Does political risk matter for economic and financial risks in Venezuela?

Dervis Kirikkaleli

doi:10.1186/s40008-020-0188-5

Abstract

In this paper, the time–frequency dependency of political risk as well as economic and financial risks is explored in Venezuela using quarterly data from 1984Q1 to 2018Q4. The present study uses the wavelet coherence technique, which allows the investigation of both the long and short-term causal relationships between political risk and economic and financial risks in Venezuela. The findings of this study indicate that: (i) significant vulnerabilities in political risk, economic risk, and financial risk are observed at different time periods and different frequency levels; (ii) political risk has a strong power for explaining economic risk from 1995 to 2005 in the long run, while between 1984 and 2010, economic risk and political risk are positively correlated at different frequency levels; (iii) in the long run, changes in political risk significantly lead to changes in financial risk in Venezuela.

Highlights

In the literature, scholars have paid considerable attention to political instability, underlining that there is a consensus on the adverse effect of political instability on macroeconomic dynamics
The present study investigates the time–frequency relationship between political risk, financial risk and economic risk in Venezuela using the wavelet approach initially developed by Goupillaud et al (1984)
4 Conclusion there is a consensus on the adverse effect of political instability on economic and financial dynamics in Venezuela, no previous studies have empirically examined the effect of political risk on economic and financial risks using the wavelet approach, which allows this study to explore both the long- and short-term causal relationship between political risk and economic and financial risks in Venezuela over the period of 1985Q1 to 2018Q4

Summary

Introduction

Scholars have paid considerable attention to political instability, underlining that there is a consensus on the adverse effect of political instability on macroeconomic dynamics. The main innovation of the present study is that it fills this gap in the literature by establishing time-series-based models to explore the causal effect of political risk on the economic and financial risks in Venezuela using the wavelet coherence approach.

Results

Conclusion