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Stock profiling using time-frequency-varying systematic risk measure.

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Summary
This summary is machine-generated.

This study introduces a wavelet method for time-frequency varying betas in the Capital Asset Pricing Model (CAPM). It reveals that systematic risk dynamics differ across investment horizons, impacting portfolio robustness and asset allocation strategies.

Keywords:
Frequency rolling windowFrequency-varying betaMaximal overlap discrete wavelets transformRisk-profileSystematic riskTime

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Area of Science:

  • Quantitative Finance
  • Financial Econometrics
  • Asset Pricing

Background:

  • Traditional asset pricing models often assume static risk parameters.
  • Understanding time-varying systematic risk is crucial for robust portfolio management.
  • Investor investment horizons significantly influence portfolio characteristics and risk assessment.

Purpose of the Study:

  • To propose a novel wavelet-based approach for estimating time-frequency-varying betas within the Capital Asset Pricing Model (CAPM).
  • To analyze the dynamic behavior of systematic risk across different time and frequency scales.
  • To investigate the impact of investor investment horizons on the robustness of portfolio characteristics.

Main Methods:

  • Application of wavelet analysis to estimate time-frequency-varying betas.
  • Utilizing a daily panel dataset of French stocks spanning from 2012 to 2022.
  • Comparative analysis of short-run and long-run beta dynamics.

Main Results:

  • Systematic risk (betas) exhibits significant variations across both time and frequency.
  • Short-run and long-run beta evolutions demonstrate distinct patterns, especially in response to event announcements.
  • Beta volatility increases during market crises, affecting risk profile robustness.
  • Short-run and long-run risk profiles differ, suggesting varied asset allocation strategies.

Conclusions:

  • The standard Capital Asset Pricing Model (CAPM) implicitly assumes short-run investment horizons.
  • Investors should adopt a time-frequency CAPM approach for more accurate systematic risk analysis.
  • Considering time-frequency dynamics is essential for effective portfolio allocation and risk management.