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A four-factor model for the Indonesia stock market

Author

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  • Li, Nanqi
  • Wei, Chishen
  • Zhang, Linti

Abstract

We propose a four-factor model that includes market, size, value, and profitability factors to explain the cross-section of stock returns for the Indonesian stock market (IDX). Asset spanning tests identify size (market capitalization), value (operating cash flow-to-price), and profitability (return on net operating assets) as the most robust characteristics for forming factors. Our four-factor model (IDX4) outperforms existing factor models in digesting stock market anomalies and explaining the returns of equity portfolios sorted by firm characteristics. The expected returns implied from the IDX4 are close to the realized returns on characteristics-sorted portfolios. IDX4 also prices a portfolio of Shariah-compliant IDX listings and the broader MSCI World Islamic ETF.

Suggested Citation

  • Li, Nanqi & Wei, Chishen & Zhang, Linti, 2026. "A four-factor model for the Indonesia stock market," Emerging Markets Review, Elsevier, vol. 73(C).
    • Handle: RePEc:eee:ememar:v:73:y:2026:i:c:s156601412600049x
    DOI: 10.1016/j.ememar.2026.101485
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    Keywords

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    JEL classification:

    • 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

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