ADDITIONAL TESTS OF MULTI-INDEX

ASSET PRICING MODELS:

EVIDENCE FROM AN EMERGING MARKET*

Seza Danolu
Middle East Technical University
Faculty of Economics and Administrative Sciences
Department of Business Administration
Dumlupnar Bulvar No:1, Ankara 06800 Turkey
E-mail: seza@metu.edu.tr
Phone: +90.312.210.2035

*: Forthcoming in REFC Spanish Journal of Finance and Accounting (Accepted

on December 20, 2016)

Electronic copy available at: https://ssrn.com/abstract=2888290

Additional tests of multi-index asset pricing models:
Evidence from an emerging market

This study provides comprehensive evidence on the performance of asset pricing models in an emerging market
setting. Tests are conducted on portfolios formed based on Fama-MacBeth betas, Fama-French size and book-to-
market factors, Carharts short- and long-term past returns and Pastor and Stambaughs (2003) liquidity beta. This is
one of the first studies to provide emerging market evidence on Pastor and Stambaughs liquidity beta measuring a
firms sensitivity to changing levels of market-wide liquidity. Results of the study are supported by metrics such as
confidence intervals around the R2 values and the Gibbons-Ross-Shanken (1989) test. Similar to previous findings,
the market factor is positive and significant even when models are augmented by the size and book-to-market factors
that are themselves consistently significant and positive. Contrary to evidence from developed markets, contrarian,
not momentum, strategies are preferred among the investors, especially for larger firms. Larger firms also are
perceived to be less vulnerable when market-wide liquidity decreases.

Keywords: asset pricing; multi-factor model; CAPM; liquidity beta; GRS test; emerging markets

JEL classification: G12

1. Introduction
The objective of this study is to compare the explanatory power of asset pricing models in the
context of an emerging market. Previous studies show that the inclusion of additional risk factors
in the classical CAPM increases the explanatory power of the model; however, such tests have not
been conducted for an emerging market in the comprehensive manner outlined in this study.
The asset pricing debate starts with Markowitzs Portfolio Theory (1952), continues with the
Sharpe (1964), Lintner (1965), and Mossin (1966) papers on the single-index Capital Asset Pricing
Model, and finally settles into the multi-index modeling proposed by the 1993 Fama and French
and 1997 Carhart studies. These models have been tested extensively for especially developed
financial markets. Most studies provide strong support for the significant effect of size and book-
to-market (B/M) factors in addition to the market risk. The literature is also rich with empirical
studies that offer alternative asset pricing models with additional risk factors such as human capital
and financial wealth changes in Jagannathan and Wangs (1996) conditional CAPM, debt market
risk measures in the intertemporal CAPM of Brennan, Ashley, and Xia (2004), Petkova (2006)
and Friewald, Wagner, and Zechner (2014), measures of consumption in the consumption CAPM
of Lettau and Ludvigson (2001), Parker and Julliard (2005), Yogo (2006), Hansen, Heaton, and Li
(2008), and Poti and Shefrin (2014), and measures of liquidity risk in the models of Pastor and
Stambaugh (2003) and Acharya and Pedersen (2005). These different models share the
commonality of strong statistical evidence but they mostly do not intersect with each other in terms
of pointing out the true factors to be included in an asset pricing model. Lewellen, Nagel and
Shanken (LNS) (2010) argue that many of the studies that claim to present statistically strong
findings base their results on the high explanatory power of the models. In their study, LNS show
that it is possible to produce rather high R2 values by using ad hoc factors that do not have any
true explanatory power but are closely correlated with the size and B/M factors. In light of the
LNS argument, in order to claim that the factors included on the right-hand-side of the models are
truly asset-pricing factors, it is necessary to show that these factors explain returns when assets
are classified into portfolios based on several different characteristics, especially those that are not
highly correlated with the size and B/M risks. Also, the intuitive appeal of reporting R2 values

Electronic copy available at: https://ssrn.com/abstract=2888290

should be balanced with robust statistical evidence by providing confidence intervals for the R 2s
in order to give some measure of the sampling error.
Another common method of gauging an asset pricing models empirical validity is to provide
evidence that its pricing error, or Jensens alpha (Jensen, 1968), is statistically zero. When the
models are tested across portfolios of assets, it is not enough to show that the individual intercepts
(Jensens alpha values) are not significant. Since the portfolios have asset and time commonalities
among them, the pricing errors are correlated across portfolios (or, assets). Therefore, Cochrane
(2005) argues that testing whether all the pricing errors are jointly equal to zero across the
portfolios affords a stronger statistical result. The Gibbons, Ross, Shanken (GRS) (1989) test
statistic is the most widely used measure to address this issue.
In the spirit of testing the asset pricing models with different asset classes or in different market
environments, emerging markets provide a useful canvas for studying the models in independent
samples that characteristically have less than perfect correlation with their developed counterparts
(Rouwenhorst, 1999). Empirical evidence regarding whether models that are originally suggested
for developed markets can be used to explain the risk-return relationship in emerging markets is
mixed at best. On the one hand, studies by Drew and Veeraraghavan (2002) for the Malaysian
market, Yksel, Yksel and Doanay (2010) for the Turkish market, Sehgal, Jain, and Morandiere
(2012) for the Indian market, Sehgal, Subramaniam, and Morandiere (2013) for the BRICKS
markets, and Walkshusl and Lobe (2014) for 15 emerging markets all find supportive evidence
that the market, size, book-to-market and momentum are robust asset-pricing factors when they
are tested in an emerging market setting as well. There are also studies that focus their attention
on the profitability of momentum strategies in emerging markets. Rouwenhorst (1999), Chan,
Hameed, and Tong (2000), Griffin, Ji, and Martin (2003), Chui, Titman, and Wei (2010) and Hou,
Karolyi, and Kho (2011) studies demonstrate that pricing errors are smaller when asset pricing
models are tested by forming portfolios based on short- and long-term momentum, and thus
provide supporting evidence that momentum is a priced risk factor in these markets as well.
On the other hand, evidence from emerging markets is not always in favor of the asset pricing
factors that find strong support in developed market samples. In one of the earlier studies, Bekaert,
Erb, Harvey, and Viskanta (1997) argue that, when measured against a global index, the market
beta may not likely represent the price formation process in emerging markets since most of these
markets are less than perfectly integrated with the rest of the world markets. Therefore, the idea of
a single-index model that accounts for the entire risk-return relationship in these market
environments is seriously questioned by Bekaert et al. (1997). Their study complements a number
of earlier emerging market studies that find a statistically significant and negative beta coefficient
in CAPM estimations1. The negative beta is justified by the frequent market crashes in emerging
markets during which high beta stocks take the deepest plunge and end up having a negative
relationship with the systematic risk in times of negative market returns. In more recent emerging
market studies, the single-index CAPM seems to have lost statistical support in favor of models
that include additional risk factors2.
The aim of this study is to provide new evidence from an emerging market setting. Asset
pricing models from the recent literature are estimated and performance of these models is
compared based on additional metrics proposed by the Lewellen et al. (2010) and Kan, Robotti,
and Shanken (2013) studies. The sample includes stocks that are traded on Borsa Istanbul between
1989 and 2013. Borsa Istanbul is a fairly young market and a popular destination for investors
seeking to diversify internationally3. Borsa Istanbul is a continuous auction market during the
sample period, where there is no market maker and shares of stock are traded through an automated
computer system. Trading is carried out in separate morning and afternoon sessions with a price
limit of 10 percent per session. Incoming orders are matched by the automated system based on
price and time priority.

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 The results of the study suggest that, similar to previous findings, market, size and book-to-
market are robust pricing factors as all three have consistently significant and positive coefficients
when the models are estimated with equally-weighted returns on portfolios formed based on
different criteria. For these models, adjusted R2 values are high and the narrow confidence intervals
around the adjusted R2s suggest small sampling errors. Also, GRS test statistics imply that the
pricing errors of these models are jointly equal to zero, a finding that provides additional evidence
regarding the usefulness of the models in the Turkish market setting.
Interestingly, contrary to previous findings, the momentum factor is not significant regardless
of the portfolio type except when the returns are calculated on a value-weighted basis for the Fama-
MacBeth beta-sorted portfolios. When the momentum factor is significant, it has a negative
coefficient. Since this result is observed only for Portfolios 7 and 8, it seems like the higher-beta
firms in the sample tend to experience a return reversal implied by the negative coefficient.
This is also one of the first studies to investigate whether changes in Pastor and Stambaughs
(2003) market-wide liquidity measure is priced in an emerging market setting. Similar to the
Pastor-Stambaugh findings, market-wide liquidity is priced when the liquidity-beta portfolio
returns are calculated on an equally-weighted basis. However, contrary to the Pastor-Stambaugh
findings, the pricing errors are negative for the two highest liquidity risk portfolios with value-
weighted returns. This finding suggests that when liquidity drops in the market, larger firms are
perceived to have less exposure to this risk. In such an environment, investors seem to prefer lower
liquidity risk to higher returns and a flight to quality towards larger firms seems to occur.
The remainder of the paper is organized as follows. Section 2 describes the data collection
process and the calculation of the common risk factors. Section 3 explains how portfolios are
formed based on different criteria and provides empirical evidence regarding the performance of
asset pricing models. Section 4 offers concluding remarks.

