Currency Conversion of Fama/French Factors: How and Why

Abstract

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. When evaluating non-US data samples from a non US-dollar investor’s perspective (e.g., European funds from a EUR perspective), we point out that the downloaded factors need to be converted into the respective non-US-dollar currency. In this paper, we show how to convert the currencies of downloaded factors. Moreover, we 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. Our findings suggest that neglecting the 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 factor models from a non-US dollar perspective.

Keywords: Fama/French factors, Currency conversion, International perspective, Performance analysis

JEL Classification: G11, G12, G14