APPLICATIONS OF THE DISCRETE AND CONTINUOUS WAVELET TRANSFORM TO THE PORTFOLIO MANAGEMENT
Abstract
The current paper demonstrates that the wavelet transform is a very
powerful tool for financial analysis. Some of the opportunities that it provides to the
financial analyst and in particular to the portfolio manager are discussed in the context of
two empirical examples. The first example illustrates how the notion of wavelet coherency
might be utilized in the process of risk diversification. In the second example is applied the
discrete wavelet transform to the preliminary stage of the portfolio return modeling. On the
basis of the delivered empirical findings it might be concluded that the application of the
wavelet transform reveals relevant decision-making information that is otherwise not that
obvious.
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