2. Data and Methodology

2.1. Data Sources
This study uses the end-of-month stock price data of the companies listed on Borsa Istanbul
between January 1989 and June 2013. The prices are adjusted for cash dividends, stock dividends
and stock splits. The number of stocks outstanding and the book equity values are obtained from
the bulletins of Borsa Istanbul and the Public Disclosure Platform web site4. Financial firms are
excluded from the sample since they tend to have unique capital structures and regulatory
restrictions that may create noise in the calculation of risk factors based on balance sheet
characteristics.
The risk free rate used in the estimations is the nominal compound return of the zero-coupon
domestic debt instrument issued by the Turkish Treasury with a remaining maturity closest to 90
days as of the last trading day of month t. The data are obtained from the Borsa Istanbul, Central
Bank of the Republic of Turkey, and the Official Journal of the Republic of Turkey databases.
BIST-100 index values are used as the market proxy in this study. This index includes 100
largest market capitalization stocks traded on the National Market of Borsa Istanbul. The index
data are obtained from Borsa Istanbul as well.

2.2. Calculation of Risk Factors

Excess market return ( ) The excess market return is calculated as the difference
between the monthly return on the BIST-100 index and the monthly return on the 90-day Treasury
security.

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Small minus Big (SMB) and High minus Low (HML) The Fama and French (1993) risk factors
are calculated following their methodology. First, all stocks that have available data on the last
trading day of June of year t (t=1990, 1992 2012) are divided into two groups based on their
market value of common equity. The stocks that have a market value higher than the median
market value are labeled as Big Stocks and the remaining stocks are labeled as Small Stocks.
Second, independent of the former grouping, all stocks that have available data on the last day
of year t-1 are divided into three groups based on their ranked Book-to-Market Value of Equity
(B/M) values. The High class includes those stocks from the highest 3 deciles (highest 30%), the
Medium class includes stocks from the 4th to 7th deciles (medium 40%) and the Low class includes
the remaining stocks (lowest 30%).
The intersection of the size and B/M independent sorts creates six portfolios: Big-High, Big-
Medium, Big-Low, Small-High, Small-Medium and Small-Low. The monthly value-weighted
portfolio returns are calculated for each of these portfolios between July of year t and June of year
t+1. The portfolios are reformed as described above in June of year t+1. The SMB factor is
calculated as the difference between the arithmetic average of the returns on the three Small
portfolios and the three Big portfolios. The HML factor is calculated as the difference between the
arithmetic average of the returns on the two Low portfolios and the two High portfolios. Time
series for the SMB and HML factors are constructed between July 1990 and June 2013.
Winner minus Loser (WML) The Carhart (1997) risk factor is calculated replicating his
methodology. First, stocks are ranked based on their past 11-month returns where there is a one-
month lag between the last day of the 11-month period and the day of ranking. After the calculation
of the returns and ranking of the stocks based on these returns, stocks are grouped into two
categories. The Winner (Loser) group includes those stocks that have the highest (lowest) 30% of
the ranked returns. The WML factor is calculated as the difference between the equally-weighted
Winner and the equally-weighted Loser portfolio returns. A time series is constructed for the WML
factor between July 1990 and June 2013. Table 1 presents the correlation structure among the four
risk factors calculated in the manner described above. The low correlations among the factors
suggest that potentially they account for different risks that are priced by investors in the market.

[insert Table 1 here]

3. Portfolio Formation and Results

Following the LNS argument, in order to claim that the factors included on the right-hand-side of
the models are truly asset-pricing factors, it is necessary to show that these factors explain returns
when assets are classified into portfolios based on several different characteristics, especially those
that are not highly correlated with the size and B/M risks. This section describes how portfolios
are formed based on different criteria and also presents the estimation results.

3.1. Tests on Beta-Sorted Portfolios

The Fama and MacBeth (1973) methodology is used to estimate the beta coefficients for the stocks
in the sample. The first four years of sample data between January 1990 and December 1993 are
used to calculate the individual stock beta coefficients as the ratio of the covariance between the
stock and market portfolio returns to the variance of the market portfolio return. Next, stocks are
sorted in ascending order based on their estimated beta coefficients and grouped into ten decile
portfolios. After portfolio formation, the next four years of data between January 1994 and
December 1997 are used to re-calculate the beta coefficient for each individual stock. Next, for the
testing period from January 1998 to December 1998, each portfolios beta coefficient is calculated

4
as the arithmetic average of the constituent stocks re-calculated betas. The portfolio beta
coefficients are re-calculated for each of the 12 months in the testing period in order to reflect any
variation in the number of stocks that stay in the portfolios throughout the year. While the portfolio
beta coefficients are re-calculated monthly, the individual stock betas are re-calculated annually
by extending the initial estimation period one year at a time to include the most recent year. This
process is reiterated until June 2013. Table 2 presents the portfolio formation, estimation and
testing periods.
[insert Table 2 here]

Once the beta estimations are completed, equally- and value-weighted portfolio returns are
calculated for the same estimation periods given in Table 2. This way, a time-series of estimated
beta values for the sample stocks is constructed for the period between the beginning of the first
testing period (January 1998) and the end of the last testing period (June 2013) for a total of 186
months. Table 3, Panels A and B present descriptive statistics for the beta-sorted portfolios. The
value-weighted portfolio returns have slightly more extreme values compared to the equally-
weighted returns and the mean returns exhibit a relatively flat trend across portfolios.

[insert Table 3 here]

[insert Table 4 here]

When the distributional characteristics of the risk factors are analyzed in Panel B of Table 1,
it is seen that all risk factors have positive skewness with the size (SMB) and book-to-market
(HML) exhibiting the smallest (around 0.24) and the momentum (WML) exhibiting the largest
amount of skewness (2.61). Likewise, all risk factors have positive kurtosis (between 0.73 for the
risk-free rate and 7.93 for WML), suggesting that these factors have leptokurtic (heavy-tailed)
distributions. These findings imply serious deviations from normality. Moreover, results of
homoscedastic volatility tests in Panel C of Table 1 suggest the presence of ARCH effects for the
risk-free rate and the HML and WML factors. The significance of the Q statistic indicates
heteroscedasticity over time. In light of these findings, models are estimated by using the
Generalized Method of Moments (GMM) since this methodology does not require the right-hand-
side variables of the models to be normally distributed or to have constant variance across time.
Table 4 shows the GMM estimates of the one-, three- and four-factor models. Panel A presents
the results for the equally-weighted portfolio returns and Panel B presents the results for the value-
weighted portfolio returns. The findings are very similar for the two return settings. The market
and size (SMB) factors are highly significant whenever they enter the models for either the value-
weighted or the equally-weighted returns. Surprisingly, the book-to-market (HML) factor's
influence is more apparent for the equally-weighted returns compared to the value-weighted
returns. This result implies that the HML factor is mostly priced for the smaller firms when the
firms are ranked in the order of their market risk (beta). The coefficients for SMB and HML are
all significant and positive. This is a result in line with the developed and emerging market studies
mentioned above, implying that smaller and high B/M (value) firms command a premium.
Furthermore, the momentum factor is significant only for Portfolios 7 and 8 and for both value-
weighted and equally-weighted returns. The significant and negative coefficients for the
momentum factor suggest that higher-beta firms tend to experience return reversals. The
profitability of a contrarian strategy is not a surprising finding since it was shown to be present in
emerging markets (Lee, Lin, and Liu (1999), Hameed and Ting (2000), Sobac, ensoy, and Ertrk
(2014). Table 4 also presents a number of metrics that help compare the performance of these three
models. The adjusted R2 values for the three-index models are somewhat higher than those of the
single-index models. As Lewellen et al. (2010) argue, it is not enough to evaluate the performance

5
of a model only on the basis of its R2 value. A confidence interval for the R2s shows how much
weight should be put on a particular model since, if the sampling error is high, this would be
reflected in the confidence interval bounds. The 95% confidence intervals are generated by
bootstrapping the adjusted R2s 500 times and allowing replications in the samples. A models
explanatory power should be given less importance if the R2 confidence interval points to a wide
range of the statistic, especially with a lower bound close to zero. In Table 4, the lower bounds for
the R2 confidence intervals are reasonably higher than zero. Mean absolute pricing errors (MAPEs)
between the actual and predicted values are also presented in Table 4 alongside the R2s. The
MAPEs are small in magnitude and somewhat smaller for the three- and four-index models in
comparison to those of the single-index models. Finally, as Cochrane (2005) argues, the model
intercepts (i.e. the Jensen's alphas) should be jointly equal to zero if the proposed model is
sufficient to describe the true risk-return relationship between the portfolio returns and the risk
factors. When portfolios are formed and re-balanced repeatedly in rolling windows over a given
horizon, they share stocks and time periods, and, as a result, the pricing errors become correlated
across assets (portfolios). When such correlations are present and the models are estimated with
the GMM methodology, the Gibbons, Ross, Shanken (GRS) (1989) test generates a statistic that
has a chi square distribution and tests the null hypothesis that the intercepts from all ten models
are jointly equal to zero:

1 2

In this equation, N is the number of assets (portfolios), is the residual covariance matrix and
is the vector of estimated intercepts.
For all six models in Table 4, the GRS statistics are insignificant as implied by their large p-
values. An insignificant GRS statistic implies that the Jensens alpha values (intercepts) for the
models are equal to zero and there seems to be no omitted factors that should be considered as part
of the pricing model for the current set of assets (portfolios).

3.2. Tests on Size and Book-to-Market Double-Sorted Portfolios

Nine portfolios are formed following a method similar to the calculation of the SMB and HML
factors. This time, the stocks that have the lowest 35% of market value ranks are classified as
Small (S) stocks, the middle 30% as Medium (M) stocks, and the highest 35% as Big (B) stocks.
Similarly, the group labeled High (H) is made up of stocks from the highest 35% of B/M ranks,
Medium (M) is made up of stocks from the middle 30% and Low (L) is made up of stocks from
the lowest 35% of B/M ranks. The reason for choosing these cutoffs is to ensure that a reasonable
number of stocks remain in the intersection portfolios. The intersection of the size and B/M
independent sorts creates nine portfolios: S/L, S/M, S/H, M/L, M/M, M/H, B/L, B/M, B/H.
Monthly equally-weighted portfolio returns are calculated for each of these portfolios between
July 1990 and June 2013.
Table 3, Panel C presents the descriptive statistics about the portfolio returns. In general,
smaller stocks and high book-to-market stocks seem to generate slightly larger portfolio returns.

