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Stock profiling using time–frequency-varying systematic risk measure

Author

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  • Roman Mestre

    (MRE - Montpellier Recherche en Economie - UM - Université de Montpellier)

Abstract

This study proposes a wavelets approach to estimating time–frequency-varying betas in the capital asset pricing model (CAPM) framework. The dynamic of systematic risk across time and frequency is analyzed to investigate stock risk-profile robustness. Furthermore, we emphasize the effect of an investor's investment horizon on the robustness of portfolio characteristics. We use a daily panel of French stocks from 2012 to 2022. Results show that varying systematic risk varies in time and frequency, and that its short and long-run evolutions differ. We observe differences in short and long dynamics, indicating that a stock's betas differently fluctuate to early announcements or signs of events. However, short-run and long-run betas exhibit similar dynamics during persistent shocks. Betas are more volatile during times of crisis, resulting in greater or lesser robustness of risk profiles. Significant differences exist in short-run and long-run risk profiles, implying a different asset allocation. We conclude that the standard CAPM assumes short-run investment. Then, investors should consider time–frequency CAPM to perform systematic risk analysis and portfolio allocation.

Suggested Citation

  • Roman Mestre, 2023. "Stock profiling using time–frequency-varying systematic risk measure," Post-Print hal-04058285, HAL.
    • Handle: RePEc:hal:journl:hal-04058285
    DOI: 10.1186/s40854-023-00457-7
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    More about this item

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • C40 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - General
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G40 - Financial Economics - - Behavioral Finance - - - General

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