Factor investing in the Turkish equity market

Although many papers test asset pricing factors in emerging markets, the common practice of pooling data from multiple countries obscures the performance of factors in individual countries. The findings in prior studies on Türkiye in particular are often conflicting and incomplete. Using the most comprehensive, up-to-date dataset on Borsa Istanbul stocks, I test 14 widely used cross-sectional predictors and find that the value factor is the strongest and the most robust, with a premium of over 17 percent a year. Other significant factors are size, profitability, and momentum, but only since 2005. Surprisingly, low-risk stocks outperform high-risk stocks on any risk measure, indicating a negative risk-return relationship in the cross-section. Inflation and currency risk pose no challenge to factor premiums. A long-only multifactor portfolio delivers 13 percent alpha relative to the emerging markets index and a Sharpe ratio of 0.64, in dollar-denominated terms.