[insert Table 5 here]

Table 5 reports the GMM results for the one-, three-, and, four-factor models. The market, size
and book-to-market factors have significant and positive coefficients for small and medium size
portfolios. The book to-market (HML) factor is negative for the Big/Low portfolio and it is

6
significant and positive for the Big/Medium and Big/High portfolios. As the size of the stocks
classified in a portfolio gets larger, the small firm risk factor seems to lose its significance. The
negative coefficient for the Big/Low portfolio suggests that investors require relatively lower
returns from large growth firms.
The GRS statistics for all three models are insignificant implying that it is not possible to reject
the hypothesis that pricing errors for the models are jointly equal to zero. Also, the confidence
intervals for the adjusted R2s as well as the MAPEs show low levels of sampling error.

3.3. Tests on Independently Sorted Size and Book-to-Market Portfolios

In addition to the double-sorted portfolios from the previous section, value-weighted returns on
portfolios sorted independently on size and book-to-market are calculated and tested in order to
see the effect of these factors separately. Size and B/M cutoffs and portfolio classifications are the
same as the previous section.
Table 3, Panel D presents the descriptive statistics for these portfolios. As expected, smaller or
higher B/M firms have higher average returns. Parallel to these averages, GMM results in Table 6
show that the returns required from low B/M (growth) firms or big firms are relatively lower as
implied by the negative coefficients of the SMB and HML factors. Recall that the coefficients for
the SMB and HML factors in all the nine double-sort portfolios from the previous section are
significant and positive. When the low B/M firms are further classified based on their size, or,
when the big firms are further classified based on their B/M values, this negative relationship
between factors and portfolio returns disappears. The momentum factor is not significant even
when the portfolios are formed based on a single firm characteristic. The GRS statistics for all six
models in Table 6 suggest that pricing errors are jointly equal to zero. Once again, the confidence
intervals for the adjusted R2s as well as the MAPEs show low levels of sampling error.

[insert Table 6 here]

3.4. Tests on Liquidity-Beta-Sorted Portfolios

Pastor and Stambaugh (2003) argue that changes in market-wide liquidity may be a risk factor that
is priced in the market. In their study, they develop a liquidity measure based on temporary price
changes that occur as a result of changes in the order flow. If a stock has a positive excess return
on a given day and if the stock has low liquidity, Pastor and Stambaugh expect a lower return from
the stock on the next day since it would be more costly for this stock to sell high and buy low.
They measure a stocks liquidity with respect to its volume and argue that as the expectation of a
return reversal increases at a given dollar volume, the liquidity of the stock declines. This is
because if an investor owns a stock with a current positive return and if the investor expects a
reversal in this return, then s/he would be less willing to sell the stock on the next day. Likewise,
if a stock currently has a negative return and a reversal is expected on the next day, liquidity would
be low again with fewer investors willing to buy the stock at higher prices on the next day. The
ultimate goal in calculating a market-wide liquidity measure is to represent a stocks sensitivity to
the changes in liquidity by calculating a liquidity beta. The calculation steps for liquidity betas are
presented in the Appendix.
Ten portfolios are formed by sorting stocks based on their liquidity betas. Portfolio 1 represents
the lowest liquidity risk and Portfolio 10 represents the highest liquidity risk. Table 3, Panels E
and F present the descriptive statistics for these portfolios. As can be seen from the tables, returns
across the portfolios exhibit a flat pattern. GMM results are presented in Table 7. Similar to the

7
results with the other portfolios, market, SMB and HML factors are significant and positive when
the portfolio returns are equally-weighted. The factor loading for the market beta is close to 1.05.
When the portfolio returns are value-weighted, on the other hand, the SMB and HML factors
mostly lose their significance. These results are somewhat similar to the case of beta-sorted
portfolios. The insignificant SMB and HML factors imply that these risks are mostly priced for
the smaller firms in the sample since the factors lose their influence when the larger firms are
allowed to weigh more in the return calculations. The momentum factor is never significant.
The Jensens alpha results paint an interesting picture. For the equally-weighted returns and
the single-index model, five out of ten alphas are individually significant and positive even though
the GRS statistic is not significant (implying that the pricing errors are jointly equal to zero). On
the other hand, for both the value- and equally-weighted portfolios, the GRS statistics for the four-
factor models are significant and the Jensen's alpha is significant and negative for Portfolios 9 and
10. This finding suggests that the liquidity risk may be priced in the market, an observation similar
to the Pastor-Stambaugh results. Interestingly, the signs of the pricing errors are negative, and,
therefore, opposite of the Pastor-Stambaugh findings, for the value-weighted portfolios. When
larger firms are weighed more in the portfolios, the required returns seem to be lower. The negative
alpha values suggest that when market-wide liquidity drops, larger firms are perceived to be less
exposed to this risk, and therefore, the investors are willing to accept a lower return from these
stocks.

[insert Table 7 here]

3.5. Tests on Past-Return-Sorted Portfolios

Decile portfolios based on past returns are formed by using a method similar to the formation of
the WML factor. Originally, De Bondt and Thaler (1985) provide evidence of market overreaction
and show that firms with low (high) returns over the past three to five years are likely to have high
(low) future returns. Jegadeesh and Titman (1993) revisit these results and demonstrate that there
is a momentum effect in short-term past returns and firms that were winners (losers) over the past
year tend to be future winners (losers). Following Carharts (1997) momentum factor definition,
stocks are classified into decile portfolios based on their compound returns over the past 12, 24,
36, 48 and 60 months between February 1990 and June 2013. There is a one-month lag between
the calculated past returns and the portfolio formation in order to avoid market microstructure
effects such as price ticks and price limits. Portfolio 1 represents the lowest return decile and
Portfolio 10 represents the highest return decile.
Table 3, Panel G presents the summary statistics for the past-return portfolios. There is some
evidence of a contrarian trend since generally past losers (winners) seem to have higher (lower)
average returns. The GMM results presented in Table 8 show that the market factor has a positive
and significant coefficient with a magnitude that is close to 1.0. The SMB and HML factors also
have positive and significant coefficients and typically loser portfolios have larger factor loadings
compared to winner portfolios. In results not reported, portfolios formed on longer-term past
returns (24, 36, 48, and 60 months) exhibit patterns that are very similar to the results obtained
with the past 12-month returns6. Fama and French (1996) find similar results for long-term past
losers and argue that since these firms are likely to behave similar to financially distressed small
firms, they are expected to have larger returns in the future. These findings also can be interpreted
as evidence of the return reversals demonstrated in the literature that started with the De Bondt
and Thaler (1985) study. Recall that in Table 4, when portfolios were sorted based on Fama-
MacBeth betas two of the value-weighted portfolio returns had significant and negative loadings
on the short-term momentum factor7.

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 [insert Table 8 here]

3.6. Fama-French (1996) Spanning Tests

The concept of multifactor asset pricing models is rooted in Rosss 1976 paper and his Arbitrage
Pricing Theory (APT). The main idea behind the APT is that asset returns are a function of a
collection of risk factors that are proxied by excess returns on portfolios that are only sensitive to
the risk factor in question and no other factor. In this setting, an investors optimal decision
combines assets in such a way to minimize variances along the multifactor dimensions. In their
1996 paper, Fama and French argue that even though size and book-to-market are purely
empirically-motivated factors to be included in asset pricing models, as long as these factors can
be shown to perform well in describing asset returns, their components (S and B for SMB; H and
L for HML; W and L for WML) can be assumed to be good proxies for the risk factors suggested
in the APT. In other words, if the factor components are indeed variance-minimizing, different
combinations of all but one of these components should be able to explain (span) the return on the
remaining factor component. In order to test whether the market, SMB and HML factors are indeed
reasonable proxies for the APT factors, factor components are modeled as functions of each other
and the models are estimated by using the GMM methodology8. Table 9 presents the results. The
first three rows are simply the CAPM models between S, L, and H factors and the market. For
these models, the intercepts (pricing errors) are all significant and negative and the R2s are less
than 90 percent, implying that the market factor alone is not sufficient to explain the returns on
these portfolios. When the market, S, L and H factors are regressed against each other by placing
one of the factors as the dependent variable, the explanatory power of the models is slightly higher
but the intercepts are still significant although the magnitude of the intercepts is quite small. This
implies that even though the market, size and B/M factors explain a large proportion of the
variability in each other, in future work, it may be useful to search for additional risk factors that
may increase the explanatory power.

[insert Table 9 here]

4. Conclusion
This study aims to estimate the single- and multi-index asset pricing models by using time-series
data from Borsa Istanbul. The Jensen's alpha (intercept from the models) is generally insignificant,
regardless of the portfolio formation methodology applied or the time period studied. This result
is in contrast with the findings of earlier research. In previous studies, Jensen's alpha proves to be
an appropriate measure of abnormal returns when the risk factors were unable to explain some
portion of the variation in portfolio returns. However, in this study, almost all of the variation in
returns in Borsa Istanbul is captured by the risk factors already included in the models. It is
interesting to note that the variation in stock prices is so strongly correlated with the size and B/M
risk factors that Jensens alpha is not significant even in the single-index models when portfolios
are formed based on rankings of these factors.
One finding of this study that is in line with the earlier academic research is the persistently
significant excess market return factor. Earlier research also reports that regardless of the factors
included in the model, the significance of the market factor does not diminish and pricing of the
systematic risk is confirmed by the findings of this study for an emerging market as well.

