Time Scale Analysis of Interest Rate Spreads and Output Using Wavelets

This paper adds to the literature on the information content of different spreads for real activity by explicitly taking into account the time scale relationship between a variety of monetary and financial indicators (real interest rate, term and credit spreads) and output growth. By means of wavelet-based exploratory data analysis we obtain richer results relative to the aggregate analysis by identifying the dominant scales of variation in the data and the scales and location at which structural breaks have occurred. Moreover, using the “double residuals” regression analysis on a scale-by-scale basis, we find that changes in the spread in several markets have different information content for output at different time frames. This is consistent with the idea that allowing for different time scales of variation in the data can provide a fruitful understanding of the complex dynamics of economic relationships between variables with non-stationary or transient components, certainly richer than those obtained using standard time domain methods.

[1]  Peter Guttorp,et al.  Wavelet analysis of covariance with application to atmospheric time series , 2000 .

[2]  P. Guttorp,et al.  Testing for homogeneity of variance in time series: Long memory, wavelets, and the Nile River , 2002 .

[3]  Aslak Grinsted,et al.  Nonlinear Processes in Geophysics Application of the Cross Wavelet Transform and Wavelet Coherence to Geophysical Time Series , 2022 .

[4]  M. Braga,et al.  Exploratory Data Analysis , 2018, Encyclopedia of Social Network Analysis and Mining. 2nd Ed..

[5]  Paulo Renato Soares Terra,et al.  The cost of capital, corporation finance and the theory of investment , 2008 .

[6]  H. Shin,et al.  Prices and Quantities in the Monetary Policy Transmission Mechanism , 2009 .

[7]  K. Arrow,et al.  The New Palgrave Dictionary of Economics , 2020 .

[8]  J. B. Ramsey,et al.  The analysis of foreign exchange data using waveform dictionaries , 1997 .

[9]  Paulo Renato Soares Terra,et al.  MODIGLIANI, F.; MILLER, M.H. 1958. The Cost of Capital, Corporation Finance and the Theory of Investment. American Economic Review , 48 (3):261-297. , 2008 .

[10]  J. B. Ramsey,et al.  Tests for Specification Errors in Classical Linear Least‐Squares Regression Analysis , 1969 .

[11]  Viviana Fernández Maturana.  The international CAPM and a wavelet-based decomposition of value at risk , 2005 .

[12]  Eric T. Swanson.  Financial market imperfections and macroeconomics: conference summary , 2010 .

[13]  Hyun Song Shin,et al.  The changing nature of financial intermediation and the financial crisis of 2007-09 , 2010 .

[14]  Margaret Mary McConnell,et al.  Output Fluctuations in the United States: What Has Changed Since the Early 1980s? , 1998 .

[15]  Ingrid Daubechies,et al.  Ten Lectures on Wavelets , 1992 .

[16]  Brandon J. Whitcher,et al.  Assessing Nonstationary Time Series Using Wavelets , 1998 .

[17]  Martin Greiner,et al.  Wavelets , 2018, Complex..

[18]  B. Bernanke,et al.  The Financial Accelerator and the Flight to Quality , 1994 .

[19]  James B. Ramsey,et al.  The contribution of wavelets to the analysis of economic and financial data , 1999, Philosophical Transactions of the Royal Society of London. Series A: Mathematical, Physical and Engineering Sciences.

[20]  B. Bernanke,et al.  Agency Costs, Net Worth, and Business Fluctuations , 1988 .

[21]  Olivier J. Blanchard,et al.  The Long and Large Decline in U.S. Output Volatility , 2001 .

[22]  John Cotter,et al.  An Empirical Analysis of Dynamic Multiscale Hedging Using Wavelet Decomposition , 2011, 1103.4943.

[23]  Bernard W. Silverman.  Wavelets in Statistics: Some Recent Developments , 1998, COMPSTAT.

[24]  B. Bernanke,et al.  The Financial Accelerator in a Quantitative Business Cycle Framework , 1998 .

[25]  Patrick M. Crowley,et al.  A Guide to Wavelets for Economists , 2007 .

[26]  P. Perron,et al.  Estimating and testing linear models with multiple structural changes , 1995 .

[27]  R. King,et al.  The Incredible Volcker Disinflation , 2005 .

