Multiscale Intertemporal Capital Asset Pricing Model

International Journal of Finance & Economics, forthcoming https://doi.org/10.1002/ijfe.2372

53 Pages Posted: 9 Jan 2021 Last revised: 7 Sep 2021

See all articles by Ryuta Sakemoto

Ryuta Sakemoto

Okayama University; Keio University

Date Written: November 18, 2020

Abstract

This study investigates the multiscale intertemporal capital asset pricing model. We focus upon differences across timescales since they represent heterogeneities of investors in markets. This study employs a wavelet approach to decompose return data into multiple timescales. Furthermore, we impose a same risk-aversion parameter constraint into all portfolios, which is proposed by Engel and Bali (2010) who show that the constraint provides a reasonable equity risk premium at a daily frequency.

We observe positive relations between the expected returns on portfolios and the covariance of the market at a daily frequency, while these relations change as timescales increase. We find that a negative risk-return relation, which might be related to a correction process of overreaction at an approximately weekly frequency (2 days to 16 days). The strongest positive relation is observed at an approximately monthly frequency (16 to 32 days). Monthly portfolio rebalances are widely used and might impact stock market return patterns. The equity risk premium in the longer frequency ranges from 8.64% to 11.10%. Our results are robust after controlling for macroeconomic variables, market implied volatility and test portfolios. Moreover, we investigate size and value factors and reveal that the risk premia disappear in the longer frequency, which suggests that Intertemporal CAPM is satisfied.

Keywords: ICAPM, wavelet, risk factor, investment horizon, risk-aversion

JEL Classification: C32, G11, G12

Suggested Citation

Sakemoto, Ryuta, Multiscale Intertemporal Capital Asset Pricing Model (November 18, 2020). International Journal of Finance & Economics, forthcoming https://doi.org/10.1002/ijfe.2372, Available at SSRN: https://ssrn.com/abstract=3734823 or http://dx.doi.org/10.2139/ssrn.3734823

Ryuta Sakemoto (Contact Author)

Okayama University ( email )

1-1-1 Tsushimanaka, Kita Ward
Okayama, 700-0082
Japan

Keio University ( email )

2-15-45 Mita
Minato-ku
Tokyo, 108-8345
Japan

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