are smallsized companies with low B/M ratios.

In Panel B, returns of portfolios sorted and grouped according to their size and profitability are given. The highest returns in the table belong to S1OP1, S4OP1 and S4OP3. In the Turkish stock market, the highest monthly returns coincide with the high profitability. As you will see in the remainder of the study, I think the most important factor determining the returns of stocks is profitability. The main message is that, even if a company is grouped in the smallest size, if its profitability is high, its return is expected to be high. But one peculiar result is that S4OP3, which represents a portfolio with low profitability and the biggest size, has a monthly excess return of 1.55%. One explanation could be that even if the biggest-sized companies have low profitability, if it is an aggressive investing company and the expectation of the market participants is positive, then a monthly average return of 1.55% would be justified. As you may see in Panel C of Table 3, big companies with aggressive investing have the highest returns.
