Financial market high-low volatility spillover and portfolio allocation: a time frequency analysis

This study explores the high- and low-volatility spillover effects and portfolio allocation from a frequency-domain perspective across the stock, bond, forex, gold, and oil markets. Specifically, we decompose realized volatility into high- and low-volatility regimes and analyse volatility spillovers from both short- and long-term components using the TVP-VAR frequency connectedness approach. In addition, we employ four portfolio strategies to evaluate cumulative returns and hedging effectiveness. This results reveal significant differences in spillover effects between high- and low-volatility networks: short-term spillovers dominate in high-volatility networks, whereas long-term spillovers are the main contributors in low-volatility networks. Furthermore, the portfolio constructed using the minimum connectedness approach (MCoP) exhibits the highest cumulative returns, whereas the minimum variance portfolio (MVP) and risk parity portfolio (RPP) achieve stronger hedging effectiveness. Overall, this study highlights the importance of jointly considering volatility intensity and time-frequency characteristics when assessing cross-market risk transmission and designing portfolio strategies.