Abstract
This study empirically examines the presence and risk–return characteristics of factor premia — momentum, low volatility, value and quality/dividend — in the Borsa İstanbul (BIST) equity universe over an approximately 10-year sample (2016-01-04–2026-07-23). For each factor, equal-weighted portfolios of the top 20 ranked stocks are constructed and periodically rebalanced, then evaluated against the BIST 100 index using cumulative return, annualized Sharpe ratio and maximum drawdown. Results indicate that momentum and quality deliver the strongest risk-adjusted premia, while the low-volatility portfolio exhibits high Sharpe and limited drawdown consistent with the low-volatility anomaly. Findings rest on a historical simulation and do not constitute investment advice.
1. Introduction
Modern finance holds that an efficient portfolio’s expected return is explained by exposure to systematic risk factors (Markowitz, 1952; Sharpe, 1964). The empirical shortcomings of the single-factor CAPM led to the discovery of additional factors — size, value, momentum, profitability and investment — that explain the cross-section of returns (Fama & French, 1993, 2015; Carhart, 1997). Our research question is whether systematic factor portfolios generate statistically and economically meaningful risk-adjusted excess returns relative to the market index on BIST.
2. Theoretical Framework and Literature
Markowitz (1952) established modern portfolio theory; Sharpe (1964) extended it into the CAPM. The weak and semi-strong forms of the Efficient Market Hypothesis (Fama, 1970) nonetheless failed to fully explain cross-sectional return differences, motivating factor models.
- Value: Fama & French (1993) three-factor model — high book-to-market stocks earn higher long-run returns.
- Momentum: Jegadeesh & Titman (1993) document past-winner outperformance; Carhart (1997) adds it to a four-factor model.
- Quality/Profitability: Novy-Marx (2013) and Fama & French (2015) show profitability explains returns.
- Low-volatility anomaly: Ang et al. (2006) and Frazzini & Pedersen (2014) find low-beta stocks earn higher risk-adjusted returns than CAPM predicts.
3. Data and Methodology
The sample comprises liquid BIST equities over ~10 years (2016-01-04–2026-07-23), benchmarked against the BIST 100 (XU100) index. For each factor, stocks are cross-sectionally ranked on the relevant metric, the top 20 (17 for dividends) are held equal-weighted (5%), and portfolios are periodically rebalanced. Performance is measured via cumulative/annualized return, Sharpe ratio, win rate and maximum drawdown.
Limitations: results derive from a backtest; transaction costs, tax and liquidity are simplified; survivorship bias may not be fully eliminated; and the sample spans a high-TL-inflation regime, so nominal multiples overstate real returns. Risk-adjusted and index-relative metrics are therefore emphasized.
4. Findings
Over the same window the BIST 100 index reached roughly 20× its starting value and returned 32.9% over the trailing 12 months. Table 1 summarizes the factor portfolios:
- Momentum — Annualized: +141.6% · 5-year: +2652.8% · Sharpe: 2.50 · Win rate: 69% · Max drawdown: -45.3%
- Low Volatility — Annualized: +29.4% · 5-year: +1383.2% · Sharpe: 1.91 · Win rate: 70% · Max drawdown: -30.2%
- Value (E/P) — Annualized: +23.2% · 5-year: +1275.6% · Sharpe: 1.44 · Win rate: 67% · Max drawdown: -49.0%
- Dividend + Quality — Annualized: +25.8% · 5-year: +1099.6% · Sharpe: 1.94 · Win rate: 66% · Max drawdown: -37.6%
- Multi-factor (ML) — Annualized: +96.4% · 5-year: +2982.8% · Sharpe: 3.02 · Win rate: 79% · Max drawdown: -36.9%
Momentum delivered the highest absolute return alongside a strong Sharpe of 2.50 and ~4.2x relative to the index, while low volatility showed the smallest drawdown (-30.2%).
5. Discussion
The evidence supports the presence of factor premia on BIST. Momentum and quality Sharpe ratios align with their documented strength in emerging markets; the low-volatility portfolio’s high risk-adjusted return is consistent with the low-volatility anomaly. Value’s recent softness echoes the global ‘value drought’. Critically, much of the high nominal return reflects TL inflation, so multiples should be read in real terms and index-relative performance emphasized. Because factors are cyclical, multi-factor diversification mitigates single-factor dependence.
6. Conclusion and Limitations
Rule-based momentum, low-volatility, value and quality portfolios produced meaningful risk-adjusted excess returns versus the index over the sample. Results should be read cautiously given the backtest basis, simplified costs and single-regime coverage. Past performance does not guarantee future results; this is not investment advice.
References
- Ang, A., Hodrick, R. J., Xing, Y., & Zhang, X. (2006). Journal of Finance, 61(1).
- Carhart, M. M. (1997). Journal of Finance, 52(1).
- Fama, E. F. (1970). Journal of Finance, 25(2).
- Fama, E. F., & French, K. R. (1993). Journal of Financial Economics, 33(1).
- Fama, E. F., & French, K. R. (2015). Journal of Financial Economics, 116(1).
- Frazzini, A., & Pedersen, L. H. (2014). Journal of Financial Economics, 111(1).
- Jegadeesh, N., & Titman, S. (1993). Journal of Finance, 48(1).
- Markowitz, H. (1952). Journal of Finance, 7(1).
- Novy-Marx, R. (2013). Journal of Financial Economics, 108(1).
- Sharpe, W. F. (1964). Journal of Finance, 19(3).
