Testing Fama and French’s Three-Factor Asset Pricing Model: Evidence from Borsa Istanbul

The aim of this study is to investigate the validity of the Three Factor Asset Pricing Model, which has been intensively tested in finance literature, in Borsa Istanbul in the period of 2006-2014 on sector base. In this context, the yearly data of the companies listed on the BIST Industrials, BIST Services and BIST Financials indexes was tested with panel data analysis method that combines horizontal profile observations of companies. Furthermore, as a result of the analysis, whether the risk factors in explaining the returns on stocks vary on sectoral base was also determined. The findings of panel data analysis stipulated that company size, market value/book value ratio, and market portfolio risk premiums explained the equity risk premium as a whole for the industrial sector. In financial and services sectors, solely market portfolio risk premium was significant in explaining equity returns.