Investigating the effect of default risk on explanatorypower of Fama-French five factor model (Evidence from Tehran Stock Exchange)

This study is examines the effect of default risk on explanatory power of Fama-French five factor model from 2009 to 2017 in Tehran Stock Exchange. In this regard, time series regression and GRS tests were used. For reaching the research purpose, Fama-French five factor model results compared with six factor model results, which default risk regarded as sixth variable using GRS test. In addition, for investigating the effect of default risk on return, time series regression was used. The research results showed that default risk variable has not a significant effect on the explanatory power of the Fama-French five factor model. In other words, default risk factor is not significant in explaining return change. Also, the results showed that among 36 investigated portfolios in this research, in most portfolios there is a positive relationship between default risk and portfolio’s return but only in 8 portfolios this relationship was significant.