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Testing factor models in Indonesia

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  • Foye, James
  • Valentinčič, Aljoša

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.

Suggested Citation

  • Foye, James & Valentinčič, Aljoša, 2020. "Testing factor models in Indonesia," Emerging Markets Review, Elsevier, vol. 42(C).
    • Handle: RePEc:eee:ememar:v:42:y:2020:i:c:s1566014119301669
    DOI: 10.1016/j.ememar.2019.100628
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    References listed on IDEAS

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    Cited by:

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    2. Yuni Pristiwati Noer Widianingsih & Doddy Setiawan, 2022. "Idiosyncratic Risk Volatility: Stock Price Informativeness or Price Error?," JRFM, MDPI, vol. 15(10), pages 1-14, October.
    3. Mbengue, Mohamed Lamine & Ndiaye, Bara & Sy, Oumar, 2023. "Which factors explain African stock returns?," Finance Research Letters, Elsevier, vol. 54(C).
    4. Aysenur Tarakcioglu Altinay & Mesut Dogan & Bilge Leyli Demirel Ergun & Sevdie Alshiqi, 2023. "The Fama-French Five-Factor Asset Pricing Model: A Research on Borsa Istanbul," Economic Studies journal, Bulgarian Academy of Sciences - Economic Research Institute, issue 4, pages 3-21.
    5. Zhijing Zhang & Yue Yu & Qinghua Ma & Haixiang Yao, 2021. "A revised comparison between FF five-factor model and three-factor model,based on China's A-share market," Papers 2112.03170, arXiv.org.
    6. Jareño, Francisco & González, María de la O & Escolástico, Alba M., 2020. "Extension of the Fama and French model: A study of the largest European financial institutions," International Economics, Elsevier, vol. 164(C), pages 115-139.

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    More about this item

    Keywords

    Emerging equity returns; Fama-French three-factor model; Fama-French five-factor model; Indonesia;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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