Timescale Betas and the Cross Section of Equity Returns: Framework, Application, and Implication for Interpreting the Fama-French Factors

60 Pages Posted: 5 Apr 2012 Last revised: 26 Jan 2017

See all articles by Byoung Uk Kang

Byoung Uk Kang

The Hong Kong Polytechnic University - School of Accounting and Finance

Francis Haeuck In

Monash University - Department of Accounting; Financial Research Network (FIRN)

Tong Suk Kim

College of Business, Korea Advanced Institute of Science and Technology (KAIST)

Date Written: January 23, 2017

Abstract

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.

Keywords: Asset Pricing, Timescale Betas, Cross Section of Stock Returns, Fama-French Factors, Wavelets

JEL Classification: C32, G12

Suggested Citation

Kang, Byoung Uk and In, Francis Haeuck and Kim, Tong Suk, Timescale Betas and the Cross Section of Equity Returns: Framework, Application, and Implication for Interpreting the Fama-French Factors (January 23, 2017). Journal of Empirical Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2034331 or http://dx.doi.org/10.2139/ssrn.2034331

Byoung Uk Kang (Contact Author)

The Hong Kong Polytechnic University - School of Accounting and Finance ( email )

School of Accounting and Finance
The Hong Kong Polytechnic University
Hung Hom, Kowloon
Hong Kong
852-2766-7085 (Phone)

HOME PAGE: http://af.polyu.edu.hk/people/academic-staff/dr-byoung-uk-kang/

Francis Haeuck In

Monash University - Department of Accounting ( email )

Building 11E
Clayton, Victoria 3800
Australia
+61 3 9905 1561 (Phone)
+61 3 9905 5475 (Fax)

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Tong Suk Kim

College of Business, Korea Advanced Institute of Science and Technology (KAIST) ( email )

85 Hoegiro, Dongdaemoon-gu
Seoul 02455
Korea, Republic of (South Korea)

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