Spectral analysis of stock-return volatility, correlation, and beta

Abstract

We apply spectral techniques to analyze the volatility and correlation of U.S. common-stock returns across multiple time horizons at the aggregate-market and individual-firm level. Using the cross-periodogram to construct frequency band-limited measures of variance, correlation and beta, we find that volatilities and correlations change not only in magnitude over time, but also in frequency. Factors that may be responsible for these trends are proposed and their implications for portfolio construction are explored.