The beta heuristic from a time/frequency perspective: A wavelet analysis of the market risk of sectors

Wavelet methodology is used to estimate scale betas for eleven industry/sectors for the period 1986-2016. A comparison of scale betas with standard regression estimates of betas finds no significant differences for any of the sectors at high frequency/low scales. However, for most of the sectors there are significant differences at medium and high scales. A rolling 60 month window shows that scale betas may differ from standard betas substantially for several years. Implications for portfolio managers, especially those employing beta rotation strategies, are provided.