Explaining mispricing with Fama-French factors: new evidence from the multiscaling approach

Francis In, Sangbae Kim and Robert Faff

Applied Financial Economics, 2010, vol. 20, issue 4, 323-330

Abstract: This article examines the Capital Asset Pricing Model (CAPM) over different frequencies utilizing a recently developed multiscaling method: wavelet analysis. Our empirical analysis shows that the risk factors are more relevant at the lower frequencies than at the higher frequencies in the traditional CAPM. In addition, the overreaction-related mispricing hypothesis explains the size effect but not the value premium. After incorporating the two risk factors (Small Minus Big (SMB) and High Minus Low (HML)), our empirical findings support the positive relationship between market risk and mean returns for big stocks, but not small stocks.

Date: 2010
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DOI: 10.1080/09603100903299667

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