Wavelet analysis of stock return energy decomposition and return comovement - a case of some central European and developed European stock markets

• Published in: E+M Ekonomie a Management Vol. 17; no. 1; pp. 104 - 120
• Main Authors: Dajcman, Silvo, Kavkler, Alenka
• Format: Journal Article
• Language: English; Czech
• Published: Liberec Technical University of Liberec 01.01.2014
• Subjects: Analysis; Austria; Boundary conditions; Capital market; Case studies; Cointegration analysis; Commodities trading; Czech Republic; Decomposition; Dow Jones averages; Econometrics; Energy industry; Forecasts and trends; France; Germany; Hungary; Industrialized nations; Investment analysis; Investments; Methods; Rates of return; Securities markets; Slovenia; Stochastic models; Stock exchange; Stock exchanges; Stock management; Stock markets; Stock returns; Stocks; Studies; Time series; United Kingdom; Volatility; Waveform analysis; Wavelet transforms; France; United Kingdom; Austria; Central Europe; Europe
• ISSN: 1212-3609; 0927-5398; 1540-496X; 1834-5883; 0018-9448; 0022-1090; 0307-4358; 0378-4266; 1544-6123; 2582-8654; 0165-1765; 1076-9307; 0895-5638; 0972-9496; 1469-7688; 0953-5314; 0735-0015; 1466-4291; 1573-7179; 1053-587X; 0261-5606; 0378-4371; 0960-3107; 0939-3625; 0893-9454; 0377-7332; 0015-198X; 1042-4431; 0162-1459; 0006-8314; 0006-3444; 1566-0141; 1099-1158; 1582-6163; 1675-7227; 1198-8177; 0219-0249; 2336-5064
• DOI: 10.15240/tul/001/2014-1-009

In this article we investigate comovement of the three Central and Eastern European (CEE) stock markets (Slovenia, the Czech Republic and Hungary) with certain developed European stock markets (Austria, France, Germany and the United Kingdom) through the novel approach of maximal overlap discrete wavelet transform (MODWT), We use two features of MODWT to explore energy decomposition of stock market returns at different time scales and to apply methodology of [29] to study comovement between investigated stock markets, We show that most of the energy (variability) of stock market return series is captured by scale 1 (which correspond to 2-4 days return dynamics) and scale 2 (which correspond to 4-8 days return dynamics) MODWT coefficients, MODWT details are used to show that comovement between stock markets is scale-dependent and declines from raw (daily) return series to first- and second-scale reconstructed return series, The findings of the survey then have important implications for foreign financial investors who already hold international portfolios that exactly replicate those of non-Czech or non-Hungarian stock markets: international investing in the Czech or Hungarian stock markets with investment horizons corresponding to scale 2 (4 to 8 days) brings greater international diversification benefits than shorter (2 to 4 day horizon) international trading diversification strategies, The Slovenian stock market differs from the Czech and Hungarian markets also in this respect, as when the scale is increased the benefits of diversification are reduced, We also find that the volatility of Slovenian stock index returns is less synchronized with other observed stock return series, Interestingly, the Czech and Slovenian stock markets seem to comove with the Austrian stock market to a greater extent than with other developed stock markets,