In Pursuit of the Optimal Combination of Fama-French and Carhart Models for Iranian Capital Market

Document Type : Research Paper


1 Professor in Financial Management, Faculty of Management, Tehran University, Tehran.Iran

2 Ph.D. Candidate, Finance-Banking, Faculty of Management, Tehran University, Tehran, Iran


It has been proved that different economies are disintegrated in terms of the optimal asset pricing model structure. Here we consider six different combinations of Fama-French and Carhart models, in terms of inclusion of momentum effect, differing effects for small and large firms and value weighting the factor components in explaining the average returns of 9 sets of LHS portfolios, some of which are specifically focused on large firms. Both time-series regression and Fama-MacBeth approach (full and rolling samples) in cross-section regression procedures have been used for testing the models. I find that momentum’s effect is significant in many of the spectra of test portfolios. Market factor’s explaining power which is significant almost solely for return SD sorts, is most pronounced when calculated based on full samples. Among all value-growth effect variants, explaining power of bHMLw has been significant. Finally, RHS portfolios corresponding to size effect have demonstrated significant explanation for average returns, only after deletion of the data from year 2017- the last 12 months of the whole 90-month research data.


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