Performance evaluation of the five-factor model of Fama and French in predicting stock returns(Case Study: Tehran Stock Exchange)

Due to markets growth, financial instruments, complexity of financial markets and advancements in category of investments, investors and workers at financial market are in need of tools, methods and models which help them in selecting the most appropriate portfolio. Due to this need, various theories, models and methods were suggested to price the financial assets and calculate the rate of stock returns and they are developing everyday. One of these models is the three factor model of Fama and French which has been under the focus of researchers during the last two decades. Five factor model of Fama and French has the factors of three model factor of Fama and French and it also includes profitability factor and investing factor. Recently (2014), the two researcher developed their previous model and suggested a new model. The aim of this study is to evaluate and explain the five factor model of Fama and French stocks returns. In order to achieve the goal of this study, 5 hypotheses have been considered. A systematic elimination method has been used to sample and the total of 182 companies have been selected in Tehran stock exchange between 1387 to 1393. To examine the hypotheses, regression panel has been used. The results of the studies shows that market factors, firm size and profitability have positive and meaningful effect on stock returns, but the factor of value (ratio of B/M) has a significant negative impact on returns.