A wavelet approach of investing behaviors and their effects on risk exposures

Roman Mestre (1)

1 MRE - Montpellier Recherche en Economie

Exposure to market risk is a core objective of the Capital Asset Pricing Model (CAPM) with a focus on systematic risk. However, traditional OLS Beta model estimations (Ordinary Least Squares) are plagued with several statistical issues. Moreover, the CAPM considers only one source of risk and supposes that investors only engage in similar behaviors. In order to analyze short and long exposures to diferent sources of risk, we developed a Time–Frequency Multi-Betas Model with ARMA-EGARCH errors (Auto Regressive Moving Average Exponential AutoRegressive Conditional Heteroskedasticity). Our model considers gold, oil, and Fama–French factors as supplementary sources of risk and wavelets decompositions. We used 30 French stocks listed on the CAC40 (Cotations Assistées Continues 40) within a daily period from 2005 to 2015. The conjugation of the wavelet decompositions and the parameters estimates constitutes decision-making support for managers by multiplying the interpretive possibilities. In the short-run, (“Noise Trader” and “High-Frequency Trader”) only a few equities are insensitive to Oil and Gold fuctuations, and the estimated Market Betas parameters are scant diferent compared to the Model without wavelets. Oppositely, in the long-run, (fundamentalists investors), Oil and Gold afect all stocks but their impact varies according to the Beta (sensitivity to the market). We also observed signifcant diferences between parameters estimated with and without wavelets.

Mots clés: Risk exposures; CAPM; Multi-betas model; Time–frequency analysis; MODWT; Oil; Gold

Domaines: Économie et finance quantitative [q-fin]

Roman Mestre. A wavelet approach of investing behaviors and their effects on risk exposures. Financial Innovation, 2021, 7 (1), ⟨10.1186/s40854-021-00239-z⟩. ⟨hal-03195190⟩