Global financial crisis and multiscale systematic risk: Evidence from selected European stock markets

In this paper, we have investigated the impact of the global financial crisis on the multi-horizon nature of systematic risk and market risk using daily data of eight major European equity markets over the period of 2005-2018. The method is based on a wavelet multiscale approach within the framework of a capital asset pricing model. Empirical results demonstrate that beta coefficients have a multiscale tendency and betas tend to increase at higher scales (lower frequencies). In addition, the size of betas and R2s tend to increase during the crisis period compared with the pre-crisis period. The multiscale nature of the betas is consistent with the fact that stock market investors have different time horizons due to different trading strategies. Our results based on scale dependent value-at-risk (VaR) suggest that market risk tends to be more concentrated at lower time scales (higher frequencies) of the data. Moreover, the scale-by-scale estimates of VaR have increased almost three fold for every market during the crisis period compared with the pre-crisis period. Finally, our approach allows for accurately forecasting time-dependent betas and VaR.