Wavelet-based systematic risk estimation an application on istanbul stock exchange

Abstract

Systematic risk estimations are broadly used in investment analysis and portfolio management. The popular measure of systematic risk is the CAPM beta. The CAPM states that the expected return on an asset depends upon its level of systematic risk. The asset's systematic risk is measured relative to that of the market portfolio. The Model has been questioned by several empirical studies focused on the impact of return interval of betas. This paper attempts to estimate the CAPM at different time scales for an emerging market. In this study we adopt wavelets analysis a relatively new and innovative approach in finance proposed by Gencay et al. (2002) as the key empirical method for examining the relationship between the return of the stock and its systematic risk at different time scales. The proposed procedure is acted on a sample composed of 98 randomly selected stocks listed on Istanbul Stock Exchange (ISE) actively traded over 2003-2007. It has proved that the relationship between the return of a stock and its beta is more robust at medium scale. This evidence shows that the Turkish stock market is more efficient in the 3rd scale (8-16 days). This finding therefore shows that the predictions of the CAPM are more relevant at the medium-horizon in a multi-scale framework as compared to the other horizons.©EuroJournals Publishing Inc. 2009. © 2009 Elsevier B.V. All rights reserved.