On the Relationship Between Stock Returns and Risk Factors: New Evidence From Wavelet Analysis

Francis In and Sangbae Kim
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Francis In: Monash University, Australia
Sangbae Kim: Kyungpook National University, Korea

Chapter 6 in An Introduction to Wavelet Theory in Finance:A Wavelet Multiscale Approach, 2012, pp 105-123 from World Scientific Publishing Co. Pte. Ltd.

Abstract: AbstractThis chapter adopts a new approach to examine the Fama–French three-factor model, which is commonly used to explain the cross-sectional variation in average stock returns over various times. The new approach is based on the wavelet multiscaling method that decomposes a given time series on a scaleby-scale basis. The empirical results reveal that if the mispricing is correct, it is expected that the loadings on the HML will be significant in the short scales, while insignificant in the long scales. It is found that all loading on the HML is significant regardless of time scales and portfolios. It is also found that the excess market return and HML combine to capture the cross-sectional variation in the six size-BM portfolio returns, and that SMB is effective in explaining the cross-section, except for large stocks.

Keywords: Wavelets; Finance; Economics; Wavelet Analysis; Multiscaling Method (search for similar items in EconPapers)
Date: 2012
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