9
 Another noteworthy result in this study is that, unlike investors from developed markets, Borsa
Istanbul investors do not seem to favor past winner stocks. This seeming popularity of contrarian
strategies may be a sign of the overreaction in market prices where past investment decisions are
corrected through return reversals.
Finally, when market-wide liquidity drops, larger firms are perceived to be less exposed to this
risk. In such an environment, investors seem to prefer lower liquidity risk to higher returns and a
flight to quality towards larger firms seems to occur.

Notes
1. Some of these studies are Hawawini, Michel, and Viallet (1983) for the French market,
Wong and Tan (1991) for the Singaporean market, Bark (1991) for the Korean market,
Huang (1997) for the Taiwanese market and Iqbal and Brooks (2007) for the Pakistani
market.
2. Example studies are by Rouwenhorst (1999) with size, book-to-market, momentum and
share turnover factors, Hwang and Satchell (1999) with skewness and kurtosis factors,
Carrieri, Errunza, and Majerbi (2006) with an exchange rate risk factor, Omran (2007) with
a skewness factor, Bekaert, Campbell, and Lundblad (2007) and Lee (2011) with a liquidity
factor, Jung, Lee, and Park (2009) with an investor heterogeneity variable, Borys (2011)
with macroeconomic factors, Hou et al. (2011) with a cash-flow-to-price factor, Iqbal,
Brooks, and Galagedera (2010) with conditional variables of trading volume and dividend
yield, and Fama and French (2012) with regional market factors.
3. According to Borsa Istanbuls 2014 annual report, approximately two thirds of the listed
equities are held by foreign investors.
4. www.kap.gov.tr
5. The average excess market return factor loading for the single-factor model, reported in
Fama-Frenchs (1993) Table 4 on p.20 is 1.1040, and the same average for the three-factor
model, reported in Table 6 on p.24, is 1.0288. FF argue that there is a "collapse of s for
stocks toward 1.0" when SMB and HML are added to the regressions. The findings of this
study are mostly consistent with this observation. FF explain this tendency by the low
correlation between the SMB and HML factors (-0.08 in the FF study, -0.13 in this study)
and their further correlation with the excess return (in the FF study, 0.32 and -0.38 ; in this
study, -0.24 and 0.17, respectively).
6. These results are available from the author upon request.
7. Additionally, in results not reported, decile portfolios are formed based on returns between
the past 60 and 13 months in order to separate out short-term and long-term
momentum/reversal effects. In other words, returns from the most recent 12 months are
excluded while ranking the stocks and forming the portfolios. Results show that the loser
portfolios no longer have larger loadings on the SMB and HML factors. Apparently, the
return reversal interpretation for long-term past returns is somewhat misleading since when
the shorter-term past returns are excluded from the ranking schedule, this effect disappears.
Also, the GRS tests suggest that pricing errors are not jointly equal to zero. This implies
that the explanatory power of the models is higher when shorter-term past returns are
included in the rankings. Results are available from the author upon request.
8. WML and its components are left out of these tests since the momentum factor is mostly
not significant in the time-series models.

10
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12
Appendix. Calculation of Liquidity Betas
The first step in the process of liquidity beta calculation is to estimate the following regression in
order to obtain the initial liquidity measure:

,+1, = , + , . ,, + , . (,, ). ,, + ,+1,

In this equation, ,, is the return on stock i on day d in month t, ,, is the return on the BIST-

100 index on day d in month t, ,, = ,, ,, , and ,, is the Turkish lira volume for stock
i on day d in month t. A stocks order flow is measured as the volume of the stock signed by the

contemporaneous return on the stock in excess of the market ((,, ). ,, ). Since Pastor and
Stambaugh assume that larger expected return reversals at a given volume should decrease the
liquidity of the stock, the liquidity measure , in this equation is expected to be negative and
larger in absolute value when a stocks liquidity is lower. The equation is estimated between
January 1989 and June 2013 for all stocks that have at least 15 daily returns in a given month.
After obtaining the liquidity measure from the first equation, market-wide innovations in
liquidity are calculated for each month by using the following definition:

1
= ( ) (, ,1 )
1
=1

In this equation, is the total Turkish lira market value at the end of month t-1 of the stocks
included in the average in month t. 1 is the total Turkish lira market value of the stocks at the
end of the first month in the sample (February 1989). The ratio of to 1 is used as a scaling
factor. Pastor and Stambaugh use this scaling in order to represent the changing size of the market
and its effect on the liquidity measure. , ,1 is the monthly difference (delta) in the liquidity
measure of the stocks included in the sample. Delta is averaged across all the stocks that have
available data in both the current and the previous months.
After calculating the monthly changes in liquidity by using the above equation, these changes
are regressed on their lags and the lagged values of the scaled level series as shown below:

1
= + 1 + ( ) 1 +
1

Variables in this equation are defined as before. In this equation, changes in market-wide liquidity
are modeled as a function of their most recent lag (1 ) and the deviation of the lagged liquidity

measure from its long-run average (( 1 ) 1 ). The error term in this equation is the
1
innovation in market-wide liquidity ( ). The error term is multiplied by 100 in order to produce
more easily readable liquidity beta values in the next step.
Once the values are obtained from the previous step, historical liquidity beta values are
calculated by estimating the three-factor Fama-French model with also included in the model:

, = 0 + + ( ) + + + ,

Variables in this equation are defined as before. is the historical liquidity beta that is used as
part of the model for calculating the predicted liquidity betas in the next step. By estimating this

13
equation, it is possible to measure a stocks sensitivity to the time-series innovations in market-
wide liquidity after accounting for the other three risk factors.
At the end of each year, starting with the 60 months over the period from 1989 to 1993 and
selecting the stocks that have at least 36 monthly returns during this period, the following time
series is constructed for each stock by adding one more year with each repetition and using all data
available up to the current year end:

, = ( )

The betas in this equation come from estimating the third and fourth equations by using all
available data up to the current year end. For instance, the third and fourth equations are estimated
by using all available data during the 60 months between 1989 and 1993 and the , calculated in
the fifth equation based on this estimation is used in the calculation of the predicted liquidity beta
for stock i in year 1994. Likewise, the third and fourth equations are estimated by using all
available data during the 72 months between 1989 and 1994 and the , calculated in the fifth
equation based on this estimation is used in the calculation of the predicted liquidity beta for stock
i in year 1995. This process is repeated by adding one more year until the end of 2012. The last
, is used in calculating the predicted liquidity beta for stock i in year 2013.
Pastor and Stambaugh argue that a stocks sensitivity to changes in market-wide liquidity also
may be affected from a number of stock-specific characteristics. Once the time-series for , is
obtained as described above, the following pooled time-series, cross-sectional regression is
estimated in order to obtain the predicted liquidity betas:

, = 0 + 1 + 2 (, . ) + 3 (,1 . )
+ 4 (,1 . ) + 5 (,1 . )
+ 6 (,1 . ) + 7 (,1 . )
+ 8 (,1 . ) +

In this equation, , is the historical liquidity beta estimated by using the fourth equation with all
available data up to the current year end, ,1 is the average of the , from the third
equation for stock i between months t-6 through t-1, ,1 is the natural log of stock is
average Turkish lira volume between months t-6 through t-1, ,1 is the cumulative return
on stock i between months t-6 through t-1, ,1 is the standard deviation of stock is monthly
returns between months t-6 through t-1, ,1 is the natural log of the price of stock i at
the end of month t-1, and ,1 is the natural log of the number of shares outstanding for
stock i at the end of month t-1.
After the values are estimated by using the above equation, predicted liquidity betas (,, )
are calculated by using the estimated coefficients:

,, = 0 + 1 + 2 , + 3 ,1 + 4 ,1
+ 5 ,1 + 6 ,1 + 7 ,1
+ 8 ,1

In this equation, ,, is the predicted liquidity beta and measures a stocks sensitivity to changes
in market-wide liquidity. At the end of each year, starting with the end of 1993, stocks are sorted
on the basis of their ,, values and decile portfolios are formed with Portfolio 1 containing

14
stocks with the lowest liquidity risk and Portfolio 10 containing stocks with the highest liquidity
risk. Once the portfolios are formed, their equally- and value-weighted monthly returns over the
next 12 months are calculated (for 1994 initially). These returns are linked across years to build
return series for each portfolio.

