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Empirical Test of Fama-French Five Factor Model and Hou q5 Factor Model Under Transaction Cost in Indonesia Stock Market
Adityawan Pradipto (a*), Zuliani Dalimunthe (a)

(a) Universitas Indonesia
Gedung Dekanat FEB UI Kampus Widjojo Nitisastro, Jl. Prof. DR. Sumitro Djojohadikusumo, Kukusan, Kecamatan Beji, Kota Depok, Jawa Barat 16424


This study aims to investigate and compare the performance of Fama-French Five Factor Model and Hou q5 factor model before and after the effect of transaction cost is taken into account in Indonesia Stock Market. To compare the performance of each factor before transaction cost, we use ordinary least square with monthly time-series data from 2002 to 2018. When comparing the performance of each factor after transaction cost, we use new performance metric from Novy-Marx and Velikov (2016) named generalized alpha. We find that Hou q5 factor model cannot explain Fama-French SMB and HML factor while Fama-French five factor model cannot explain ROE and IA factor of Hou q5 factor model. Except for SMB factor, this result is robust even when transaction cost is incorporated into the analysis. Our findings indicates that transaction cost is not a significant factor for comparing both model despite of monthly rebalancing of Hou q5 factor model.

Keywords: asset pricing, fama-french 5 factor model, hou q^{5} factor model, transaction cost, indonesia stock market

Topic: Finance


Conference: The 3rd International Seminar of Contemporary Research on Business and Management (ISCRBM 2019)

Plain Format | Corresponding Author (Adityawan Pradipto)

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