Granger causal relationship between bond yield changes and equity returns through wavelets analysis: the case of Turkey

Year 2020, Volume: 20 Issue: 4, 301 - 317, 30.11.2020

Remzi Gök , Erhan Çankal

https://doi.org/10.21121/eab.618452

Cited By: 2

Abstract

This paper re-examines the stock-bond
relationship in Turkey by using weekly price observations of stock indices and
interest rates over a sample period between 2005-04-01 and 2016-12-30.
Considering heterogeneity investment periods, we employed both standard and
wavelets methods to provide a deeper understanding. The findings suggest the
presence of unit roots in our variables at the level and reveal evidence of the
cointegration and a one-way causal relationship in the long-run. Given that the conventional time-domain tests document
insignificant results, we employed causality tests on the decomposed series to unearth
the true dynamics of causal linkages. Furthermore,
the empirical results support the presence of bi-directional causality between the
fluctuations in bond yields and equity returns, i.e. they are significant
predictors of each other in the medium and long time horizons. The empirical results
pertinent to asymmetric causality tests show a one-way
causality from the negative shocks in stock prices to the positive shocks in
interest rates. Specifically, the results of frequency causality test reveal
that the predictive power of the financial index returns on the interest rate
changes intensifies across frequencies.

Keywords

Wavelets, symmetric, asymmetric, frequency causality

References

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