The process of transferring negative impulses in capital markets – a wavelet analysis

ABSTRACT

The empirical research that is presented herein deals with the process of transferring negative impulses in capital markets during the subprime crisis (contagion, comovements, crisis transmission and shocks). A significant and positive contribution of the research conducted is the demonstration of how the wavelet analysis can be used in examining the various responses of the financial markets. The first stage of the research involved an analysis of the response of seven European markets (CAC40, DAX, FTSE100, IBEX, ATHEX, BUX and WIG20 indexes) to the proceedings in the US market, exemplified by the Dow Jones Industrial Average Index. The second stage involved examining the relationships of strong European markets (CAC40, DAX, FTSE100), and then the impact that the strongest German market DAX had on four other and weaker European markets – two from Western Europe (IBEX, ATHEX) and two from Central-Eastern Europe (BUX and WIG20). This article presents a methodological approach to transfer impulses on capital markets.

KEYWORDS:

• Contagion
• comovements
• crisis transmission
• financial shocks
• wavelet analysis

JEL::

• C14
• C58
• F36
• G01
• G15

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1 http://www.worldbank.org/economicpolicy/managing%20volatility/contagion/definitions.htm (14 May 2015).

2 A limitation of this approach is long duration of analysed process 2^j. In order to adjust the method to different time series durations, the author proposed to add extra information to adjust time series duration, cf. the MODWT method [20,11].

3 The estimation used the smoothing operator as defined by Torrence and Webster (cf. Grinsted et al. [15]).

4 http://grinsted.github.io/wavelet-coherence/ (modified 10.11.2017).

5 The following software was used in this research: “Crosswavelet and wavelet coherence software were provideed by A. Grinsted’ for MATLAB (trial version) [14] and ‘the Biwavelet R Package’ [12].

6 The spectral analysis concerned only four capital markets (the German, British, French and Polish markets).