A Multiscale Approach to Emerging Market Pricing

Abstract

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.

Keywords: Emerging Markets, ICAPM, Multi-scale analysis.

JEL Classification: C5