15
Table 1. Descriptive statistics for risk factors

Panel A. Correlations among risk factors

SMB HML WML

1.00
SMB -0.25 1.00
HML 0.17 -0.14 1.00
WML -0.09 0.00 -0.06 1.00

Panel B. Distributional metrics for risk factors

SMB HML WML

Mean 0.0373 0.0374 0.0014 0.0093 2.2416

Median 0.0325 0.0274 -0.0004 0.0076 1.4724
Minimum 0.0038 -0.3903 -0.2662 -0.3839 0.4870
Maximum 0.1541 0.7978 0.3224 0.3745 14.4480
Standard Deviation 0.0279 0.1469 0.0673 0.0790 2.1336
Skewness 0.7933 1.0420 0.2269 0.2633 2.6104
Kurtosis 0.7318 3.7705 2.9762 7.2854 7.9299

Panel C. Homoscedastic variance tests

SMB HML WML

Order 1 5.5953 0.0051 0.0181 2.6509 11.7854

(0.0190) (0.9479) (0.8882) (0.1094) (0.0007)
Order 2 7.3443 0.3042 2.2236 12.6818 22.1212
(0.0391) (0.8649) (0.3370) (0.0032) (0.0001)
Panel A presents the correlations among risk factors and Panel B presents the distributional metrics for each of the
risk factors used in the models. In Panel C, Q statistics of the ARCH disturbances with their corresponding p values
in parentheses are presented to test for changes in variance across time. The risk-free rate ( ) used in the calculation
of excess returns is the monthly nominal return on the 90-day zero-coupon Treasury security. is the monthly return
on the BIST-100 index. SMB and HML factors are formed as follows: First, all stocks that have available data on the
last trading date of June of year t (t=1990, 1992 2012) are divided into two groups based on their market value of
common equity (market price of the stock times the number of stocks outstanding). The stocks that have a market
value higher than the median market value are labeled as Big Stocks (B) and the remaining stocks are labeled as Small
Stocks (S). Second, independent of the former grouping, all stocks that have available data on the last day of year t-1
are divided into three groups based on their ranked B/M values. The B/M for year t is defined as the book value of
equity for the fiscal year ending in year t-1 divided by the market value of equity on the last trading day of year t-1.
The range of B/M values is divided into ten deciles to identify the breakpoints for grouping stocks. The group labeled
High (H) is made up of those stocks that fall into the highest 3 deciles (highest 30%), the group labeled Medium (M)
is made up of those stocks that fall into the 4th to 7th deciles (medium 40%) and the group labeled Low (L) is made up
of the remaining stocks (lowest 30%). The intersection of the size and B/M independent sorts creates six portfolios:
B/H, B/M, B/L, S/H, S/M, S/L. The monthly value-weighted portfolio returns are calculated for each of these
portfolios between July of year t and June of year t+1. The portfolios are re-balanced as described above in June of
year t+1. SMB is the difference between the average monthly returns on the three small stock portfolios (S/H, S/M,
S/L) and the three big stock portfolios (B/H, B/M, B/L). HML is the difference between the average monthly returns
on the two high B/M portfolios (B/H, S/H) and the two low B/M portfolios (B/L, S/L). In order to calculate the WML
factor, stocks are grouped into decile portfolios based on their compound returns between months t-12 and t-1. On
month t, stocks in the highest three deciles are grouped into the Winner portfolio and stocks in the lowest three deciles
are grouped into the Loser portfolio. WML is the difference between the equally-weighted average monthly returns
on the Winner and Loser portfolios. Bold figures indicate significance at an alpha level of 10% or lower.

16
Table 2. Portfolio formation, estimation, and testing periods for beta-sorted portfolios

Periods

1 2 3 4
Portfolio Formation 1990-1993 1994-1997 1998-2001 2002-2005
First Estimation 1994-1997 1998-2001 2002-2005 2006-2009
First Testing 1998 2002 2006 2010
Second Estimation 1994-1998 1998-2002 2002-2006 2006-2010
Second Testing 1999 2003 2007 2011
Third Estimation 1994-1999 1998-2003 2002-2007 2006-2011
Third Testing 2000 2004 2008 2012
Fourth Estimation 1994-2000 1998-2004 2002-2008 2006-2012
Fourth Testing 2001 2005 2009 2013
This table presents the breakdown of the portfolio formation, estimation and testing periods for the calculation of
Fama and MacBeth (1973) beta values. January of any beginning year and December of any ending year are the
beginnings and endings of the periods mentioned in the table.

17
Table 3. Summary statistics for returns on portfolios sorted on different criteria

Beta Portfolios

Portfolio 1 2 3 4 5 6 7 8 9 10

Panel A. Value-Weighted Returns

Mean 3.33 3.21 3.05 2.98 3.03 2.79 2.45 2.99 2.53 3.00
Std Dev 15.20 14.49 15.65 13.15 14.64 14.10 13.94 14.63 14.22 14.40
t(Mean) 2.99 3.03 2.66 3.10 2.83 2.70 2.39 2.79 2.42 2.84
Panel B. Equally-Weighted Returns
Mean 3.28 2.99 3.15 3.15 3.19 3.08 2.57 3.24 2.97 3.41
Std Dev 14.94 13.69 15.40 12.98 15.06 13.87 13.60 14.41 13.78 14.06
t(Mean) 2.99 2.98 2.79 3.31 2.89 3.03 2.58 3.06 2.94 3.31
Double-Sorted Size and B/M Portfolios

Panel C. Value-Weighted Returns

Portfolio S/L S/M S/H M/L M/M M/H B/L B/M B/H
Mean 4.01 4.63 5.09 4.17 4.56 4.45 3.88 4.14 5.04
Std Dev 16.86 15.44 15.61 14.58 15.37 15.61 14.35 16.03 19.39
t(Mean) 3.95 4.98 5.41 4.76 4.93 4.73 4.50 4.29 4.32
Independepent B/M and Size Portfolios

Panel D. Value-Weighted Returns

B/M Portfolios Size Portfolios

Portfolio L H S B
Mean 3.84 5.03 4.64 4.03
Std Dev 14.07 16.64 14.69 14.32
t(Mean) 4.54 5.02 5.25 4.68
Liquidity Beta Portfolios

Portfolio 1 2 3 4 5 6 7 8 9 10

Panel E. Value-Weighted Returns

Mean 3.64 4.03 3.70 4.01 3.89 4.13 3.88 3.03 3.11 3.42
Std Dev 17.31 15.05 14.81 14.71 14.94 18.28 14.71 14.91 15.73 15.58
t(Mean) 3.21 4.10 3.82 4.17 3.98 3.45 4.04 3.11 3.02 3.36
Panel F. Equally-Weighted Returns
Mean 4.22 4.30 4.19 4.51 4.30 4.34 4.19 3.60 4.04 3.65
Std Dev 15.74 15.11 15.04 14.76 14.62 14.33 13.27 13.97 14.59 14.02
t(Mean) 4.10 4.36 4.26 4.67 4.50 4.63 4.83 3.94 4.24 3.98

18
Table 3 (Continued)

Past Return Portfolios

Portfolio 1 2 3 4 5 6 7 8 9 10

Panel G. Past11Lag1 Return Portfolios Equally-Weighted Portfolio Returns

Mean 5.05 4.78 4.76 4.54 5.42 4.80 4.50 4.51 4.35 4.25
Std Dev 17.76 15.94 16.05 15.25 15.44 15.25 14.88 15.10 14.66 14.62
t(Mean) 4.76 5.03 4.97 5.00 5.88 5.28 5.07 5.00 4.97 4.88
This table presents the summary statistics for returns on portfolios formed on Fama and MacBeth's (1973) beta, Fama
and Frenchs (1993) size and B/M, Pastor and Stambaughs (2003) liquidity and Carharts (1997) past returns. The
formation of the portfolios for each criterion is described in Table 1. For the 10-portfolio classifications, Portfolio 1
includes stocks with the lowest 10% of the relevant criterion's values and Portfolio 10 includes stocks with the highest
10% of the relevant criterion's values.

19
Table 4. GMM estimation results for beta-sorted portfolios

Panel A. Beta-Sorted Portfolios Equally-Weighted Portfolio Returns

1 2 3 4 5 6 7 8 9 10 GRS p(GRS)
Intercept 0.01 0.00 0.01 0.01 0.01 0.01 0.00 0.01 0.00 0.01
1.07 0.89 1.21 1.40 1.13 1.04 0.07 1.23 1.03 1.99 7.96 0.63
0.84 0.84 0.99 0.83 0.91 0.86 0.89 0.92 0.91 0.91
12.65 17.79 18.70 16.77 14.41 14.94 21.27 12.71 28.41 24.21

Adj R2 0.60 0.71 0.79 0.78 0.68 0.72 0.79 0.75 0.83 0.79
95% C.I. LB 0.44 0.62 0.70 0.69 0.50 0.61 0.71 0.64 0.75 0.70
95% C.I. UB 0.75 0.79 0.88 0.86 0.86 0.83 0.87 0.86 0.90 0.87
MAPE 0.06 0.06 0.05 0.05 0.05 0.06 0.05 0.05 0.04 0.05
Intercept 0.00 0.00 0.00 0.00 0.01 0.00 0.00 0.00 0.00 0.01
0.67 0.55 0.54 1.11 1.17 0.59 -0.85 0.89 0.67 1.50 7.72 0.66
0.92 0.91 1.04 0.89 1.02 0.93 0.95 0.98 0.95 0.95
14.14 20.65 21.64 19.86 13.35 17.51 28.50 17.29 30.24 22.62
SMB 0.77 0.54 0.55 0.55 0.77 0.70 0.59 0.60 0.40 0.45
7.24 5.02 5.83 8.87 5.11 6.33 8.47 5.20 4.37 3.62
HML 0.28 0.16 0.41 0.17 -0.13 0.25 0.36 0.25 0.15 0.28
1.81 1.40 3.28 1.86 -0.46 2.08 4.89 2.59 1.71 2.75

Adj R2 0.69 0.76 0.84 0.84 0.79 0.81 0.86 0.81 0.86 0.82
95% C.I. LB 0.56 0.69 0.78 0.78 0.71 0.74 0.81 0.73 0.79 0.77
95% C.I. UB 0.82 0.83 0.91 0.90 0.87 0.88 0.92 0.88 0.92 0.88
MAPE 0.05 0.05 0.05 0.04 0.05 0.04 0.04 0.04 0.04 0.04
Intercept 0.00 0.00 0.00 0.01 0.01 0.01 0.01 0.02 0.00 0.01
0.32 -0.11 0.20 1.04 1.07 1.19 1.31 2.50 0.56 1.06 9.03 0.53
0.92 0.91 1.04 0.89 1.01 0.93 0.94 0.97 0.95 0.95
14.01 20.10 21.07 19.32 13.02 17.04 28.66 16.16 29.38 22.30
SMB 0.77 0.54 0.55 0.55 0.77 0.70 0.59 0.60 0.40 0.45
7.25 4.98 5.84 8.80 5.13 6.26 8.67 5.34 4.35 3.60
HML 0.28 0.16 0.41 0.17 -0.13 0.25 0.37 0.26 0.15 0.28
1.80 1.41 3.30 1.85 -0.45 2.07 4.87 2.64 1.70 2.74
WML 0.00 0.00 0.00 0.00 0.00 0.00 -0.01 -0.01 0.00 0.00
0.22 0.42 0.11 -0.27 -0.36 -0.84 -2.81 -2.13 -0.07 -0.08

