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

See all articles by Maximilian Glück

Maximilian Glück

Friedrich-Alexander-Universität Erlangen-Nürnberg

Benjamin Hübel

HUK-COBURG Asset Management

Hendrik Scholz

Friedrich-Alexander-Universität Erlangen-Nürnberg

Date Written: November 16, 2020

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. 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

Glück, Maximilian and Hübel, Benjamin and Scholz, Hendrik, Currency Conversion of Fama-French Factors: How and Why (November 16, 2020). 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, Available at SSRN: https://ssrn.com/abstract=3437648 or http://dx.doi.org/10.2139/ssrn.3437648

Maximilian Glück (Contact Author)

Friedrich-Alexander-Universität Erlangen-Nürnberg ( email )

Lange Gasse 20
Lange Gasse 20,
Nürnberg, 90403
Germany

Benjamin Hübel

HUK-COBURG Asset Management ( email )

Germany

Hendrik Scholz

Friedrich-Alexander-Universität Erlangen-Nürnberg ( email )

Lange Gasse 20
Lange Gasse 20,
Nürnberg, 90403
Germany

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