A four-factor model for the Indonesia stock market

We propose a four-factor model that includes market, size, value, and profitability factors to explain the cross-section of stock returns for the Indonesian stock market (IDX). Asset spanning tests identify size ( market capitalization ), value ( operating cash flow-to-price ), and profitability ( return on net operating assets ) as the most robust characteristics for forming factors. Our four-factor model (IDX4) outperforms existing factor models in digesting stock market anomalies and explaining the returns of equity portfolios sorted by firm characteristics. The expected returns implied from the IDX4 are close to the realized returns on characteristics-sorted portfolios. IDX4 also prices a portfolio of Shariah-compliant IDX listings and the broader MSCI World Islamic ETF. • Propose 4-factor model ( IDX4 ) for Indonesian stock market. • Market, size ( market cap ), value: ( cash flow-to-price ), profitability ( EBIT/NOA ). • IDX4 digests anomalies and equity portfolios sorted by firm characteristics. • IDX4 performs well for Shariah-compliant listings and the MSCI World Islamic ETF. • IDX4 is a publicly available benchmark for academics, investors, and practitioners.