Dynamic interaction between economic policy uncertainty and financial stress: A multi-scale correlation framework

Xiaolei Sun, Xiaoyang Yao and Jun Wang

Finance Research Letters, 2017, vol. 21, issue C, 214-221

Abstract: Quantifying the dynamic interaction between economic policy uncertainty and financial stress is in its infancy. To identify the inherent relationship between them, this paper proposes a multi-scale correlation framework. Empirical results show that interaction occurs significantly and distinctly on different scales. Correlation is significant and fluctuates drastically in short-term fluctuation with unidirectional spillover effect from financial stress to economic policy uncertainty. Bidirectional spillover effects exist in the medium pattern with periodic correlation of two-regime characteristic. It helps for decision making to establish a proper timing reference to design a more reasonable arbitrage portfolio and improve risk-hedging strategies.

Keywords: Economic policy uncertainty; Financial stress; Empirical mode decomposition; BEKK-GARCH; Multi-scales; Dynamic correlation (search for similar items in EconPapers)
JEL-codes: C52 G10 G18 (search for similar items in EconPapers)
Date: 2017
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (28)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:21:y:2017:i:c:p:214-221

DOI: 10.1016/j.frl.2016.12.010

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