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Quadruple wavelet coherence and pairwise cointegration: comparative time-frequency analysis of bank deposit rate

Alper Kirik (Financial Economics Programme, Yeditepe University, Istanbul, Turkey)
Tunc Oygur (Financial Economics Programme, Yeditepe University, Istanbul, Turkey)
Yaman Omer Erzurumlu (Engineering Management Department, Bahcesehir University, Istanbul, Turkey)

Journal of Economic Studies

ISSN: 0144-3585

Article publication date: 7 February 2022

Issue publication date: 24 February 2023

189

Abstract

Purpose

This study aims to attempt to understand the joint co-movement of bank deposit rate and its main underlying determinants (foreign exchange rate (FX) rate, cross-currency swap rate and implied forward rate). The authors also compare time and frequency variant approaches in this dynamic.

Design/methodology/approach

The authors examine bank deposit rates where multiple variables jointly interact, and the integration is time and frequency variant. The study applies both cointegration and wavelet coherence methods and conducts a comparative analysis. It investigates eight markets over 2005–2020 aiming to capture the impact of changing market conditions and degree of development.

Findings

The results are in line with cross-country interdependence, where we observe more robust evidence for co-movement during adverse economic conditions with higher correlation compared to other periods such as the 2007–2009 US mortgage crises, 2010–2012 Euro crises and 2019 pandemic. Moreover, wavelet analysis suggests deposit rate lags FX rate and leads cross-country swap rate. The USA arguably leads the co-movement accompanied briefly by Japan and followed closely by other developed markets and later the developing markets. Heat maps suggest clustering of countries.

Practical implications

The wavelet coherence's ability to indicate the periods and the frequencies of the relationship is essential to capture the true nature of the relationship. Such additional insight would enable the practitioners to determine the true price of the deposit rate.

Originality/value

The study captures the long suggested collective nature of three main underlying determinants of bank deposit. The results shed light on the order of dynamics in a complex bank deposit environment. Comparative analysis further highlights the valuable insight quadruple wavelet coherence provides.

Keywords

Citation

Kirik, A., Oygur, T. and Erzurumlu, Y.O. (2023), "Quadruple wavelet coherence and pairwise cointegration: comparative time-frequency analysis of bank deposit rate", Journal of Economic Studies, Vol. 50 No. 2, pp. 147-172. https://doi.org/10.1108/JES-04-2021-0188

Publisher

:

Emerald Publishing Limited

Copyright © 2022, Emerald Publishing Limited

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