Analyses of wavelet coherence: financial risk and economic risk in China

Abstract

Purpose This study aims to close a gap in the relevant literature by investigating the causal linkage between financial risk (FR) and economic risk (ER) in China for the period 1985Q1–2018Q4. Design/methodology/approach Based on the aim of the present study, Toda Yamamoto causality and wavelet coherence tests are used to capture the relationship between FR and ER in China. Findings The findings from wavelet coherence reveal that there is feedback causality between FR and ER in China at different frequencies and different periods between 1985 and 2018. The consistency of the findings from wavelet coherence is confirmed by the outcomes of Toda Yamamoto causality test. Research limitations/implications Although this study provides strong and consistent empirical findings for China, further studies should consider advancing the argument by focusing on different emerging markets. Practical implications Results are crucial for policy decision-making and can be used by researchers and macro-economic policymakers to take an action, if necessary, by implementing more appropriate or alternative economic and financial decisions. Originality/value To the best of the author’s knowledge, this relationship in China has not been comprehensively explored by using newly developed econometrics techniques. Therefore, this study is likely to open a debate about the literature as the study concludes with a discussion on short- and long-run implications for policymakers in China.