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Testing factor models in Indonesia

James Foye and Aljoša Valentinčič

Emerging Markets Review, 2020, vol. 42, issue C

Abstract: Fama and French (2015) recently proposed a five-factor model which adds investment and profitability terms to their seminal three-factor model. Motivated by the accounting-based nature of the new factors, we test of variants of the models in Indonesia – a country previous researchers have characterized by an idiosyncratic financial reporting environment and low earnings quality. Although multi-factor spanning tests imply these factors contribute to the explanation of average returns, tests using sets of LHS portfolios reveal all competing models produce large intercepts and the five-factor model offers at best only a trivial improvement to the description of average LHS returns.

Keywords: Emerging equity returns; Fama-French three-factor model; Fama-French five-factor model; Indonesia (search for similar items in EconPapers)
JEL-codes: G10 G12 G14 G15 (search for similar items in EconPapers)
Date: 2020
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DOI: 10.1016/j.ememar.2019.100628

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