Long-term dependency between sovereign bonds and sectoral indices of India: evidence using Hurst exponent and wavelet analysis

Abstract

Purpose

The purpose of this study is to provide a new way to optimize a portfolio and to show that combining the Hurst exponent and wavelet analysis may help to increase portfolio returns.

Design/methodology/approach

The authors use the Hurst exponent and wavelet analysis to study the long-term dependencies between sovereign bonds and sectoral indices of India. The authors further construct and evaluate the performance of three portfolios constructed on the basis of Hurst standard deviation (SD) – global minimum variance (GMV), most diversified portfolio (MDP) and equal risk contribution (ERC).

Findings

The authors find that an ERC portfolio generates positive superior return as compared other two. Since our sample includes periods of two crisis – post-2007 financial crisis and the ongoing pandemic, this study reveals that combining government bond with equities and gold provides a higher returns when the portfolios are constructed using the risk exposures of each asset in the overall portfolio risk.

Practical implications

The findings provide guidance to portfolio managers by helping them to select assets using the Hurst approach and wavelet analysis thereby increasing the portfolio returns.

Originality/value

In this study, the authors use a combination of Hurst exponent and wavelet analysis to understand the long-term dependencies among various assets and provide a new methodology to optimize a portfolio. As far as the authors’ knowledge, no study in the past has attempted to provide a joint framework for portfolio optimization and therefore this study is the first to apply this methodology.

Citation

Das, S. and Kumar, A. (2021), "Long-term dependency between sovereign bonds and sectoral indices of India: evidence using Hurst exponent and wavelet analysis", Managerial Finance, Vol. 47 No. 10, pp. 1448-1464. https://doi.org/10.1108/MF-12-2020-0596