Analyzing the Impact of Firm-Specific Variables on Stock Returns: A Fama-French and Fama-Macbeth Approaches

The present study aims to investigate the explanatory power of Fama and French three factor and five factor models in explaining a set of anomalies using Fama and Macbeth regression approaches. For this purpose, a sample of 136 companies listed on the Tehran Stock Exchange was selected over the period from 2008 to 2023. Each anomaly variable was divided into five portfolios and after comparing the average excess returns of the stocks, the explanatory power of different portfolios in terms of number of anomalies is assessed. The overall findings indicate that there is a significant difference between the number of additional returns of stocks in different portfolios based on the investigated anomalies, which means the efficiency of the portfolio. The results of examining the impact of anomalies on the explanation of excess stock returns show that among the investigated anomalies, dividend yield, bankruptcy risk and stock return volatility have a significant impact on explaining excess returns in both three factor and five factor models. However, accruals have not had a significant effect. This result suggests that part of the stock returns can be explained significantly by these variables. In addition, a comparison of the explanatory power of excess stock returns between the three factor and five factor models of Fama and French reveals no significant difference between the two models in terms of capturing the examined anomalie.