Policy uncertainty and the sovereign-bank nexus: A time-frequency analysis using wavelet transformation

Stephan Bales

Finance Research Letters, 2022, vol. 44, issue C

Abstract: This paper examines the impact of policy uncertainty on the sovereign-bank nexus over various time-scales and frequencies. Considering Credit Default Swap premia from 32 banks in 10 countries, cross-wavelet analysis shows that sovereign default risk leads banking sector default risk in the short-run, while the relation reverses in the medium-run. Periods of high sovereign-bank dependence, moreover, coincide with periods of great political uncertainty. Applying partial wavelet coherency analysis, the sovereign-bank dependencies significantly weaken once the influence of Economic Policy Uncertainty is eliminated. This shows a tightening of the sovereign-bank nexus in times of great policy uncertainty.

Keywords: Economic policy uncertainty; Sovereign-bank nexus; Wavelet analysis (search for similar items in EconPapers)
JEL-codes: C32 C58 E32 E44 G28 (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:44:y:2022:i:c:s1544612321001197

DOI: 10.1016/j.frl.2021.102038

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