Structural breaks and common factors in the volatility of the Fama-French factor portfolios

Claudio Morana and Andrea Beltratti

Applied Financial Economics, 2006, vol. 16, issue 14, 1059-1073

Abstract: In this paper the time series properties of the Fama-French factor returns volatility processes are studied. Among the original findings of this paper, structural breaks in the volatility of the factors, and strong coincidence between the timing of the breaks in the volatility of the market portfolio and the timing of the breaks in the volatility of SMB are emphasized. Moreover, analyses of the break free series show that two common long memory factors drive the long-run evolution of the series. The first factor mainly affects the volatility of the market and the volatility of SMB, while the second one mainly affects the volatility of HML. These results imply that the time-varying volatility of stocks is driven mainly by the time-varying volatility of the market as a whole and of the HML portfolio, while the volatility of SMB does not seem to be an independent driving force.

Date: 2006
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Working Paper: Structural Breaks and Common Factors in the Volatility of the Fama-French Factor Portfolios (2005)
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DOI: 10.1080/09603100500426598

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