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Measuring The Effectiveness of Fama and French Model in The Indonesian Stock Exchange

Sultan Zein Malian, Suikai Gao, Ira Fachira

Abstract


Abstract. This study investigates the Fama and French Three Factor Model that is applied in the Indonesian Stock Exchange or known by the Indonesian as the Indeks Harga Saham Gabungan (IHSG). This research focuses on finding secondary information, or evidence from previous paper that support or oppose the use of the said model within the mentioned scope. The main objective of this study is to provide evidence that will contribute to explain the Three Factors of the Fama and French Models in IHSG as one of an emerging markets. As a multi-beta factor of the earlier model called Capital Asset Pricing Model (CAPM) which only utilizes the systematic risk, Fama and French added two new factors which are the size factor that derives from the firm size and value factor which is measured in book to market value. Overall, we can conclude that there are market risk premium, size premium, and value premium which can elaborate the excess return in Indonesia, Fama and French is also proven to be a superior model than CAPM. Although there are several findings that considers other factors to further enhance the result.

Keywords: Fama and French Three Factor Model; CAPM; IHSG;Market risk premium; Size premium; Value premium

 


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