The International CAPM and a Wavelet-Based Decomposition of Value at Risk

Viviana Fernandez

No 12233, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: In this article, we formulate a time-scale decomposition of an international version of the CAPM that accounts for both market and exchange-rate risk. In addition, we derive an analytical formula for time-scale value at risk and marginal value at risk (VaR) of a portfolio. We apply our methodology to stock indices of seven emerging economies belonging to Latin America and Asia, for the sample period 1990-2004. Our main conclusions are the following. First, the estimation results hinge upon the choice of the world market portfolio. In particular, the stock markets of the sampled countries appear to be more integrated with other emerging countries than with developed ones. Second, value at risk depends on the investor's time horizon. In the short run, potential losses are greater than in the long run. Third, additional exposure to some specific stock indices will increase value at risk to a greater extent, depending on the investment horizon. Our results go in line with recent research in asset pricing that stresses the importance of heterogeneous investors.

JEL-codes: C22 G15 (search for similar items in EconPapers)
Date: 2006-05
New Economics Papers: this item is included in nep-fin, nep-fmk, nep-rmg and nep-sea
Note: AP
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Citations: View citations in EconPapers (1)

Published as Fernandez Viviana P, 2005. "The International CAPM and a Wavelet-Based Decomposition of Value at Risk," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 9(4), pages 1-37, December.

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Journal Article: The International CAPM and a Wavelet-Based Decomposition of Value at Risk (2005)
Working Paper: The International CAPM and a wavelet-based decomposition of Value at Risk (2005)
Working Paper: The International CAPM and a wavelet-based decomposition of Value at Risk (2005)
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