Systematic risk and timescales

Ramazan Genay, Faruk Seļuk and Brandon Whitcher

Quantitative Finance, 2003, vol. 3, issue 2, 108-116

Abstract: In this paper we propose a new approach to estimating the systematic risk (the beta of an asset) in a capital asset pricing model (CAPM). The proposed method is based on a wavelet multiscaling approach that decomposes a given time series on a scale-by-scale basis. At each scale, the wavelet variance of the market return and the wavelet covariance between the market return and a portfolio are calculated to obtain an estimate of the portfolio's beta. The empirical results show that the relationship between the return of a portfolio and its beta becomes stronger as the wavelet scale increases. Therefore, the predictions of the CAPM model are more relevant in the medium long run as compared to short time horizons.

Date: 2003
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DOI: 10.1088/1469-7688/3/2/305

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