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Wavelet timescales and conditional relationship between higher-order systematic co-moments and portfolio returns

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  • Don Galagedera
  • Elizabeth Maharaj

Abstract

This paper investigates the association between portfolio returns and higher-order systematic co-moments at different timescales obtained through wavelet multi-scaling, a technique that decomposes a given return series into timescales enabling investigation at different return intervals. In Australian industry portfolios, the relative risk positions indicated by systematic co-moments at some timescales are different from those revealed in daily returns. A strong positive (negative) linear association between beta and portfolio return and co-kurtosis and portfolio return in the up (down) market is observed in daily returns and at different timescales. The beta risk is priced in the up and down markets. Co-kurtosis is not priced when the beta is in the pricing model. Co-skewness appears to be priced at a relatively high timescale and this is observed only after the up and down separation of market returns.

Suggested Citation

  • Don Galagedera & Elizabeth Maharaj, 2008. "Wavelet timescales and conditional relationship between higher-order systematic co-moments and portfolio returns," Quantitative Finance, Taylor & Francis Journals, vol. 8(2), pages 201-215.
    • Handle: RePEc:taf:quantf:v:8:y:2008:i:2:p:201-215
    DOI: 10.1080/14697680600989576
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    Cited by:

    1. Faria, Gonçalo & Verona, Fabio, 2018. "Forecasting stock market returns by summing the frequency-decomposed parts," Journal of Empirical Finance, Elsevier, vol. 45(C), pages 228-242.
    2. Faria, Gonçalo & Verona, Fabio, 2020. "The yield curve and the stock market: Mind the long run," Journal of Financial Markets, Elsevier, vol. 50(C).
    3. Don Galagedera & Elizabeth Maharaj & Robert Brooks, 2008. "Relationship between downside risk and return: new evidence through a multiscaling approach," Applied Financial Economics, Taylor & Francis Journals, vol. 18(20), pages 1623-1633.
    4. Faria, Gonçalo & Verona, Fabio, 2018. "The equity risk premium and the low frequency of the term spread," Research Discussion Papers 7/2018, Bank of Finland.
    5. Gonçalo Faria & Fabio Verona, 2021. "Time-frequency forecast of the equity premium," Quantitative Finance, Taylor & Francis Journals, vol. 21(12), pages 2119-2135, December.
    6. repec:zbw:bofrdp:2020_006 is not listed on IDEAS
    7. repec:zbw:bofrdp:2017_001 is not listed on IDEAS
    8. repec:zbw:bofrdp:2016_029 is not listed on IDEAS
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    10. Faria, Gonçalo & Verona, Fabio, 2018. "Forecasting stock market returns by summing the frequency-decomposed parts," Journal of Empirical Finance, Elsevier, vol. 45(C), pages 228-242.
    11. Gonçalo Faria & Fabio Verona, 2016. "Forecasting the equity risk premium with frequency-decomposed predictors," Working Papers de Economia (Economics Working Papers) 06, Católica Porto Business School, Universidade Católica Portuguesa.
    12. 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.
    13. Gonçalo Faria & Fabio Verona, 2016. "Forecasting the equity risk premium with frequency-decomposed predictors," Working Papers de Economia (Economics Working Papers) 06, Católica Porto Business School, Universidade Católica Portuguesa.
    14. 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.
    15. Gonçalo Faria & Fabio Verona, 2021. "Time-frequency forecast of the equity premium," Quantitative Finance, Taylor & Francis Journals, vol. 21(12), pages 2119-2135, December.
    16. repec:zbw:bofrdp:2018_007 is not listed on IDEAS
    17. Emmanuel Jurczenko & Bertrand Maillet & Paul Merlin, 2008. "Efficient Frontier for Robust Higher-order Moment Portfolio Selection," Post-Print halshs-00336475, HAL.
    18. Högholm, Kenneth & Knif, Johan & Koutmos, Gregory & Pynnönen, Seppo, 2011. "Distributional asymmetry of loadings on market co-moments," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 21(5), pages 851-866.
    19. Al Rababa’a, Abdel Razzaq & Alomari, Mohammad & McMillan, David, 2021. "Multiscale stock-bond correlation: Implications for risk management," Research in International Business and Finance, Elsevier, vol. 58(C).

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