Time-varying Fama-French factor loadings in the Turkish equity market

Abstract

The standard Fama-French three-factor model assumes constant factor loadings for the market, size, and value factors. This assumption has been questioned on the grounds that systematic risk exposures may adjust to changing economic conditions, policy regimes, and financial shocks, with direct implications for asset pricing, portfolio allocation, and risk management. Existing research documents time variation in market beta, but evidence on whether exposures to the size and value factors also evolve over time remains limited, particularly for emerging markets characterized by frequent macroeconomic and financial shifts. For the Turkish equity market, empirical work on time varying risk has largely concentrated on the market beta. On the other hand, estimates from static Fama-French models applied to different sample periods differ across studies, pointing to possible time variation in size and value factor loadings. This study addresses the lack of formal evidence on time variation in market, size, and value factor loadings in the Turkish equity market. Six size-value portfolios are constructed from firms listed on Borsa İstanbul using monthly size and book-to-market classifications. Time-varying factor loadings are estimated for the July 2013-June 2025 period using rolling window regressions with a 36-month window. Stability is assessed using Bai-Perron multiple structural break tests. Robustness is evaluated using alternative rolling window lengths and the nonparametric E-Divisive change-point detection procedure. The findings reveal statistically significant temporal variation in all three factor loadings across portfolios. Structural breaks are concentrated in a small number of recurring periods, particularly around 2015, 2018, 2021, and 2023. Robustness analyses identify broadly similar episodes of instability across alternative methods and rolling-window specifications. These findings demonstrate the limitations of static factor models in the Turkish equity market and highlight the relevance of dynamic approaches for understanding and managing systematic risk in emerging markets