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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:

  1. 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
  2. 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?

Cheers

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  • $\begingroup$ I may be wrong, but I think ideally you would have to generate those 3 factors explicitly for Danish equities and regress your portfolio returns against those factors. Another way may be to regress USD converted portfolio returns against USD denominated EU factors as Danish equities are probably more correlated with EU equities rather than US equities. $\endgroup$
    – AK88
    May 18, 2017 at 6:45
  • $\begingroup$ possible duplicate: quant.stackexchange.com/questions/25145/…, also relevant: quant.stackexchange.com/questions/24301/… $\endgroup$
    – vonjd
    May 21, 2017 at 14:21

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