I am analysing some portfolio returns from the perspective of a Danish investor, i.e. in the local currency, DKK.
I want to regress portfolio returns in DKK on the returns of a 3 factor Fama & French model.
The only factor returns I can find on Ken French's website are all denominated in USD, even the European factors he has at: http://mba.tuck.dartmouth.edu/pages/faculty/ken.french/data_library.html#Developed
What is the right approach to see if portfolio returns in other currencies than USD are explained by FF factors?
Some ideas and the result of attempting them:
- Regress portfolio returns in DKK on the European 3 factor returns (which is denominated in USD). Result: Positive alpha with p=0.057 (so significant on a 10% level), but also significantly exposed to SMB and HML
- Convert daily portfolio prices to USD (using the fx rate of a given day) and recalculate returns. Then regress these returns (now on a USD base) with European 3 factor returns (still denominated in USD). Result: No alpha (p=0.82)
Please help me understand if either of these are the correct approach, or if there is another, better way. Also, do I make any assumptions unknowingly when calculating to USD?