Evaluating the Predictive Power of the Fama-French Three-Factor Model in Islamic Capital Markets: Evidence from JII70 Stocks

Authors

  • Yasir Maulana Department Management, Faculty of Business and Economics, Universitas Kuningan, Kuningan, Jawa Barat, 45513, Indonesia
  • Munir Nur Komarudin Department Management, Faculty of Business and Economics, Universitas Kuningan, Kuningan, Jawa Barat, 45513, Indonesia
  • Nurul Siti Jahidah Department Management, Faculty of Business and Economics, Universitas Kuningan, Kuningan, Jawa Barat, 45513, Indonesia
  • Herma Wiharno Department Management, Faculty of Business and Economics, Universitas Kuningan, Kuningan, Jawa Barat, 45513, Indonesia

DOI:

https://doi.org/10.21927/jesi.2025.15(3).260-276

Keywords:

Fama-French three-factor, stock portfolio, excess return, JII70, islamic capital market

Abstract

Introduction: Stock returns are a crucial aspect on forming portfolio investing. For investors, they serve as an indicator for measuring the level of profit or loss generated from an investment over a specific period. The purpose is to examine the applicability of the Fama-French Three-Factor Model in predicting excess returns for Jakarta Islamic Index (JII70) stocks within a Sharia-compliant equity universe.

Method: We analyze JII70 stocks for the period 2019-2023. The Factors included are market risk premium, firm size proxied by SMB, and book-to-market proxied by HML. Building a portfolio, SMB, and HML, and analyzing it with data panel regression. After the portfolio was built, the factor analysis was conducted by ordinary least squares regression using risk, size, and book-to-market factors on Fama-French Model.

Results: The results reveal that only the book-to-market factor (HML) consistently and significantly influences excess stock returns. In contrast, the market risk premium and size factor do not show meaningful effects across the sample. These findings indicate that value-related characteristics still play a role in Islamic stock pricing, whereas risk and size dimensions may behave differently due to Sharia screening.

Conclusion: The model's predictive power is weak in Islamic markets, implying the need for additional factors. Suggests refinement of Islamic asset pricing frameworks. Investors and portfolio managers in Indonesia's Islamic capital market should integrate additional factors such as momentum, liquidity, or ESG to enhance predictive accuracy. The unique characteristics of Sharia-compliant stocks necessitate tailored asset pricing models, while regulators can use these insights to refine Sharia index methodologies.

References

Aprillia, F. R., Warman, E., & Hidayati, S. (2022). Pengujian Fama-French Three Factor Model Terhadap Excess Return Saham Pada Perusahaan Indeks Kompas100 Periode 2016-2020. IKRAITH-EKONOMIKA, 5(1), 262–271. https://doi.org/10.37817/ikraith-ekonomika.v5i1

Chowdhury, E. K. (2017). Functioning of Fama-French Three-Factor Model in Emerging Stock Markets: An Empirical Study on Chittagong Stock Exchange, Bangladesh. Journal of Financial Risk Management, 06(04), 352–363. https://doi.org/10.4236/jfrm.2017.64025

Dewi, A. O., & Komara, E. F. (2024). Investigate The Influence Of The Fama and French Five-Factor Model On The SRI-KEHATI Stock Index. Jurnal Manajemen Bisnis, 11(2), 1399–1412. https://doi.org/10.33096/jmb.v11i2.776

Fama, E. F., & French, K. R. (2015). A five-factor asset pricing model. Journal of Financial Economics, 116(1), 1–22. https://doi.org/10.1016/j.jfineco.2014.10.010

Fama, E. F., & French, K. R. (2018). Choosing factors. Journal of Financial Economics, 128(2), 234–252. https://doi.org/10.1016/j.jfineco.2018.02.012

Faozan, A., Syah, T. A., Kusuma, H., & Adawiyah, W. R. (2023). Good corporate governance and moderating the influence of intellectual capital on the financial performance: The study of the Islamic banking industry. Corporate & Business Strategy Review, 4(2), 225–237. https://doi.org/10.22495/cbsrv4i2siart2

Haryono, S., & Atika, B. (2023). Analyzing the Dynamics of Islamic Stock Market Indices in Several Muslim Countries. In International Journal of Professional Business Review (Vol. 8, Issue 7). https://doi.org/10.26668/businessreview/2023.v8i7.2891

Liu, H., & Gao, Y. C. (2019). The impact of corporate lifecycle on Fama–French three-factor model. Physica A: Statistical Mechanics and Its Applications, 513, 390–398. https://doi.org/10.1016/j.physa.2018.09.037

Maulana, Y., & Lestari, P. (2025). Analisis excess return pada perusahaan MNC36 dengan Fama French Model tiga faktor. AKURASI: Jurnal Riset Akuntansi Dan Keuangan, 7(1), 59–70. https://doi.org/10.36407/akurasi.v7i1.1490

