The International CAPM and a wavelet-based decomposition of Value at Risk
AbstractIn this article, we formulate a time-scale decomposition of an international version of the CAPM that accounts for both market and exchange-rate risk. In addition, we derive an analytical formula for time-scale value at risk and marginal value at risk (VaR) of a portfolio. We apply our methodology to stock indices of seven emerging economies belonging to Latin America and Asia, for the sample period 1990-2004. Our main conclusions are the following. First, the estimation results hinge upon the choice of the world market portfolio. In particular, the stock markets of the sampled countries appear to be more integrated with other emerging countries than with developed ones. Second, value at risk depends on the investor's time horizon. In the short run, potential losses are greater than in the long run. Third, additional exposure to some specific stock indices will increase value at risk to a greater extent, depending on the investment horizon. Our results go in line with recent research in asset pricing that stresses the importance of heterogeneous investors.
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Bibliographic InfoPaper provided by IIIS in its series The Institute for International Integration Studies Discussion Paper Series with number iiisdp075.
Date of creation: 15 Dec 2005
Date of revision:
wavelets; ICAPM; value at risk.;
Other versions of this item:
- Fernandez Viviana P, 2005. "The International CAPM and a Wavelet-Based Decomposition of Value at Risk," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 9(4), pages 1-37, December.
- Viviana Fernandez, 2006. "The International CAPM and a Wavelet-Based Decomposition of Value at Risk," NBER Working Papers 12233, National Bureau of Economic Research, Inc.
- Viviana Fernï¿½ndez, 2005. "The International CAPM and a wavelet-based decomposition of Value at Risk," Documentos de Trabajo, Centro de EconomÃa Aplicada, Universidad de Chile 203, Centro de EconomÃa Aplicada, Universidad de Chile.
- C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models &bull Diffusion Processes
- G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
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