Evaluating the Fama-French Three-Factor Model on Indonesian Banking Stocks

This study investigates the applicability of the Fama-French Three-Factor Model and the Capital Asset Pricing Model (CAPM) in predicting stock returns of banking companies listed on the Indonesia Stock Exchange. A total of 29 banking firms, observed from January 2010 to December 2013, provide the data for this analysis. Using multiple linear regression, the findings reveal that while the CAPM is a viable predictor of stock returns in the Indonesian banking sector, the Fama-French Three-Factor Model does not fully apply. Specifically, only the excess market return and firm size factors are significant in explaining the variability in stock returns, whereas the book-to-market equity factor shows no significant impact. These results suggest a partial adaptation of the Fama-French model in emerging markets like Indonesia.