A note on the relationship between Fama–French risk factors and innovations of ICAPM state variables |
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| Authors: | Francis In Sangbae Kim |
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| Institution: | aDepartment of Accounting and Finance, Monash University, Clayton, Victoria, 3168, Australia;bSchool of Business Administration, Kyungpook National University, Sankyuk-dong, Puk-ku, Daegu, 702-701, Republic of Korea |
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| 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. |
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| Keywords: | ICAPM Risk factor Time scale Investment opportunity |
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