Fama and French Five- Factor Study of Stock Market in Indonesia
Abstract
In general, contemporary finance theories agree that the Fama and French Five-Factor model provides a more comprehensive explanation for average stock returns compared to its predecessors. Previous research on the five-factor model in Indonesia has yielded inconclusive results, and none of the studies has attempted to compare the significance of the five factors over shorter and longer periods, or even within shorter periods. As a result, the researchers of this study endeavor to ascertain the importance of the five elements – the profitability (RMW), market, size (SMB), profitability (RMW), book-to-market (HML), and investment (CMA) factors – to an excess return on the portfolio over shorter and longer periods. The findings indicate that SMB and CMA factors exhibit statistically insignificant, significantly negative, and significantly positive correlations with excess portfolio return, respectively, over the three shorter periods and the longer period. A significant negative correlation is observed between the HML factor and excess portfolio return over the longer period, while the relationship is deemed insignificant over the three shorter periods. No significant relationship was found between the RMW factor and excess portfolio return over the (2005-2019) period and two (2010-2014, 2015-2019) periods, but one shorter period is significantly positive.
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Nicholson, S. F. (1960). Price-earnings Ratios. Financial Analysts Journal, 16(4), 43–45.
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Rosenberg, B., Reid, K., & Lanstein, R. (1985). Persuasive evidence of market inefficiency. The Journal of Portfolio Management, 11(3), 9–16. https://doi.org/10.3905/jpm.1985.409007
Ross, S. A. (1976). The arbitrage theory of capital asset pricing. Journal of Economic Theory, 13, 341–360. https://doi.org/10.1016/0022-0531(76)90046-6
Sharpe, W. F. (1964). Capital asset prices: A theory of market equilibrium under conditions of risk*. The Journal of Finance, 19(3), 425–442. https://doi.org/10.1111/j.1540- 6261.1964.tb02865.x
Singal, V. (2019). Portfolio risk and return: Part II. In 2020 CFA Program Level I Volume 6 Alternative Investments and Portfolio Management (Vol. 6). CFA Institute.
Titman, S., Wei, K. C. J., & Xie, F. (2004). Capital investments and stock returns. Journal of Financial and Quantitative Analysis, 39(4), 24. https://doi.org/10.1017/S0022109000003173
Wibowo, Y. N. P., & Angela, C. (2020). Corporate governance and equity finance: Evidence from the Indonesian manufacturing companies listed in the IDX IN 2016-2018. Universitas Kristen Petra.
Wijaya, S. C., Murhadi, W. R., & Utami, M. (2017). Analisis Fama French five factor model dan three factor model dalam menjelaskan return portofolio saham. Universitas Surabaya.
ycharts. (n.d.). Excess returns. https://ycharts.com/glossary/terms/excess_returns
Ying, Q., Yousaf, T., Ain, Q. ul, Akhtar, Y., & Rasheed, M. S. (2019). Stock investment and excess returns: A critical review in the light of the efficient market hypothesis. Journal of Risk and Financial Management, 12(2), 97. https://doi.org/10.3390/jrfm12020097
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