Maulana, Y., Masruroh, R., & Komarudin, M. N. (2024). The Effect Of Gender Diversity and Financial Performance On Stock Returns With Sustainability As An Intervening Variable. Integrated Journal of Business and Economics (IJBE), 8(3), 347–363. https://doi.org/10.33019/ijbe.v8i3.932

Mishra, D. R., & O'Brien, T. J. (2019). Fama-French, CAPM, and implied cost of equity. Journal of Economics and Business, 101(August 2018), 73–85. https://doi.org/10.1016/j.jeconbus.2018.08.002

Modjo, M. I., Hutagaol-Martowidjojo, Y., & Victoria, M. (2025). Shaping performance in downturns: the role of ESG and Shariah compliance in Indonesia. Cogent Business and Management, 12(1). https://doi.org/10.1080/23311975.2025.2537798

Muddasir, M., & Kulali, G. (2025). Fama-French Three-Factor Asset Pricing Model In Borsa Istanbul: Exchange Including Two Additional Factors In The Model. Journal of Management & Economics Research, 23(1). https://doi.org/https://doi.org/10.11611/yead.1593464

Munawaroh, U., & Sunarsih, S. (2020). The effects of Fama-French five factor and momentum factor on Islamic stock portfolio excess return listed in ISSI. Jurnal Ekonomi & Keuangan Islam, 6(2), 119–133. https://doi.org/10.20885/jeki.vol6.iss2.art4

Özer, N., Öncü, M. A., Özer, A., & Çömlekçi, İ. (2021). Fama French 5 Factor Model Versus Alternative Fama French 5 Factor Model: Evidence from Selected Islamic Countries. Bilimname, 45, 427–461. https://doi.org/10.28949/bilimname.952079

Qadeer, A., De Moor, L., & Ahmad, A. (2023). Asset pricing dynamics in sustainable equity portfolios: Evidence from the Pakistan Stock Exchange. Economic Research-Ekonomska Istrazivanja , 36(3). https://doi.org/10.1080/1331677X.2022.2147977

Silvia, A., & Griska, C. T. (2021). Empirical Evidence of Asset Pricing Based on Single Index Model, Fama, and French Three and Five-Factor Models in Indonesia Stock Exchange. Akurasi : Jurnal Studi Akuntansi Dan Keuangan, 4(1), 87–98. https://doi.org/10.29303/akurasi.v4i1.82

Suryono, A. (2022). Financial Performance Analysis on Empirical Study CSR Disclosure: IDX Manufacturing Company. JESI (Jurnal Ekonomi Syariah Indonesia), 12(1), 69–76. http://dx.doi.org/10.21927/jesi.2022.12(1).69-76

Sutrisno, B., & Ekaputra, I. A. (2016). Uji Empiris Model Asset Pricing Lima Faktor Fama-French Di Indonesia. Jurnal Keuangan Dan Perbankan, 20(3), 343â – 357. https://doi.org/10.26905/jkdp.v20i3.287

Tang, Z. (2023). Risk-Return Analysis of Equity Portfolios: Comparison Between CAPM and Fama-French Three Factor Model. 3rd International Conference on Economic Development and Business Culture (ICEDBC 2023), 227–237. https://doi.org/10.2991/978-94-6463-246-0_28

Urbański, S., & Zarzecki, D. (2022). The Fama-French model for estimating the cost of equity capital: The impact of real options of investment projects. Economic Systems, 46(1). https://doi.org/10.1016/j.ecosys.2021.100874

Viantina, A. L., Purbowisanti, R., Noer, D., Rahmanto, A., & Ilmiah, D. (2022). The Influence Of Plafond, Tenor, Application Process, and Loan Frequency on The Growth of Bank Syariah Indonesia's MSMEs Customers. 2(2), 179–194. https://doi.org/10.21154/invest.v2i2.5405

Wiharno, H., Lesmana, A. S., Maulana, Y., & Komarudin, M. N. (2023). Stock Portfolio Optimization in Bullish and Bearish Conditions Using the Black-Litterman Model. Jurnal Manajemen Dan Kewirausahaan, 25(2), 92–104. https://doi.org/10.9744/jmk.25.2.92-104

Downloads

Published

2025-12-26

Issue

Vol. 15 No. 3 (2025)

Section

Articles

License

Authors who publish with this journal agree to the following terms:

1. Authors retain copyright and grant the journal right of first publication, with the work [SPECIFY PERIOD OF TIME] after publication simultaneously licensed under a Creative Commons Attribution License that allows others to share the work with an acknowledgement of the work's authorship and initial publication in this journal.

 

2. Authors are able to enter into separate, additional contractual arrangements for the non-exclusive distribution of the journal's published version of the work (e.g., post it to an institutional repository or publish it in a book), with an acknowledgement of its initial publication in this journal.

 

3. Authors are permitted and encouraged to post their work online (e.g., in institutional repositories or on their website) prior to and during the submission process, as it can lead to productive exchanges, as well as earlier and greater citation of published work (See The Effect of Open Access).

 

Lisensi Creative Commons
JESI by http://ejournal.almaata.ac.id/index.php/JESI is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License.

Â