Saber Sheari; Narbeh Aghazarian
Volume 5, Issue 19 , October 2007, , Pages 115-134
Abstract
The present study empirically examines the explanatory power of portfolio returns by Fama and French three-factor model (including systematic risk of portfolio, size of portfolio and book-to-market value of portfolio) in Tehran Stock Exchange (TSE). This study is to answer the question that whether the ...
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The present study empirically examines the explanatory power of portfolio returns by Fama and French three-factor model (including systematic risk of portfolio, size of portfolio and book-to-market value of portfolio) in Tehran Stock Exchange (TSE). This study is to answer the question that whether the three factors of Fama and French model are able to explain returns of portfolios in Tehran Stock Exchange with its special economic conditions or not. Furthermore, there is a comparison between the results of Fama and French model and CAPM. The importance of this empirical research is how it helps to do accurate and complete calculations for the best investment decision making.
The shares data have been obtained from Tehran Stock Exchange for the financial years 1378 to 1382 (from zo" of March 1999 till 20th of March 2003). At the beginning of each year, sample stocks are divided into six portfolios based on their size and book-to-market value and the empirical test has been done for these six portfolios.
The results of examining the empirical evidence show that there is no significant relationship between systematic risk (Beta) and return of portfolios. But the considerable relationship bears between the size and return of BIH portfolio (portfolio with Big size and High book-to market value). This result repeats itself between book-to-market value and return of BIH portfolio. We have tested all three Fama and French factors together and the model explains portfolio returns in both S/H (Small size and High book-to-market value) and BIM (Big size and Medium book-to-market value) portfolios. The empirical results, as a whole, confirm that Fama and French three-factor model has greater explanatory power of stock returns in comparison with CAPM in Tehran Stock Exchange.