[28]  G. C. Tiao,et al.  Use of Cumulative Sums of Squares for Retrospective Detection of Changes of Variance , 1994 .

[29]  J. B. Ramsey,et al.  DECOMPOSITION OF ECONOMIC RELATIONSHIPS BY TIMESCALE USING WAVELETS , 1998, Macroeconomic Dynamics.

[30]  Frederic S. Mishkin,et al.  Predicting U.S. Recessions: Financial Variables as Leading Indicators , 1995, Review of Economics and Statistics.

[31]  F. In,et al.  The Relationship Between Financial Variables and Real Economic Activity: Evidence From Spectral and Wavelet Analyses , 2003 .

[32]  Mauro Gallegati,et al.  Instrumental variables and wavelet decompositions , 2010 .

[33]  James B. Ramsey,et al.  Wavelets in Economics and Finance: Past and Future , 2002 .

[34]  Dirk Dubbers,et al.  Conference Summary , 2005, Journal of research of the National Institute of Standards and Technology.

[35]  Markus K. Brunnermeier,et al.  Market Liquidity and Funding Liquidity , 2005 .

[36]  J. B. Ramsey,et al.  The Decomposition of Economic Relationships by Time Scale Using Wavelets: Expenditure and Income , 1998 .

[37]  J. B. Ramsey,et al.  An Analysis of U.S. Stock Price Behavior Using Wavelets , 1995 .

[38]  Viviana Fernandez.  The International CAPM and a Wavelet-Based Decomposition of Value at Risk , 2005 .

[39]  Dudley D. Dillard.  Can “It” Happen Again? Essays on Instability and Finance , 1984 .

[40]  Michael R. Chernick,et al.  Wavelet Methods for Time Series Analysis , 2001, Technometrics.

[41]  R. Gencay,et al.  Multiscale systematic risk , 2005 .

[42]  R. Gencay,et al.  An Introduction to Wavelets and Other Filtering Methods in Finance and Economics , 2001 .

[43]  Chang‐Jin Kim,et al.  Has the U.S. Economy Become More Stable? A Bayesian Approach Based on a Markov-Switching Model of the Business Cycle , 1999, Review of Economics and Statistics.

[44]  Gary B. Gorton.  Slapped by the Invisible Hand: The Panic of 2007 , 2010 .

[45]  R. Frisch,et al.  Partial Time Regressions as Compared with Individual Trends , 1933 .

[46]  B. Bernanke,et al.  Chapter 21 The financial accelerator in a quantitative business cycle framework , 1999 .

[47]  R. C. Merton,et al.  On the Pricing of Corporate Debt: The Risk Structure of Interest Rates , 1974, World Scientific Reference on Contingent Claims Analysis in Corporate Finance.

[48]  James B. Ramsey,et al.  The Application of Wave Form Dictionaries to Stock Market Index Data , 1996 .

[49]  B. Greenwald,et al.  Financial Market Imperfections and Business Cycles , 1993 .

[50]  R. Gencay,et al.  Scaling properties of foreign exchange volatility , 2001 .

[51]  Mauro Gallegati,et al.  The US Wage Phillips Curve Across Frequencies and Over Time , 2011 .

[52]  Simon Gilchrist,et al.  Credit Market Shocks and Economic Fluctuations: Evidence from Corporate Bond and Stock Markets , 2009 .

[53]  Arturo Estrella,et al.  The term structure as a predictor of real economic activity , 1991 .

[54]  P. Perron,et al.  Computation and Analysis of Multiple Structural-Change Models , 1998 .

[55]  Mauro Gallegati,et al.  Wavelet variance and correlation analyses of output in G7 countries , 2005 .

[56]  D. Percival,et al.  Analysis of Subtidal Coastal Sea Level Fluctuations Using Wavelets , 1997 .

[57]  MorrisseyPeter.  Slapped by the Invisible Hand: The Panic of 2007 (a review) , 2010 .

[58]  Simon Gilchrist,et al.  Credit Spreads and Business Cycle Fluctuations , 2011 .

[59]  Markus K. Brunnermeier,et al.  A Macroeconomic Model with a Financial Sector , 2012 .

[60]  D. Romer,et al.  A New Measure of Monetary Shocks: Derivation and Implications , 2003 .