Testing factor models in Indonesia

Fama and French (2015) recently proposed a five-factor model which adds investment and profitability terms to their seminal three-factor model. Motivated by the accounting-based nature of the new factors, we test of variants of the models in Indonesia – a country previous researchers have characterized by an idiosyncratic financial reporting environment and low earnings quality. Although multi-factor spanning tests imply these factors contribute to the explanation of average returns, tests using sets of LHS portfolios reveal all competing models produce large intercepts and the five-factor model offers at best only a trivial improvement to the description of average LHS returns.