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A wavelet-based assessment of market risk: The emerging markets case

António Rua and Luis Nunes ()

Working Papers from Banco de Portugal, Economics and Research Department

Abstract: The measurement of market risk poses major challenges to researchers and different economic agents. On one hand, it is by now widely recognized that risk varies over time. On the other hand, the risk profile of an investor, in terms of investment horizon, makes it crucial to also assess risk at the frequency level. We propose a novel approach to measuring market risk based on the continuous wavelet transform. Risk is allowed to vary both through time and at the frequency level within a unified framework. In particular, we derive the wavelet counterparts of well-known measures of risk. One is thereby able to assess total risk, systematic risk and the importance of systematic risk to total risk in the time-frequency space. To illustrate the method we consider the emerging markets case over the last twenty years, finding noteworthy heterogeneity across frequencies and over time, which highlights the usefulness of the wavelet approach.

JEL-codes: C40 F30 G15 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-rmg
Date: 2012
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