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Portfolio allocation and the investment horizon: a multiscaling approach

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  • Sangbae Kim
  • Francis In

Abstract

A new approach is proposed for analysing portfolio allocation over various time scales. This new approach is based on wavelet analysis, which decomposes a given time series on a scale-by-scale basis. Empirical results indicate that, as the investment horizon lengthens, a greater weighting should be allocated to stocks. An explanation for this result is that the mean-reverting property of stock returns causes investors to perceive that stocks are less risky than bonds and T-bills at longer time scales compared with shorter time scales. When we include the effect of risk aversion, it is found that the higher the risk aversion, the less the Sharpe ratio, indicating that a more conservative investor prefers a smoother consumption stream.

Suggested Citation

  • Sangbae Kim & Francis In, 2010. "Portfolio allocation and the investment horizon: a multiscaling approach," Quantitative Finance, Taylor & Francis Journals, vol. 10(4), pages 443-453.
    • Handle: RePEc:taf:quantf:v:10:y:2010:i:4:p:443-453
    DOI: 10.1080/14697680902960226
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    Citations

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    Cited by:

    1. Xingyu Dai & Dongna Zhang & Chi Keung Marco Lau & Qunwei Wang, 2023. "Multiobjective portfolio optimization: Forecasting and evaluation under investment horizon heterogeneity," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 42(8), pages 2167-2196, December.
    2. Snezana Eminidou & Marios Zachariadis & Elena Andreou, 2020. "Inflation Expectations and Monetary Policy Surprises," Scandinavian Journal of Economics, Wiley Blackwell, vol. 122(1), pages 306-339, January.
    3. Un, Kuok Sin & Ausloos, Marcel, 2022. "Equity premium prediction: Taking into account the role of long, even asymmetric, swings in stock market behavior," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 608(P1).
    4. Michis, Antonis A., 2014. "Investing in gold: Individual asset risk in the long run," Finance Research Letters, Elsevier, vol. 11(4), pages 369-374.
    5. Francis In & Sangbae Kim, 2012. "An Introduction to Wavelet Theory in Finance:A Wavelet Multiscale Approach," World Scientific Books, World Scientific Publishing Co. Pte. Ltd., number 8431.
    6. Chakrabarty, Anindya & De, Anupam & Gunasekaran, Angappa & Dubey, Rameshwar, 2015. "Investment horizon heterogeneity and wavelet: Overview and further research directions," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 429(C), pages 45-61.
    7. Antonis A. Michis, 2021. "Wavelet Multidimensional Scaling Analysis of European Economic Sentiment Indicators," Journal of Classification, Springer;The Classification Society, vol. 38(3), pages 443-480, October.
    8. In, Francis & Kim, Sangbae & Gençay, Ramazan, 2011. "Investment horizon effect on asset allocation between value and growth strategies," Economic Modelling, Elsevier, vol. 28(4), pages 1489-1497, July.
    9. Anindya Chakrabarty & Anupam De & Gautam Bandyopadhyay, 2016. "Horizon heterogeneity, institutional constraint and managerial myopia: a multi-frequency perspective on ELSS," International Journal of Business Excellence, Inderscience Enterprises Ltd, vol. 9(1), pages 18-47.
    10. Chaker Aloui & Rania Jammazi & Hela Ben Hamida, 2018. "Multivariate Co-movement Between Islamic Stock and Bond Markets Among the GCC: A Wavelet-Based View," Computational Economics, Springer;Society for Computational Economics, vol. 52(2), pages 603-626, August.
    11. Hai Vo, Long & Hong Vo, Duc, 2020. "Long-run dynamics of exchange rates: A multi-frequency investigation," The North American Journal of Economics and Finance, Elsevier, vol. 54(C).
    12. Laimutė Urbšienė & Andrius Bugajevas & Marekas Pipiras, 2016. "The Impact Of Investment Horizon On The Return And Risk Of Investments In Securities In Lithuania," Organizations and Markets in Emerging Economies, Faculty of Economics, Vilnius University, vol. 7(2).
    13. Antonios K. Alexandridis & Mohammad S. Hasan, 2020. "Global financial crisis and multiscale systematic risk: Evidence from selected European stock markets," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 25(4), pages 518-546, October.
    14. Mohammad Alomari & Abdel Razzaq Al rababa’a & Ghaith El-Nader & Ahmad Alkhataybeh, 2021. "Who’s behind the wheel? The role of social and media news in driving the stock–bond correlation," Review of Quantitative Finance and Accounting, Springer, vol. 57(3), pages 959-1007, October.
    15. Cheuk Hee Cheung & Tansel Yilmazer, 2019. "Wealth Management While Dealing with Memory Loss," Journal of Family and Economic Issues, Springer, vol. 40(3), pages 470-485, September.
    16. Naseri, Marjan & Masih, Mansur, 2014. "Integration and Comovement of Developed and Emerging Islamic Stock Markets: A Case Study of Malaysia," MPRA Paper 58799, University Library of Munich, Germany.
    17. Juliana Malagon & David Moreno & Rosa Rodr�guez, 2015. "Time horizon trading and the idiosyncratic risk puzzle," Quantitative Finance, Taylor & Francis Journals, vol. 15(2), pages 327-343, February.

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