Wavelets decomposition, volatility analysis and correlation for financial indexes

Abstract

Since the benefits of portfolio international diversification results appeared in financial literature, the issue of financial co-movements among different markets has been a key question. Many recent studies have approached this topic targeting a correlation investigation among financial indicators. Unfortunately, the huge majority of them focus only in the time domain, ignoring the relevant frequency domain which could differentiate long and short-run investment contribution to the energy of a time series. This paper proposes a wavelet-based volatility and correlation analysis of key financial indexes for the Brazilian, American and European markets looking for some results concerning the correlation structure between them in time and frequency domain, obtaining distinct results for long and short-run investment performance and contribution.