Adj R2 0.69 0.76 0.84 0.84 0.79 0.81 0.87 0.81 0.85 0.82
95% C.I. LB 0.56 0.69 0.78 0.78 0.71 0.74 0.81 0.74 0.79 0.77
95% C.I. UB 0.82 0.83 0.90 0.90 0.87 0.88 0.92 0.88 0.92 0.88
MAPE 0.05 0.05 0.05 0.04 0.05 0.04 0.04 0.04 0.04 0.04

20
Table 4 (Continued)

Panel B. Beta-Sorted Portfolios Value-Weighted Portfolio Returns

1 2 3 4 5 6 7 8 9 10 GRS p(GRS)
Intercept 0.01 0.01 0.01 0.00 0.00 0.00 0.00 0.00 0.00 0.00
1.12 1.25 1.00 0.96 0.96 0.49 -0.18 0.80 -0.03 1.04 5.97 0.82
0.85 0.85 1.01 0.83 0.91 0.88 0.91 0.93 0.93 0.94
13.45 15.26 19.26 16.14 14.81 15.82 22.73 13.21 26.90 25.26

Adj R2 0.60 0.65 0.79 0.75 0.73 0.73 0.78 0.76 0.81 0.80
95% C.I. LB 0.45 0.55 0.70 0.65 0.61 0.63 0.70 0.65 0.74 0.72
95% C.I. UB 0.75 0.76 0.88 0.85 0.85 0.84 0.86 0.87 0.88 0.88
MAPE 0.06 0.06 0.05 0.05 0.05 0.05 0.05 0.05 0.05 0.05
Intercept 0.01 0.01 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
0.92 0.96 0.35 0.66 0.92 -0.04 -0.87 0.47 -0.34 0.52 5.78 0.83
0.93 0.90 1.06 0.87 0.99 0.94 0.96 0.99 0.97 0.97
14.60 17.05 21.90 18.25 15.21 17.88 29.41 17.37 26.94 22.92
SMB 0.65 0.41 0.53 0.40 0.59 0.58 0.50 0.52 0.35 0.33
5.47 3.29 5.44 5.10 5.10 4.84 6.11 4.43 3.51 2.48
HML 0.11 0.14 0.38 0.16 -0.01 0.27 0.31 0.20 0.12 0.27
0.71 1.05 2.98 1.58 -0.06 2.18 3.26 1.96 1.20 2.42

Adj R2 0.66 0.68 0.84 0.78 0.79 0.80 0.83 0.80 0.83 0.83
95% C.I. LB 0.53 0.57 0.77 0.69 0.71 0.72 0.77 0.72 0.77 0.77
95% C.I. UB 0.80 0.78 0.90 0.87 0.88 0.87 0.89 0.88 0.90 0.88
MAPE 0.06 0.06 0.05 0.05 0.05 0.05 0.05 0.05 0.04 0.05
Intercept 0.01 0.00 0.00 0.00 0.01 0.00 0.01 0.02 0.00 0.00
0.80 0.07 0.20 0.66 0.84 0.58 1.00 2.17 0.05 0.44 6.30 0.79
0.93 0.90 1.06 0.87 0.99 0.94 0.95 0.98 0.97 0.97
14.35 16.65 21.23 17.87 14.79 17.43 29.59 16.22 26.31 22.53
SMB 0.65 0.40 0.53 0.40 0.59 0.58 0.51 0.53 0.35 0.33
5.47 3.26 5.45 5.08 5.13 4.80 6.25 4.55 3.50 2.47
HML 0.11 0.13 0.38 0.16 -0.01 0.27 0.31 0.21 0.12 0.27
0.71 1.05 2.99 1.57 -0.06 2.17 3.27 2.00 1.20 2.41
WML 0.00 0.00 0.00 0.00 0.00 0.00 -0.01 -0.01 0.00 0.00
-0.13 0.54 0.01 -0.18 -0.33 -0.74 -2.70 -2.11 -0.40 -0.11

Adj R2 0.66 0.68 0.83 0.78 0.79 0.79 0.83 0.81 0.83 0.82
95% C.I. LB 0.53 0.57 0.77 0.69 0.71 0.72 0.77 0.73 0.77 0.77
95% C.I. UB 0.79 0.78 0.90 0.87 0.87 0.87 0.90 0.88 0.89 0.88
MAPE 0.06 0.06 0.05 0.05 0.05 0.05 0.04 0.05 0.04 0.05
This table presents the one-, three- and four-factor GMM estimations for portfolios formed on Fama and MacBeth
(1973) beta values. Portfolio formation is described in Table 1. The dependent variable is the equally- or value-
weighted monthly portfolio excess returns that are calculated between January 1998 and June 2013. , , SMB,
HML and WML are described in Table 1. GRS is the Gibbons, Ross, Shanken (1985) statistic testing the null
hypothesis that all intercepts are jointly equal to zero. The GRS statistic estimated under the GMM is chi-square
distributed and p(GRS) is the p-value for the GRS statistic. 95% C.I. LB is the lower bound for the 95% confidence
interval for the adjusted R2 value. 95% C.I. UB is the upper bound for the 95% confidence interval for the adjusted R 2
value. The confidence intervals for the adjusted R2 values are calculated by bootstrapping the adjusted R2s 500 times
and allowing replications in the samples. MAPE (expressed in decimal points) is the mean absolute pricing error
between the actual and predicted values for each model. Numbers below the coefficient estimates are t statistics. Bold
figures indicate significance at an alpha level of 10% or lower.

21
Table 5. GMM estimation results for size and b/m double-sorted portfolios

Size and B/M Portfolios Equally-Weighted Returns

S/L S/M S/H M/L M/M M/H B/L B/M B/H GRS p(GRS)
Intercept 0.01 0.01 0.02 0.00 0.01 0.01 0.00 0.00 0.01
0.82 1.73 2.73 0.97 1.64 1.57 0.72 1.12 1.36 11.16 0.27
0.86 0.85 0.86 0.84 0.92 0.93 0.89 0.93 1.05
12.08 15.35 16.58 20.32 26.45 20.72 39.00 30.77 15.51

Adj R2 0.58 0.60 0.65 0.71 0.79 0.76 0.90 0.84 0.67
95% C.I. LB 0.47 0.51 0.55 0.62 0.72 0.68 0.86 0.79 0.52
95% C.I. UB 0.68 0.68 0.74 0.79 0.85 0.84 0.93 0.89 0.82
MAPE 0.08 0.07 0.07 0.06 0.05 0.06 0.03 0.04 0.06
Intercept 0.00 0.01 0.01 0.00 0.00 0.00 0.00 0.00 0.00
0.39 1.22 3.10 1.20 1.14 0.63 1.12 0.57 0.51 11.96 0.22
0.96 0.91 0.92 0.94 0.97 0.97 0.92 0.93 1.01
16.37 25.83 32.04 28.94 36.39 26.29 40.14 30.14 18.63
SMB 1.05 1.05 1.02 0.81 0.65 0.75 0.13 0.22 0.21
11.58 12.67 13.91 10.46 12.75 16.61 2.60 3.49 2.29
HML 0.21 0.54 0.55 -0.07 0.27 0.49 -0.12 0.17 0.68
2.32 7.22 10.17 -1.23 5.37 8.64 -2.99 2.90 4.56

Adj R2 0.74 0.82 0.87 0.84 0.87 0.90 0.90 0.85 0.75
95% C.I. LB 0.67 0.77 0.84 0.79 0.83 0.87 0.88 0.81 0.64
95% C.I. UB 0.81 0.86 0.91 0.88 0.91 0.94 0.93 0.90 0.86
MAPE 0.06 0.05 0.04 0.04 0.04 0.04 0.03 0.04 0.05
Intercept 0.00 0.00 0.00 0.01 0.01 0.00 0.00 0.00 0.00
0.09 0.65 1.13 1.05 1.80 1.04 0.85 -0.31 0.60 5.46 0.79
0.96 0.91 0.93 0.94 0.97 0.97 0.92 0.94 1.01
16.05 25.65 32.43 28.40 36.13 25.25 39.95 29.75 17.59
SMB 1.05 1.05 1.03 0.81 0.64 0.75 0.13 0.22 0.21
11.60 12.65 14.08 10.46 12.60 16.42 2.60 3.60 2.28
HML 0.21 0.54 0.55 -0.07 0.27 0.49 -0.12 0.18 0.68
2.32 7.25 10.43 -1.24 5.08 8.77 -3.00 2.93 4.53
WML 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
0.21 0.26 1.89 -0.18 -1.24 -0.63 -0.02 0.62 -0.21

Adj R2 0.74 0.82 0.87 0.84 0.87 0.90 0.90 0.85 0.75
95% C.I. LB 0.67 0.77 0.84 0.79 0.84 0.87 0.87 0.81 0.64
95% C.I. UB 0.81 0.86 0.91 0.88 0.91 0.93 0.93 0.90 0.86
MAPE 0.06 0.05 0.04 0.04 0.04 0.04 0.03 0.04 0.05
This table presents the one-, three- and four-factor GMM estimations for portfolios formed at the intersection of the
size and B/M classifications. Portfolio formation is described in Table 1. The dependent variable is the equally-
weighted monthly portfolio excess returns that are calculated between July 1990 and June 2013. , , SMB, HML
and WML are described in Table 1. GRS is the Gibbons, Ross, Shanken (1985) statistic testing the null hypothesis
that all intercepts are jointly equal to zero. The GRS statistic estimated under the GMM is chi-square distributed and
p(GRS) is the p-value for the GRS statistic. 95% C.I. LB is the lower bound for the 95% confidence interval for the
adjusted R2 value. 95% C.I. UB is the upper bound for the 95% confidence interval for the adjusted R 2 value. The
confidence intervals for the adjusted R2 values are calculated by bootstrapping the adjusted R2s 500 times and allowing
replications in the samples. MAPE (expressed in decimal points) is the mean absolute pricing error between the actual
and predicted values for each model. Numbers below the coefficient estimates are t statistics. Bold figures indicate
significance at an alpha level of 10% or lower.

