Time\u2013frequency dependency of financial risk and economic risk: evidence from Greece

Dervis Kirikkaleli

doi:10.1186/s40008-019-0173-z

Abstract

This study aims to shed some light on the one of the most popular phenomena in the economics and finance literature—nexus between economic growth and financial development—for the case of Greece over 1990Q1 to 2018Q4 within the framework of risk. In other words, this study investigates the causal link between financial risk and economic risk in Greece using wavelet coherence tests while answering the following questions: (i) does financial risk lead to economic risk in Greece and/or does economic risk lead to financial risk in Greece, and (ii) if so, why? The wavelet coherence approach allows the study to capture the long-run and short-run causal linkages among the time series variables since the approach combines time and frequency domain causalities. The findings from wavelet coherence supports the Schumpeter hypothesis since the findings proves that there is unidirectional causality from financial risk to economic risk in Greece (i) between 1995 and 1998; (ii) between 2003 and 2013; (iii) between 2013 and 2017 at different frequency levels. The findings clearly reveal how financial risk is important predictor for economic risk in Greece over the period of 1990–2018.

Highlights

Since the innovative theoretical study of Schumpeter (1911), considerable attention has been drawn to the nexus between financial development and economic growth
It is important for policymakers to know whether there is any causal linkage between financial risk and economic risk in either developed or developing countries
The present study examines the co-movement between financial risk and economic risk in Greece using the wavelet approach initially developed by Goupillaud et al (1984)

Summary

Introduction

Since the innovative theoretical study of Schumpeter (1911), considerable attention has been drawn to the nexus between financial development and economic growth. This nexus has remained one of the most important research topics in the last ten decades. It is important for policymakers to know whether there is any causal linkage between financial risk and economic risk in either developed or developing countries Even, it is more important for Greece where the country is hit by the 2007–2008 global crisis and faced by the domestic debt crisis between 2009 and 2012. Greece’ debt crisis triggered the political instability and social exclusion in Greece, even

Objectives

Findings

Conclusion