Does Heterogeneity in Investment Horizons Affect Portfolio Diversification? Some Insights Using M-GARCH-DCC and Wavelet Correlation Analysis

Syed Faiq Najeeb, Obiyathulla Bacha and Abul Masih

Emerging Markets Finance and Trade, 2015, vol. 51, issue 1, 188-208

Abstract: Recent literature draws attention to the issue of whether heterogeneity in investment horizons has an effect on resulting investor exposures. In this article, using Malaysia as a case study, we make the first attempt to examine comovement dynamics of Islamic equity returns to identify international portfolio diversification opportunities for investors having heterogeneous investment horizons. We use three recent and appropriate methodologies: M-GARCH-DCC, Continuous Wavelet Transforms (CWT), and Maximum Overlap Discrete Wavelet Transform (MODWT). The results significantly tend to indicate that effective portfolio diversification opportunities between our sample markets exist mainly for short holding periods while for longer investment horizons, where investor stockholding periods exceed one year, the markets appear to be mostly highly correlated yielding minimal portfolio diversification benefits. Overall, the results critically highlight the significance of heterogeneity in investment horizons and bear important implications for portfolio diversification strategies.

Date: 2015
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Persistent link: https://EconPapers.repec.org/RePEc:mes:emfitr:v:51:y:2015:i:1:p:188-208

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DOI: 10.1080/1540496X.2015.1011531

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