An Introduction to Wavelet Theory in Finance

In, Francis Haeuck; Kim, Sangbae

doi:10.1142/8431

Cited by 93 publications

(94 citation statements)

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“…The heterogeneous players in the financial markets are: intra-day traders or speculators, hedge funds, portfolio managers, regulators or central bankers, pension and insurance fund managers, etc. The implication of heterogeneity in investment horizon or financial asset holding periods is that the true dynamic relationship between different aspects of capital market activities will be unveiled only when the asset prices are decomposed into different time scales or investment horizons or asset holding periods (In and Kim 2013). This analysis can be done with the help of different wavelet transforms such as, discrete wavelet transform (DWT), maximum overlap discrete wavelet transform (MODWT), and continuous wavelet transform (CWT) and the correlation between two CWT generally known as the wavelet coherence.…”

Section: Methodsmentioning

confidence: 99%

“…Gencay et al (2001) were one of the earliest proponents of the time scaled dependence of returns and correlations in financial markets. In and Kim (2013) have combined a cluster of their papers using wavelet time-scaling in finance to produce a book just published. Dacjman et al (2012), in their recent study on co-movement dynamics between the developed European stock markets of the United Kingdom, Germany, France and Austria also find evidence in favour of scale dependence for stock market returns.…”

Section: Uniqueness Of Islamic Bonds (Sukuk)mentioning

confidence: 99%

“…In choosing the wavelet filter, we have applied the principal of maintaining a 'balance' between the sample size and the length of the wavelet filter (In and Kim, 2013). Previous studies on high-frequency data have shown that a moderate-length filter such as L = 8 is adequate to deal with the characteristic features of timeseries data (see Gencay et al, 2001, 2002, In and Kim 2013). In the literature, it is argued that an LA (8) filter generates more smooth wavelet coefficients than other filters such as, Haar wavelet filter.…”

Section: Continuous Wavelet Transform (Cwt)mentioning

confidence: 99%

“…For brevity, the paper omits the mathematical details of the method {interested readers may refer to Madaleno and Pinho (2012), Gencay et al (2001;2002) and In and Kim (2013)}.…”

Section: The Continuous Wavelet Transform (Cwt)mentioning

confidence: 99%

See 3 more Smart Citations

Does a Held-to-Maturity Strategy Impede Effective Portfolio Diversification for Islamic Bond (Sukuk) Portfolios? A Multi-Scale Continuous Wavelet Correlation Analysis

Najeeb

Bacha

Masih

2016

Emerging Markets Finance and Trade

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The Islamic bonds or sukuk market is one of the fastest growing segments of the nearly US$2trillion global Islamic finance industry. However, lack of trading in secondary sukuk markets is a peculiar feature in this sector and both institutional and retail sukuk investors are known to adopt a held-to-maturity investment strategy. Consequently, there is a critical gap in literature in studying the portfolio diversification opportunities available to sukuk investors and evaluating these in the light of held-to-maturity strategies. This paper (using recently available data and continuous wavelet transform methodologies) has made an initial attempt to study the portfolio diversification strategies for Islamic bond (sukuk) portfolios across heterogeneous investment horizons using the Malaysian and the Gulf Cooperation Council (GCC) sukuk markets as a case study. Our findings critically indicate that returns between local currency sukuk in different markets have low levels of long-term correlations, thus enabling portfolio diversification benefits. However, international currency sukuk issued in different markets exhibit high levels of long-term correlations which impede portfolio diversification benefits for held-to-maturity investments. A similar impediment is also witnessed in the domestic market context where diversification is intended by investing in different types of domestic sukuk. Overall, our findings critically highlight the feasibility of held-to-maturity sukuk investment strategies from a portfolio diversification perspective.

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Section: Methodsmentioning

confidence: 99%

Section: Uniqueness Of Islamic Bonds (Sukuk)mentioning

confidence: 99%

Section: Continuous Wavelet Transform (Cwt)mentioning

confidence: 99%

“…For brevity, the paper omits the mathematical details of the method {interested readers may refer to Madaleno and Pinho (2012), Gencay et al (2001;2002) and In and Kim (2013)}.…”

Section: The Continuous Wavelet Transform (Cwt)mentioning

confidence: 99%

See 2 more Smart Citations

Does a Held-to-Maturity Strategy Impede Effective Portfolio Diversification for Islamic Bond (Sukuk) Portfolios? A Multi-Scale Continuous Wavelet Correlation Analysis

Najeeb

Bacha

Masih

2016

Emerging Markets Finance and Trade

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“…Instead all the calculations are performed in terms of a filter bank of coefficients. 3 For a time series based introduction to wavelet analysis see Percival and Walden (2000), but for applications of wavelets to economics and finance see either In and Kim (2013) or the papers in the book by Gallegati and Simmler (2014). 4 In general, the wavelets used in practice will possess more vanishing moments than required by the admissibility condition.…”

Section: Discrete Wavelet Filtermentioning

confidence: 99%

Robust estimation of nonstationary, fractionally integrated, autoregressive, stochastic volatility

Jensen

2016

Studies in Nonlinear Dynamics &Amp; Econometrics

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Empirical volatility studies have discovered nonstationary, long-memory dynamics in the volatility of the stock market and foreign exchange rates. This highly persistent, infinite variance, but still mean reverting, behavior is commonly found with nonparametric estimates of the fractional differencing parameter, d, for financial volatility. In this paper, a fully parametric Bayesian estimator, robust to nonstationarity, is designed for the fractionally integrated, autoregressive, stochastic volatility ( , this MCMC algorithm relies on the wavelet representation of the log-squared return series. Unlike the Fourier transform, where a time series must be a stationary process to have a spectral density function, wavelets can represent both stationary and nonstationary processes. As long as the wavelet has a sufficient number of vanishing moments, this paper's MCMC sampler will be robust to nonstationary volatility and capable of generating the posterior distribution of the autoregressive and long-memory parameters of the SV-FIAR model regardless of the value of d. Using simulated and empirical stock market return data, we find our Bayesian estimator producing reliable point estimates of the autoregressive and fractional differencing parameters with reasonable Bayesian confidence intervals for either stationary or nonstationary SV-FIAR models.

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Harvesting Islamic risk premium with long–short strategies: A time scale decomposition using the wavelet theory

Ahroum¹,

Achchab²

2019

Int. J Fin Econ

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The impact of the Islamic screening on the performance of stock and sukuk investments is subject of a serious debate. The aim of this paper is to contribute to the ongoing studies on Islamic markets by giving new insights about characteristics of the Islamic risk premium. To attempt this objective, we adopt a risk premia methodology using long–short strategies and a time scale decomposition to find out the scale and the intensity degree of this effect over time. Furthermore, we consider the Islamic risk premium as a market factor. Wavelet analysis results in Malaysia highlight the presence of the Islamic effect at low frequency bands and a higher intensity among the corporate debt market. However, this approach's effectiveness is conditioned to the existence of Islamic and conventional benchmarks.

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An Introduction to Wavelet Theory in Finance

Cited by 93 publications

References 0 publications

Does a Held-to-Maturity Strategy Impede Effective Portfolio Diversification for Islamic Bond (Sukuk) Portfolios? A Multi-Scale Continuous Wavelet Correlation Analysis

Does a Held-to-Maturity Strategy Impede Effective Portfolio Diversification for Islamic Bond (Sukuk) Portfolios? A Multi-Scale Continuous Wavelet Correlation Analysis

Robust estimation of nonstationary, fractionally integrated, autoregressive, stochastic volatility

Harvesting Islamic risk premium with long–short strategies: A time scale decomposition using the wavelet theory

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