Currency Conversion of Fama-French Factors: How and Why
The Journal of Portfolio Management Quantitative Special Issue 2021 © 2021 PMR. All rights reserved. Available for download: https://jpm.pm-research.com/content/early/2020/11/17/jpm.2020.1.192
Posted: 19 Aug 2019 Last revised: 19 Nov 2020
Date Written: November 16, 2020
A convenient way to apply Fama/French factor models in empirical research is to use factor returns downloaded from databases like Kenneth French’s data library. These factors are usually provided in US dollars – for both US and non-US stock markets. But when evaluating non-US data samples from a non US-dollar investor’s perspective (e.g., European funds from a EUR perspective), the authors maintain that the downloaded factors need to be converted into the respective non-US-dollar currency. They show how to convert the currencies of downloaded factors and illustrate the statistical and practical relevance of the currency conversion based on passive index returns of the MSCI Europe IMI and returns of actively managed European equity funds from a EUR perspective. Their findings show that neglecting currency conversion results in skewed estimated alphas and factor loadings. The currency conversion of downloaded factors is thus relevant in drawing reliable conclusions when applying time-series or cross-sectional factor models from a non-US dollar perspective.
Keywords: Currency, Factor-based moels, Performance measurement
JEL Classification: G11, G12, G14
Suggested Citation: Suggested Citation