Multiscale Systematic Risk: An Application on ISE-30

Abstract

In this study, variance changing to the scale and multi-scale Capital Asset Pricing Model (CAPM) is tested by Wavelets as a new analysis method in finance and economics. It introduces a new approach to the variance changing to the scale as a general risk indicator, and to multi-scale CAPM portfolio theory as a systematic risk indicator. In the study, variance changes to scale and systematic risk changes to scale of 10 stocks in ISE-30 have been determined. The ability of the investors to conduct risk based analysis up to 128 days allows them to determine the risk level to the scale (stock holding period). According to the study results; it is determined that the variances of 10 stocks from ISE 30 change according to the scale and variance differentiation as an expression of general risk level increase starting from the 1st scale (1 to 4 days). In multi-scale CAPM, it is determined that systematic risk of all stocks is changed to frequency (scale) and increased at higher scales. The finding as to beta and return at the high levels shall be in stronger form evidenced by Gencay et al (2005) is determined as not applicable to ISE 30. The risk and return for ISE 30 are close to the positive in the 3rd scale (32 days), but they are in the same direction for the other scales. This finding shows that the risk-return maximization of a portfolio of 10 stocks from ISE may be achieved at a level of 32 days and the risk will be higher than the return in the portfolios established at those levels different than 32 days