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Fama-French Model: Multiscale Portfolio Analysis
Spousta, Radek ; Kraicová, Lucie (advisor) ; Teplý, Petr (referee)
This thesis studies the empirical relationship between excess asset returns and the Fama−French risk factors at various scales using a combination of the Fama−French model and wavelet-based methods. We re-examine previously published results obtained for six portfolios formed on size and book-to-market ratio in the U.S. market, and focus on the influence of different scales on the original results. We conclude that the most the total variance of the risk factors and excess portfolio returns is concentrated at scale 1 and 2, which corresponds to periodicities of 2-4 months and 4-8 months, respectively. Next, we observe significant variation in estimated parameters across different scales. Furthermore, some of the Fama−French risk factors are strongly correlated at scale 2, 3 and 4, which is unobservable in standard correlation matrix. Overall, the multiscale approach seems beneficial for analysis of the Fama−French three-factor model as it reveals information that remains hidden to traditional methods.
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