The effects of economic and financial shocks on private investment: A wavelet study of return and volatility spillovers

This paper examines the linkage between private investments and shocks in economic and financial indicators. Using data from India, we study the return and volatility spillovers from crude price, credit availability, real exchange rate, inflation, output gap, government spending, and economic policy uncertainty to private investments. We combine the ARMA-GARCH model with wavelet multiresolution analysis to capture the multiscale features of return and volatility spillovers among the time series. Our findings uncover spillovers in the time-scale decomposed series that are otherwise not observable in the original data, thereby throwing new light on the private investment-macroeconomic shock relationship. Private investment receives return spillovers from all variables at lower frequencies. Volatility spillovers from credit availability, exchange rate, output gap, and public investment exist at higher frequencies. The findings are robust to different forecast horizons, window sizes, frequency of data observation, and methodology of volatility extraction.