22
Table 6. GMM estimation results for independent size and b/m portfolios
Independent B/M Portfolios Independent Size Portfolios
Value-Weighted Returns Value-Weighted Returns
L H GRS p(GRS) S B GRS p(GRS)
Intercept 0.00 0.01 0.01 0.00
0.32 2.37 5.86 0.05 1.63 1.30 3.71 0.16
0.89 0.96 0.82 0.93
34.65 20.27 16.58 53.70

Adj R2 0.88 0.73 0.68 0.93

95% C.I. LB 0.84 0.66 0.60 0.91
95% C.I. UB 0.92 0.81 0.76 0.95
MAPE 0.03 0.06 0.06 0.03
Intercept 0.00 0.01 0.00 0.00
1.23 1.43 2.89 0.24 1.20 1.86 3.51 0.17
0.90 0.91 0.89 0.93
34.67 26.94 31.92 51.11
SMB -0.03 0.05 0.33 -0.04
-1.47 1.63 17.76 -2.86
HML -0.13 0.36 0.22 -0.05
-5.70 8.08 8.80 -3.02

Adj R2 0.90 0.85 0.90 0.94

95% C.I. LB 0.87 0.80 0.88 0.92
95% C.I. UB 0.93 0.90 0.93 0.96
MAPE 0.03 0.04 0.03 0.03
Intercept 0.00 0.00 0.00 0.00
1.22 0.49 1.48 0.48 -0.48 0.93 3.10 0.21
0.90 0.91 0.89 0.93
33.90 25.86 32.10 51.12
SMB -0.03 0.05 0.33 -0.04
-1.47 1.64 18.08 -2.85
HML -0.13 0.36 0.22 -0.05
-5.72 8.08 9.07 -3.02
WML 0.00 0.00 0.00 0.00
-0.36 0.46 1.77 0.59

Adj R2 0.90 0.85 0.90 0.94

95% C.I. LB 0.87 0.80 0.88 0.92
95% C.I. UB 0.93 0.90 0.93 0.96
MAPE 0.03 0.04 0.03 0.03
This table presents the one-, three- and four-factor GMM estimations for portfolios formed independently on the size
and B/M factors. Portfolio formation is described in Table 1. The dependent variable is the value-weighted monthly
portfolio excess returns that are calculated between July 1990 and June 2013. , , SMB, HML and WML are
described in Table 1. GRS is the Gibbons, Ross, Shanken (1985) statistic testing the null hypothesis that all intercepts
are jointly equal to zero. The GRS statistic estimated under the GMM is chi-square distributed and p(GRS) is the p-
value for the GRS statistic. 95% C.I. LB is the lower bound for the 95% confidence interval for the adjusted R 2 value.
95% C.I. UB is the upper bound for the 95% confidence interval for the adjusted R 2 value. The confidence intervals
for the adjusted R2 values are calculated by bootstrapping the adjusted R2s 500 times and allowing replications in the
samples. MAPE (expressed in decimal points) is the mean absolute pricing error between the actual and predicted
values for each model. Numbers below the coefficient estimates are t statistics. Bold figures indicate significance at
an alpha level of 10% or lower.

23
Table 7. GMM estimation results for portfolios sorted on liquidity betas

Panel A. Liquidity-Beta-Sorted Portfolios Equally-Weighted Portfolio Returns

1 2 3 4 5 6 7 8 9 10 GRS p(GRS)
Intercept 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.00 0.01 0.00
1.27 1.73 1.51 2.11 1.76 2.08 1.93 0.31 1.22 0.41 13.56 0.19
0.92 0.94 0.93 0.91 0.91 0.91 0.84 0.88 0.90 0.86
15.96 21.13 23.62 24.49 23.49 23.59 22.92 25.64 17.16 23.55

Adj R2 0.68 0.77 0.78 0.76 0.78 0.81 0.81 0.79 0.76 0.76
95% C.I. LB 0.58 0.69 0.69 0.68 0.71 0.74 0.75 0.73 0.68 0.69
95% C.I. UB 0.79 0.86 0.86 0.85 0.85 0.87 0.87 0.85 0.84 0.83
MAPE 0.06 0.05 0.05 0.05 0.05 0.05 0.05 0.05 0.05 0.05
Intercept 0.00 0.00 0.00 0.01 0.01 0.01 0.01 0.00 0.00 0.00
0.95 1.40 1.04 1.92 1.40 1.71 1.50 -0.43 0.75 -0.54 12.45 0.26
0.99 0.97 0.96 0.95 0.94 0.93 0.85 0.91 0.94 0.90
23.48 23.55 28.66 28.92 33.75 29.32 22.64 32.02 18.87 32.80
SMB 0.32 0.22 0.21 0.22 0.20 0.17 0.10 0.20 0.21 0.23
8.72 9.57 8.15 11.09 8.59 9.97 4.09 11.52 9.01 9.25
HML 0.11 0.15 0.16 0.13 0.13 0.13 0.09 0.11 0.11 0.15
1.57 3.95 2.91 2.92 4.06 3.77 2.39 3.73 2.67 4.13

Adj R2 0.84 0.86 0.86 0.86 0.86 0.87 0.84 0.87 0.84 0.87
95% C.I. LB 0.79 0.81 0.81 0.81 0.81 0.82 0.79 0.84 0.80 0.82
95% C.I. UB 0.88 0.91 0.91 0.91 0.90 0.91 0.89 0.91 0.89 0.91
MAPE 0.04 0.04 0.04 0.04 0.04 0.04 0.04 0.04 0.04 0.04
Intercept 0.01 0.00 0.00 0.01 0.00 0.01 0.00 0.00 0.00 -0.01
1.04 -0.40 0.36 1.76 0.58 2.41 0.14 -0.96 0.03 -1.46 19.32 0.04
0.99 0.98 0.96 0.95 0.94 0.93 0.86 0.91 0.94 0.90
23.41 23.48 28.18 28.61 33.72 27.59 23.01 31.75 18.66 32.67
SMB 0.32 0.22 0.21 0.22 0.20 0.17 0.10 0.20 0.21 0.23
8.73 9.53 8.18 11.02 8.59 9.88 4.12 11.62 9.05 9.16
HML 0.11 0.15 0.16 0.13 0.13 0.12 0.09 0.11 0.11 0.15
1.54 3.91 2.96 2.89 4.21 3.65 2.61 3.94 2.77 4.11
WML 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
-0.46 1.53 0.42 -0.40 0.40 -1.06 0.89 0.77 0.58 1.13

Adj R2 0.84 0.86 0.86 0.86 0.86 0.87 0.84 0.87 0.84 0.87
95% C.I. LB 0.79 0.81 0.81 0.81 0.81 0.82 0.79 0.84 0.79 0.82
95% C.I. UB 0.88 0.91 0.91 0.90 0.90 0.91 0.89 0.91 0.89 0.91
MAPE 0.04 0.04 0.04 0.04 0.04 0.04 0.04 0.04 0.04 0.04

24
Table 7 (Continued)

Panel B. Liquidity-Beta-Sorted Portfolios Value-Weighted Portfolio Returns

1 2 3 4 5 6 7 8 9 10 GRS p(GRS)
Intercept 0.00 0.01 0.00 0.01 0.00 0.01 0.00 0.00 0.00 0.00
0.29 1.45 0.57 1.14 0.84 1.20 0.82 -0.78 -0.67 -0.11 8.89 0.54
1.06 0.96 0.93 0.90 0.89 1.13 0.87 0.83 0.93 0.94
16.63 23.97 28.39 22.88 18.37 12.24 23.16 17.43 11.99 19.75

Adj R2 0.74 0.82 0.79 0.76 0.73 0.77 0.71 0.63 0.70 0.73
95% C.I. LB 0.65 0.75 0.72 0.67 0.65 0.69 0.61 0.47 0.59 0.65
95% C.I. UB 0.83 0.89 0.86 0.85 0.81 0.85 0.82 0.78 0.82 0.82
MAPE 0.06 0.05 0.05 0.05 0.05 0.06 0.06 0.06 0.06 0.06
Intercept 0.00 0.00 0.00 0.01 0.01 0.01 0.00 0.00 -0.01 0.00
-0.06 1.27 0.71 1.32 1.15 1.31 0.71 -0.63 -1.01 -0.82 11.50 0.32
1.09 0.97 0.94 0.92 0.89 1.13 0.84 0.85 0.94 0.93
16.74 23.69 26.62 23.17 18.63 12.54 18.97 16.98 11.99 21.17
SMB 0.18 0.05 0.01 0.01 -0.06 -0.02 -0.06 0.02 0.08 0.10
4.50 2.24 0.46 0.54 -1.40 -0.72 -1.73 0.58 2.70 3.06
HML 0.07 0.03 -0.04 -0.06 -0.08 -0.04 0.06 -0.04 0.09 0.19
0.89 1.18 -0.89 -1.37 -1.08 -0.78 0.95 -0.64 2.18 3.78

