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

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  • Bales, Stephan

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.

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  • Bales, Stephan, 2022. "Policy uncertainty and the sovereign-bank nexus: A time-frequency analysis using wavelet transformation," Finance Research Letters, Elsevier, vol. 44(C).
    • Handle: RePEc:eee:finlet:v:44:y:2022:i:c:s1544612321001197
    DOI: 10.1016/j.frl.2021.102038
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    Cited by:

    1. Bales, Stephan & Burghartz, Kaspar & Burghof, Hans-Peter & Hitz, Lukas, 2023. "Does the source of uncertainty matter? The impact of financial, newspaper and Twitter-based measures on U.S. banks," Research in International Business and Finance, Elsevier, vol. 65(C).
    2. Brunetti, Celso & Harris, Jeffrey H. & Mankad, Shawn, 2022. "The urgency to borrow in the interbank market," Economics Letters, Elsevier, vol. 221(C).
    3. Bales, Stephan & Burghof, Hans-Peter, 2024. "Public attention, sentiment and the default of Silicon Valley Bank," The North American Journal of Economics and Finance, Elsevier, vol. 69(PA).
    4. Wu, Jiaxu & Yang, Yibing, 2024. "The impact of bank-enterprise distance on the digital economic value of manufacturing enterprises," Finance Research Letters, Elsevier, vol. 60(C).
    5. Bales, Stephan, 2022. "Sovereign and bank dependence in the eurozone: A multi-scale approach using wavelet-network analysis," International Review of Financial Analysis, Elsevier, vol. 83(C).
    6. Jana, Rabin K. & Ghosh, Indranil, 2023. "Time-varying relationship between geopolitical uncertainty and agricultural investment," Finance Research Letters, Elsevier, vol. 52(C).

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    More about this item

    Keywords

    Economic policy uncertainty; Sovereign-bank nexus; Wavelet analysis;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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