Investment horizon heterogeneity and wavelet: Overview and further research directions

• Systematic literature review of wavelet theory in finance has been conducted.
• Evolution of wavelet has been delineated in a succinct way.
• The migration of wavelet into different verticals of finance has been sketched.
• Relationship between horizon heterogeneity and information heterogeneity is probed.
• New research possibilities in this domain are explored.

Wavelet based multi-scale analysis of financial time series has attracted much attention, lately, from both the academia and practitioners from all around the world. The unceasing metamorphosis of the discipline of finance from its humble beginning as applied economics to the more sophisticated depiction as applied physics and applied psychology has revolutionized the way we perceive the market and its complexities. One such complexity is the presence of heterogeneous horizon agents in the market. In this context, we have performed a generous review of different aspects of horizon heterogeneity that has been successfully elucidated through the synergy between wavelet theory and finance. The evolution of wavelet has been succinctly delineated to bestow necessary information to the readers who are new to this field. The migration of wavelet into finance and its subsequent branching into different sub-divisions have been sketched. The pertinent literature on the impact of horizon heterogeneity on risk, asset pricing and inter-dependencies of the financial time series are explored. The significant contributions are collated and classified in accordance to their purpose and approach so that potential researcher and practitioners, interested in this subject, can be benefited. Future research possibilities in the direction of “agency cost mitigation” and “synergy between econophysics and behavioral finance in stock market forecasting” are also suggested in the paper.