The co-movement between equity markets of Thailand and China : a wavelet-based approach

Abstract

This paper applied the MODWT wavelet method to decompose correlations of the stock market of Thailand and China into different time scales and frequencies. The decomposed correlations are then examined and compared between short-term and long-term, and also between different time periods when the interdependence of two markets is expected to change. The result shows that long-term correlation is not significantly higher and sometimes is significantly lower than the short-term, whereas the correlation does significantly increase from 2005 to 2020. Furthermore, the paper investigates the effectiveness of using the correlation in the suitable time scale and frequency in an application of a minimum variance portfolio. By comparing the traditional correlation and correlation obtained from the wavelet method, we found that the minimum variance portfolio from the wavelet method performs better. The result implied that the wavelet method support investors and policymakers to understand the linkage between two markets and make better decisions based on the co-movement of returns.