Time-Frequency Analysis of Financial Risk and Economic Risk in India : New Insights Based on Wavelet Coherence Approach

The economic sustainability of a nation could be at stake if there are no adequate measures in place to cope with financial and economic risks, which are the gravest challenges it faces. The uncertainty of economic factors produces fluctuations in the financial sector and makes them more susceptible. However, this aspect was not taken into account in previous studies. To fill in the gap in the literature, this study uses both economic and financial risk indices to determine how risks are interconnected across time (frequency) and how they are linked to one another. To do so, in this study, we utilized quarterly data from 1984-Q1 to 2018-Q4 and applied the Granger causality, Toda-Yamamoto causality, and novel Gradual shift causality approaches to examine the aforementioned objectives. The findings in our paper observe a long-term, medium-term, and short-term positive connection between economic and financial risk and find that economic risk has a one-way causal relationship with financial risk, demonstrating that economic risk has strong predictive power for financial risk. Moreover, the wavelet power spectrum outcomes reflect the high vulnerability of economic and financial risks during 1991, 1992, and 1996. Hence, this is the first research of its kind for the Indian economy, and it extends to the existing literature by examining the link between the two most significant indicators in terms of time and frequency dependency. The findings in our paper offer excellent perspectives for both investors and policymakers for assessing prospects for investment and policy changes if necessary