Timescale betas and the cross section of equity returns: Framework, application, and implications for interpreting the Fama-French factors

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We show that standard beta pricing models quantify an asset's systematic risk as a weighted combination of a number of different timescale betas. Given this, we develop a wavelet-based framework that examines the cross-sectional pricing implications of isolating these timescale betas. An empirical application to the Fama-French model reveals that the model's well-known empirical success is largely due to the beta components associated with a timescale just short of a business cycle (i.e., wavelet scale 3). This implies that any viable explanation for the success of the Fama-French model that has been applied to the Fama-French factors should apply particularly to the scale 3 components of the factors. We find that a risk-based explanation conforms closely to this implication.
Publisher
ELSEVIER SCIENCE BV
Issue Date
2017-06
Language
English
Article Type
Article
Keywords

BOOK-TO-MARKET; MEASURING BUSINESS CYCLES; ECONOMIC TIME-SERIES; ASSET-PRICING MODEL; STOCK RETURNS; RISK-FACTORS; EXPECTED RETURNS; WAVELET ANALYSIS; SYSTEMATIC-RISK; CONSUMPTION

Citation

JOURNAL OF EMPIRICAL FINANCE, v.42, pp.15 - 39

ISSN
0927-5398
DOI
10.1016/j.jempfin.2017.01.004
URI
http://hdl.handle.net/10203/224889
Appears in Collection
MT-Journal Papers(저널논문)
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