Validity of Fama-French Three-Factor Model In Asset Pricing: An Application In Istanbul Stock Exchange

Harun Guzeldere, (harun.guzeldere@kosgeb.gov.tr) and Serra Eren Sarioglu (serraeren@istanbul.edu.tr)
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Harun Guzeldere,: Istanbul University
Serra Eren Sarioglu: Istanbul University

Business and Economics Research Journal, 2012, vol. 3, issue 2, 1

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 (search for similar items in EconPapers)
JEL-codes: C19 D53 G14 (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (2)

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