Analysis of Accuracy Fama-French Five-Factor and Momentum Model on stocks in the Indonesia Stock Exchange
Dedi Effendi and Rahmat Aryo Baskoro

Master of Management, Faculty of Economics and Business, University of Indonesia

Abstract

The development of the capital market in Indonesia experiences rapid growth every year. In 2017-2020 there was increase in the number of stock investors 39.5% every year. In 2017 there were 628 thousand investors, this amount increased significantly in 2020 to 1.69 million single investor identification (SID). Along with the increase in the number of investors, the total trading value of stock also increased. In 2020 the total stock trading value was reached Rp. 2.229 trillion or an increase of 58.5% from 2015. These improvements demonstrated Indonesian investors^ strong interest in stock instruments. On the other hand, with high interest in stock market investing, investors have the challenge of increasing returns while minimizing risk. Investors extensive knowledge is critical in choosing the most appropriate asset pricing when making investment decision. We investigated the accuracy of Fama-French Factor and Momentum Model compared with Fama-French Five Factor Model and Capital Asset Pricing Model. The research examined 272 company stock samples in Indonesian Stock Exchange for 2016-2021 period. The accuracy of the models were tested using data in sample and out sample. The hypothesis was tested using regression analysis, mean absolute deviation, mean squared error, and the t-test. We conducted regression analysis with data in-sample (July 2016-June 2020) and forecasting analysis with data out-sample (June 2020-July 2021). According to our findings, the Five Factors Fama-French and Momentum model explained the variability of stock returns on the Indonesia Stock Exchange better than the other two models in examining the in-sample data. Meanwhile, for the three models evaluated, forecasting tests using Mean Absolute Deviation (MAD) and Mean Squared Error (MSE) provide values that are not too dissimilar and close to zero. Through t-test, the same result revealed that there was no significant difference between the actual and expected returns from the three models.

Keywords: Fama-French five factor and momentum model- Fama-French five factor model- Capital asset pricing model- Momentum factor- Asset pricing

Topic: Corporate Finance