Currency Consistency in International Fama–French Factor Construction

Summary

The document asks whether returns used to construct the size and value components of a Fama–French three-factor model should be converted to the home currency when the market-return data have already been converted. The example concerns a Danish investor analyzing equity returns in Denmark, Finland, Norway, and Sweden, with returns expressed in Danish kroner.

The accepted answer says to use currency-adjusted returns for the SMB and HML calculations as well. It grounds this recommendation in the factor definitions: SMB compares average returns of small-stock portfolios with large-stock portfolios, while HML compares diversified high book-to-market and low book-to-market portfolios. The referenced international factor description reports returns in US dollars, underscoring that the currency convention applies to portfolio returns throughout factor construction. The document offers a concise consistency rule rather than empirical comparisons, and does not discuss currency hedging, translation timing, or how to handle exchange-rate data.

Key ideas

• SMB is formed by comparing returns on small-stock portfolios with returns on large-stock portfolios.
• HML compares returns on high book-to-market portfolios with returns on low book-to-market portfolios.
• When analyzing returns from a particular investor’s currency perspective, convert the component portfolio returns consistently before forming the factors.
• Factor definitions and published datasets use an explicit currency convention that should be checked.

Tags

# Calculation of Fama-French risk factors


# Calculation of Fama-French risk factors












Background: I am conducting some research on equity returns across Denmark, Finland, Norway and Sweden. The analysis is seen from a Danish investor’s point of view, and therefore I have currency adjusted all return data into DKK.

All data is retreived from Thomson Reuters Eikon.

Question: Right now I am trying to calculate the Fama-French (1993) three factor model (mkt, smb and hml). Should I also currency adjust the data I use as input for computing the SMB and HML factors?

## Answer by AKdemy (score 2, accepted)

https://quant.stackexchange.com/a/68089

Yes.

Size, value, and momentum in international stock returns by Fama French states:

> SMB is the equal-weight average of the returns on the three small stock portfolios for the region minus the average of the returns on the three big stock portfolios.

HML is the difference between the returns on diversified portfolios of high book-to-market (value) stocks and low book-to-market (growth) stocks.

The description of table 1 explains that:

> All returns are in U.S. dollars.

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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.