Adj R2 0.78 0.82 0.79 0.76 0.73 0.77 0.72 0.62 0.72 0.77
95% C.I. LB 0.71 0.75 0.72 0.67 0.66 0.69 0.63 0.47 0.61 0.69
95% C.I. UB 0.85 0.90 0.86 0.85 0.81 0.85 0.81 0.78 0.83 0.85
MAPE 0.06 0.05 0.05 0.05 0.05 0.06 0.05 0.06 0.06 0.05
Intercept 0.00 0.00 0.00 0.01 0.01 0.01 0.00 0.00 -0.01 -0.01
-0.13 0.53 -0.48 2.29 0.72 0.91 0.14 -0.41 -1.71 -1.69 17.06 0.07
1.09 0.97 0.95 0.91 0.89 1.13 0.84 0.85 0.94 0.93
16.57 23.02 26.68 22.49 18.22 12.14 19.45 16.50 11.82 20.48
SMB 0.18 0.05 0.01 0.01 -0.06 -0.02 -0.06 0.02 0.08 0.10
4.50 2.23 0.47 0.53 -1.39 -0.72 -1.73 0.58 2.70 3.05
HML 0.07 0.03 -0.04 -0.06 -0.08 -0.04 0.06 -0.04 0.10 0.19
0.89 1.20 -0.87 -1.41 -1.06 -0.76 0.94 -0.64 2.30 3.78
WML 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
0.10 0.30 1.14 -1.60 0.03 0.22 0.38 -0.12 0.86 1.28

Adj R2 0.78 0.82 0.79 0.76 0.73 0.77 0.72 0.62 0.72 0.77
95% C.I. LB 0.71 0.85 0.71 0.85 0.71 0.85 0.71 0.85 0.71 0.85
95% C.I. UB 0.75 0.89 0.75 0.89 0.75 0.89 0.75 0.89 0.75 0.89
MAPE 0.06 0.05 0.05 0.05 0.05 0.06 0.06 0.06 0.06 0.05
This table presents the one-, three- and four-factor GMM estimations for portfolios formed on Pastor and Stambaughs
(2003) market-wide liquidity measure. Portfolio formation is described in Table 3. The dependent variable is the
value-weighted monthly portfolio excess returns that are calculated between January 1994 and December 2012. ,
, SMB, HML and WML are described in Table 1. GRS is the Gibbons, Ross, Shanken (1985) statistic testing the
null hypothesis that all intercepts are jointly equal to zero. The GRS statistic estimated under the GMM is chi-square
distributed and p(GRS) is the p-value for the GRS statistic. 95% C.I. LB is the lower bound for the 95% confidence
interval for the adjusted R2 value. 95% C.I. UB is the upper bound for the 95% confidence interval for the adjusted R 2
value. The confidence intervals for the adjusted R2 values are calculated by bootstrapping the adjusted R2s 500 times
and allowing replications in the samples. MAPE (expressed in decimal points) is the mean absolute pricing error
between the actual and predicted values for each model. Numbers below the coefficient estimates are t statistics. Bold
figures indicate significance at an alpha level of 10% or lower.

25
Table 8. GMM estimation results for portfolios sorted on past returns

Past11Lag1 Return Portfolios Equally-Weighted Portfolio Returns

1 2 3 4 5 6 7 8 9 10 GRS p(GRS)
Intercept 0.02 0.02 0.02 0.01 0.02 0.02 0.01 0.01 0.01 0.01
2.52 2.52 2.56 2.48 3.88 3.30 2.60 2.85 2.30 1.75 18.19 0.05
0.94 0.89 0.89 0.89 0.89 0.89 0.88 0.89 0.87 0.80
14.55 20.57 15.61 18.66 28.13 23.88 24.40 21.25 22.78 17.96

Adj R2 0.62 0.68 0.67 0.73 0.72 0.75 0.76 0.75 0.78 0.65
95% C.I. LB 0.52 0.60 0.57 0.65 0.65 0.69 0.68 0.67 0.71 0.56
95% C.I. UB 0.72 0.77 0.77 0.81 0.80 0.81 0.84 0.83 0.84 0.74
MAPE 0.08 0.07 0.07 0.06 0.06 0.06 0.05 0.06 0.05 0.06
Intercept 0.01 0.01 0.01 0.01 0.02 0.01 0.01 0.01 0.01 0.01
2.09 2.05 2.27 2.20 4.07 2.91 2.12 2.60 1.94 1.41 21.25 0.02
1.01 0.94 0.95 0.93 0.94 0.92 0.90 0.93 0.90 0.83
15.72 21.48 16.50 19.93 29.39 26.09 24.40 21.72 24.39 20.38
SMB 0.29 0.22 0.25 0.21 0.22 0.16 0.16 0.19 0.13 0.13
8.15 7.18 9.02 7.65 7.22 7.31 6.74 5.28 5.68 5.25
HML 0.20 0.17 0.13 0.12 0.12 0.14 0.16 0.09 0.08 0.08
3.27 3.41 2.82 4.25 3.26 3.82 3.85 1.92 1.63 1.88

Adj R2 0.74 0.78 0.77 0.81 0.81 0.80 0.82 0.81 0.81 0.68
95% C.I. LB 0.67 0.72 0.71 0.76 0.76 0.75 0.76 0.76 0.76 0.60
95% C.I. UB 0.81 0.83 0.84 0.86 0.86 0.85 0.88 0.86 0.86 0.76
MAPE 0.07 0.06 0.06 0.05 0.05 0.05 0.05 0.05 0.05 0.06
Intercept 0.00 -0.01 0.00 0.00 0.01 0.01 0.00 0.01 0.00 -0.01
-0.09 -0.90 0.36 -0.03 1.00 0.80 0.33 1.11 0.28 -0.92 22.33 0.01
1.02 0.95 0.96 0.94 0.95 0.93 0.91 0.94 0.91 0.84
16.32 22.32 16.29 20.23 30.08 26.58 23.27 21.62 24.36 20.14
SMB 0.30 0.23 0.25 0.21 0.22 0.16 0.16 0.19 0.13 0.13
8.63 7.66 9.42 7.88 7.41 7.33 6.80 5.27 5.67 5.44
HML 0.20 0.18 0.13 0.12 0.12 0.14 0.16 0.09 0.08 0.09
3.57 3.95 3.00 4.61 3.56 4.03 3.95 1.93 1.67 2.00
WML 0.01 0.01 0.00 0.00 0.01 0.00 0.00 0.00 0.00 0.01
1.22 2.14 1.00 1.57 2.62 0.84 0.92 1.00 1.91 1.92

Adj R2 0.74 0.79 0.77 0.82 0.81 0.80 0.82 0.81 0.81 0.69
95% C.I. LB 0.67 0.73 0.70 0.77 0.76 0.75 0.76 0.76 0.76 0.61
95% C.I. UB 0.82 0.84 0.84 0.86 0.86 0.85 0.89 0.86 0.86 0.77
MAPE 0.07 0.06 0.05 0.05 0.05 0.05 0.04 0.05 0.05 0.06
This table presents the one-, three- and four-factor GMM estimations for portfolios formed on past 11-month returns
with a 1 month lag. Portfolio formation is described in Table 1. The dependent variable is the equally-weighted
monthly portfolio excess returns that are calculated between July 1990 and June 2013. , , SMB, HML and WML
are described in Table 1. GRS is the Gibbons, Ross, Shanken (1985) statistic testing the null hypothesis that all
intercepts are jointly equal to zero. The GRS statistic estimated under the GMM is chi-square distributed and p(GRS)
is the p-value for the GRS statistic. 95% C.I. LB is the lower bound for the 95% confidence interval for the adjusted
R2 value. 95% C.I. UB is the upper bound for the 95% confidence interval for the adjusted R 2 value. The confidence
intervals for the adjusted R2 values are calculated by bootstrapping the adjusted R2s 500 times and allowing
replications in the samples. MAPE (expressed in decimal points) is the mean absolute pricing error between the actual
and predicted values for each model. Numbers below the coefficient estimates are t statistics. Bold figures indicate
significance at an alpha level of 10% or lower.

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Table 9. GMM estimation results for risk factors

Adj R2
S = -0.03 +0.84 M +e 0.66
(-4.78) (15.06)

L = -0.04 +0.91 M +e 0.86

(-10.42) (34.01)

H = -0.03 +0.98 M +e 0.73

(-4.33) (19.54)

SMB = 0.00 -0.11 M +e 0.06

(0.34) (-3.33)

HML = 0.01 +0.09 M +e 0.03

(2.00) (1.98)

S = -0.00 +0.02 M +0.33 L +0.54 H +e 0.78

(-0.65) (0.18) (3.84) (7.20)

L = -0.03 +0.79 M +0.18 S -0.03 H +e 0.87

(-8.75) (14.03) (3.85) (-0.54)

H = -0.01 +0.56 M +0.57 S -0.06 L +e 0.81

(-2.23) (4.84) (7.16) (-0.55)

M = 0.03 +0.01 S +0.69 L +0.26 H +e 0.89

(8.60) (0.17) (13.29) (5.26)
This table presents GMM estimations for explaining the returns on portfolios formed on size and book-to-market
factors. S is the small stocks portfolio (smaller than the median size), L is the low book-to-market stocks portfolio
(lowest 30%), H is the high book-to-market stocks portfolio (highest 30%), SMB is the difference between the small
(S) and big (B) portfolios, HML is the difference between the high (H) and low (L) portfolios, M is the monthly return
on the BIST-100 index. Portfolio formation is described in Table 1. All returns are in excess of the risk-free rate. The
big stocks portfolio (larger than the median size) is excluded because of the high correlation (96%) between the market
returns and returns of this portfolio. Numbers below the coefficient estimates are t statistics. Bold figures indicate
significance at an alpha level of 10% or lower.

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