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

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  • Sun, Xiaolei
  • Yao, Xiaoyang
  • Wang, Jun

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.

Suggested Citation

  • Sun, Xiaolei & Yao, Xiaoyang & Wang, Jun, 2017. "Dynamic interaction between economic policy uncertainty and financial stress: A multi-scale correlation framework," Finance Research Letters, Elsevier, vol. 21(C), pages 214-221.
    • Handle: RePEc:eee:finlet:v:21:y:2017:i:c:p:214-221
    DOI: 10.1016/j.frl.2016.12.010
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    More about this item

    Keywords

    Economic policy uncertainty; Financial stress; Empirical mode decomposition; BEKK-GARCH; Multi-scales; Dynamic correlation;
    All these keywords.

    JEL classification:

    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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