A note on the relationship between Fama-French risk factors and innovations of ICAPM state variables

Francis In; Sangbae Kim

doi:10.1016/j.frl.2007.04.001

A note on the relationship between Fama-French risk factors and innovations of ICAPM state variables

Francis In, Sangbae Kim

School of Business Administration

Monash University

Research output: Contribution to journal › Article › peer-review

16 Scopus citations

Abstract

This note examines, over various time scales, the extent to which SMB (the difference between the average returns of the small-stock portfolios and big-stock portfolios) and HML (the difference in returns between the high-BM portfolios and low-BM portfolios) factors share information with the innovations of state variables, which are interpreted as alternative investment opportunities. To examine the relationship, we adopt a new and innovative approach of wavelet analysis as our main empirical method. It is found that SMB and HML may play only a limited role in capturing alternative investment opportunities in the short run, but they share much information with alternative investment opportunities in the long run.

Original language	English
Pages (from-to)	165-171
Number of pages	7
Journal	Finance Research Letters
Volume	4
Issue number	3
DOIs	https://doi.org/10.1016/j.frl.2007.04.001
State	Published - Sep 2007

Keywords

ICAPM
Investment opportunity
Risk factor
Time scale

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10.1016/j.frl.2007.04.001

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AU - In, Francis

AU - Kim, Sangbae

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AB - This note examines, over various time scales, the extent to which SMB (the difference between the average returns of the small-stock portfolios and big-stock portfolios) and HML (the difference in returns between the high-BM portfolios and low-BM portfolios) factors share information with the innovations of state variables, which are interpreted as alternative investment opportunities. To examine the relationship, we adopt a new and innovative approach of wavelet analysis as our main empirical method. It is found that SMB and HML may play only a limited role in capturing alternative investment opportunities in the short run, but they share much information with alternative investment opportunities in the long run.

KW - ICAPM

KW - Investment opportunity

KW - Risk factor

KW - Time scale

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ER -

A note on the relationship between Fama-French risk factors and innovations of ICAPM state variables

Abstract

Keywords

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