Investment Horizon Dependent CAPM: Adjusting Beta for Long-Term Dependence

León, Carlos; Leiton, Karen; Reveíz, Alejandro

doi:10.2139/ssrn.2179593

Cited by 5 publications

(2 citation statements)

References 26 publications

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“…Pearson) correlation for financial time-series has been documented as displaying serious shortcomings due to the presence of non-normality and long-term dependence (e.g. León et al 2012;León and Reveiz, 2011;Malevergne and Sornette, 2006;Holton, 1992). These issues are acknowledged but not considered in this paper.…”

Section: Introductionmentioning

confidence: 93%

Extracting the sovereigns' CDS market hierarchy : a correlation-filtering approach

León-Rincón¹,

Leiton-Rodríguez²,

Pérez-Villalobos³

et al. 2013

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Since correlation may be interpreted as a measure of the influence across time-series, it may be conveniently mapped into a distance and into a weighted adjacency matrix. Based on such matrix, network theory has attempted to filter out the noise in correlation matrices by extracting the dominant hierarchy (i.e. the strongest linear-dependence signals) within time-series.The aim of this brief paper is to find the current hierarchy in the sovereigns' CDS market after the structural shift caused by the failure of Lehman Brothers. Thus, based on two different correlation-into-distance mapping techniques and a minimal spanning tree-based correlation-filtering methodology on 36 sovereign CDS spread time-series, the target is to identify which sovereigns are providing the strongest -less noisy-and most informative signals.The resulting sovereigns' CDS market hierarchy agrees with prior findings of Gilmore et al. (2010) regarding sovereigns' bonds market, such as the importance of geographical clustering and the idiosyncratic nature of Japan and United States. Additionally, results (i) confirm that a small set of common factors affect the entire system; (ii) identify the relevance of credit rating clustering; (iii) identify Russia, Turkey and Brazil as regional benchmarks; (iv) suggest that lowermedium grade rated sovereigns are the most influential, but also the most prone to contagion; and (v) suggest the existence of a "Latin American common factor".

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Section: Introductionmentioning

confidence: 93%

Extracting the sovereigns' CDS market hierarchy : a correlation-filtering approach

León-Rincón¹,

Leiton-Rodríguez²,

Pérez-Villalobos³

et al. 2013

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show abstract

“…En Colombia, León et al (2012) estiman el sesgo del CAPM en cuanto a los betas y los retornos esperados, y demuestran que el supuesto de neutralidad del horizonte del tiempo es inválido. Este trabajo resalta la importancia del horizonte de inversión para el manejo del riesgo y la asignación del capital, y realiza pruebas estadísticas con un 99% de confianza que demuestran que más del 60% de las acciones exhiben betas que son estadísticamente diferentes de aquellos que incorporan el efecto de la dependencia de largo plazo.…”

Section: Consecuencias Prácticas De La Dependencia De Largo Plazounclassified

Uso de la metodología Wavelets para la validación de la regla de la raíz del tiempo y su aplicación al riesgo de mercado

Pirateque-Niño¹

2014

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Implied Probabilities of Default from Colombian Money Market Spreads: The Merton Model under Equity Market Informational Constraints

León

2012

SSRN Journal

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Informational constraints may turn the Merton Model for corporate credit risk impractical. Applying this framework to the Colombian financial sector is limited to four stock-market-listed firms; more than a hundred banking and non-banking firms are not listed. Within the same framework, firms' debt spread over the risk-free rate may be considered as the market value of the sold put option that makes risky debt trade below default-risk-free debt. In this sense, under some supplementary but reasonable assumptions, this paper uses money market spreads implicit in sell/buy backs to infer default probabilities for local financial firms. Results comprise a richer set of (38) banking and non-banking firms. As expected, default probabilities are non-negligible, where the ratio of default-probability-to-leverage is lower for firms with access to lender-of-last-resort facilities. The approach is valuable since it allows for inferring forward-looking default probabilities in the absence of stock prices. Yet, two issues may limit the validity of results to serial and crosssection analysis: overvaluation of default probabilities due to (i) spreads containing non-credit risk factors, and (ii) systematic undervaluation of the firm's value. However, cross-section assessments of default probabilities within a wider range of firms are vital for financial authorities' decision making, and represent a major improvement in the implementation of the Merton Model in absence of equity market data.

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Investment Horizon Dependent CAPM: Adjusting Beta for Long-Term Dependence

Cited by 5 publications

References 26 publications

Extracting the sovereigns' CDS market hierarchy : a correlation-filtering approach

Extracting the sovereigns' CDS market hierarchy : a correlation-filtering approach

Uso de la metodología Wavelets para la validación de la regla de la raíz del tiempo y su aplicación al riesgo de mercado

Implied Probabilities of Default from Colombian Money Market Spreads: The Merton Model under Equity Market Informational Constraints

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