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A multiscale approach to emerging market pricing

Listed author(s):
  • Bruno Milani

    ()

    (Federal University of Santa Maria)

  • Paulo Sérgio Ceretta

    ()

    (Federal University of Santa Maria)

Registered author(s):

    Market risk measurement has a long tradition in finance and it has been drawing the attention of many academic studies since Markowitz (1952). But the CAPM model (and derived models) assumptions have been targets of much criticism, in the sense that beta estimation may be imprecise. The supposition of investor's homogenous expectations is one of its problems, knowing that investors have different profiles concerning risk exposure and time horizon. Thus, this article aims to verify the scale differences of emerging markets risk pricing based on the international CAPM model. To perform this analysis, it was used wavelet decomposition and panel regressions. The results confirm some literature trends regarding the beta tendency to increase at lower frequencies, as well as the best fit(R2). Additionally, we bring a unique contribution in relation to the long term leverage effect, showing that this form of risk affects only the long-term investors, causing a risk exposure not verified in the short term.

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    File URL: http://www.accessecon.com/Pubs/EB/2014/Volume34/EB-14-V34-I2-P72.pdf
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    Article provided by AccessEcon in its journal Economics Bulletin.

    Volume (Year): 34 (2014)
    Issue (Month): 2 ()
    Pages: 784-792

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    Handle: RePEc:ebl:ecbull:eb-13-00316
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    1. Bekaert, Geert & Harvey, Campbell R, 1995. " Time-Varying World Market Integration," Journal of Finance, American Finance Association, vol. 50(2), pages 403-444, June.
    2. Rua, António & Nunes, Luis C., 2012. "A wavelet-based assessment of market risk: The emerging markets case," The Quarterly Review of Economics and Finance, Elsevier, vol. 52(1), pages 84-92.
    3. Cifter, Atilla & Ozun, Alper, 2007. "Multiscale Systematic Risk: An Application on ISE-30," MPRA Paper 2484, University Library of Munich, Germany.
    4. Masih, Mansur & Alzahrani, Mohammed & Al-Titi, Omar, 2010. "Systematic risk and time scales: New evidence from an application of wavelet approach to the emerging Gulf stock markets," International Review of Financial Analysis, Elsevier, vol. 19(1), pages 10-18, January.
    5. Conlon, T. & Crane, M. & Ruskin, H.J., 2008. "Wavelet multiscale analysis for Hedge Funds: Scaling and strategies," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 387(21), pages 5197-5204.
    6. Black, Fischer, 1976. "The pricing of commodity contracts," Journal of Financial Economics, Elsevier, vol. 3(1-2), pages 167-179.
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