Time–Varying Dynamics and Asymmetric Effects of the Fama–French Factor Betas

38 Pages Posted: 28 Aug 2012

See all articles by Petko S. Kalev

Petko S. Kalev

La Trobe Business School

Leon Zolotoy

University of Melbourne - Melbourne Business School

Date Written: August 26, 2012

Abstract

We examine the impact of information shocks on systematic equity risk in a multiple-factor linear model framework. Using nonparametric and parametric models, we test for the presence of asymmetric effects of information shocks on the Fama–French factor betas. Overall, we document that market, size and book-to-market betas display different asymmetry patterns with respect to new information. More specifically, we find that market factor betas increase (decrease) following large negative (positive) market innovations. No evidence of an asymmetric response to the news is found for the size (SMB) factor betas. The book-to-market betas seem to decrease (increase) following large negative (positive) shocks to the book-to-market (HML) portfolio. Based on dynamic estimates of our empirical Fama–French betas we derive the economic values which an investor can gain by using dynamic factor loadings in portfolio selection. Finally, using stochastic dominance principles, we compare the performance of industry hedge portfolios.

Keywords: asymmetry, economic value, Fama–French model, information shocks, systematic risk

JEL Classification: G12

Suggested Citation

Kalev, Petko S. and Zolotoy, Leon, Time–Varying Dynamics and Asymmetric Effects of the Fama–French Factor Betas (August 26, 2012). 25th Australasian Finance and Banking Conference 2012, Available at SSRN: https://ssrn.com/abstract=2136751 or http://dx.doi.org/10.2139/ssrn.2136751

Petko S. Kalev (Contact Author)

La Trobe Business School ( email )

Department of Economics and Finance
Donald Whitehead Building: Level 3, DWB313
Bundoora, Victoria 3086
Australia
+613 9479 6285 (Phone)
+613 9479 1654 (Fax)

HOME PAGE: http://www.latrobe.edu.au/business/about/staff/profile?uname=PKalev

Leon Zolotoy

University of Melbourne - Melbourne Business School ( email )

200 Leicester Street
Carlton, Victoria 3053 3186
Australia

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