Evaluating Relative Robustness of Characteristic-Based Model Vs Fama-French's Three Factor Model in Explaining the Cross Section of Stock Returns in Tehran Stock Exchange

Using Fama Macbeth's cross-section regression technique and Equilibrium Asset Pricing Model's underlying hypothesis, Fama and French introduced a three factor asset pricing model. The model is going to shed some light on the issue of asset pricing anomalies, detected in stock exchange markets.EAPMs suppose that the covariance structure between stock's return and macroeconomics factors determines the expected return of the stock. However, Daniel and Titman believe that behavioral factors affect a stock's expected return. In other word, high realized return of small and value stocks stems from firm's characteristics not from the trade – off between risk and return.The present study research to find out whether covariance structure or firm's fundamental characteristics drive expected return in Tehran Stock Exchange.In sum, the result indicate that a stock's market beta cannot be regarded as only risk measure, but size and value portfolio's beta considered as vital risk measures in Tehran Stock Exchange.