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

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  • Rua, António
  • Nunes, Luis C.

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.

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Bibliographic Info

Article provided by Elsevier in its journal The Quarterly Review of Economics and Finance.

Volume (Year): 52 (2012)
Issue (Month): 1 ()
Pages: 84-92

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Handle: RePEc:eee:quaeco:v:52:y:2012:i:1:p:84-92

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Web page: http://www.elsevier.com/locate/inca/620167

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Keywords: Market risk; Variance; CAPM; Beta coefficient; Continuous wavelet transform; Emerging markets;

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Cited by:
  1. Bruno Milani & Paulo Sérgio Ceretta, 2014. "A multiscale approach to emerging market pricing," Economics Bulletin, AccessEcon, vol. 34(2), pages 784-792.
  2. António Rua, 2012. "Wavelets in economics," Economic Bulletin and Financial Stability Report Articles, Banco de Portugal, Economics and Research Department.
  3. Gazi Salah Uddin & Mohamed Arouri & Aviral Kumar Tiwari, 2014. "Co-movements between Germany and International Stock Markets: Some New Evidence from DCC-GARCH and Wavelet Approaches," Working Papers 2014-143, Department of Research, Ipag Business School.
  4. Akoum, Ibrahim & Graham, Michael & Kivihaho, Jarno & Nikkinen, Jussi & Omran, Mohammed, 2012. "Co-movement of oil and stock prices in the GCC region: A wavelet analysis," The Quarterly Review of Economics and Finance, Elsevier, vol. 52(4), pages 385-394.

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