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A wavelet approach of investing behaviors and their effects on risk exposures

Roman Mestre

Financial Innovation, 2021, vol. 7, issue 1, 1-37

Abstract: Abstract Exposure to market risk is a core objective of the Capital Asset Pricing Model (CAPM) with a focus on systematic risk. However, traditional OLS Beta model estimations (Ordinary Least Squares) are plagued with several statistical issues. Moreover, the CAPM considers only one source of risk and supposes that investors only engage in similar behaviors. In order to analyze short and long exposures to different sources of risk, we developed a Time–Frequency Multi-Betas Model with ARMA-EGARCH errors (Auto Regressive Moving Average Exponential AutoRegressive Conditional Heteroskedasticity). Our model considers gold, oil, and Fama–French factors as supplementary sources of risk and wavelets decompositions. We used 30 French stocks listed on the CAC40 (Cotations Assistées Continues 40) within a daily period from 2005 to 2015. The conjugation of the wavelet decompositions and the parameters estimates constitutes decision-making support for managers by multiplying the interpretive possibilities. In the short-run, (“Noise Trader” and “High-Frequency Trader”) only a few equities are insensitive to Oil and Gold fluctuations, and the estimated Market Betas parameters are scant different compared to the Model without wavelets. Oppositely, in the long-run, (fundamentalists investors), Oil and Gold affect all stocks but their impact varies according to the Beta (sensitivity to the market). We also observed significant differences between parameters estimated with and without wavelets.

Keywords: Risk exposures; CAPM; Multi-betas model; Time–frequency analysis; MODWT; Oil; Gold (search for similar items in EconPapers)
JEL-codes: C32 C58 C65 G11 G40 (search for similar items in EconPapers)
Date: 2021
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Working Paper: A wavelet approach of investing behaviors and their effects on risk exposures (2021)
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DOI: 10.1186/s40854-021-00239-z

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