Journal of Risk

Wavelet decomposition and applied portfolio management

Theo Berger

  • We decompose return series into particular trends
  • We introduce decomposed return series to applied portfolio management
  • Portfolio allocations that minimize short-run noise present a promising alternative


In this paper, we decompose financial return series into their time and frequency domains in order to separate short-term noise from long-term trends. First, we investigate the dependence between US stocks at different time scales before and after the outbreak of financial crisis. Second, we set up a novel analysis and introduce the application of decomposed return series to a portfolio management setup. We then model portfolios that minimize the volatility of each particular time scale. As a result, portfolio compositions that minimize the short-run volatility of the first scales represent a promising choice, since they slightly outperform portfolio compositions that minimize the variance of the unfiltered return series.

Sorry, our subscription options are not loading right now

Please try again later. Get in touch with our customer services team if this issue persists.

New to View our subscription options

You need to sign in to use this feature. If you don’t have a account, please register for a trial.

Sign in
You are currently on corporate access.

To use this feature you will need an individual account. If you have one already please sign in.

Sign in.

Alternatively you can request an individual account here