Time-Frequency Linkages and Co-Movements between the Euro and European Stock Market: A Continuous Wavelet Analysis

Abstract

We investigate the evolution of co-movement and lead-lag relationships between the nominal effective European exchange rate and the largest European stock markets in the time and frequency dimension. We decompose the financial return series into different time scales and apply the cross-wavelet coherence and phase difference. Within our sample set, which consists of daily data from 2000 to 2016, we observe patterns consistent with the notion of contagion, suggesting strong and sudden increases in the cross-market synchronization on particular frequency bands. Investigating the lead-lag relationships between both markets, we observe periods and frequencies where the causality runs from one variable to the other and vice-versa.

Keywords: Wavelet, Europe, Cyclical and Anti-Cyclical Effects, Wavelet-Coherence, Lead-Lag Relationship

JEL Classification: C40, E32, E44