Real and complex wavelets in asset classification: An application to the US stock market

Journal of Business Economics and Management

2019

This paper investigates the relationship between money/credit growth and house price inflation for a sample of twelve developed countries. The novel application of the continuous wavelet transform showed significant but time-varying linkages between these two variables. During quantitative easing in the United States and the United Kingdom, growth of respectively broad money and bank credit was leading house price inflation for the 2-8 years cycle. In contrast to this, the Bank of Japan and the European Central Bank either did not assign a separate role to house prices in their reaction functions or the two central banks were not capable to significantly increase house prices by extending money/credit during the business cycle. The significant co-movements of financial variables and house prices around booming episodes warn us that a new asset price boom might appear within the length of a business cycle as a consequence of overly expansionary monetary policy. In the euro area, the significant, long run, and close to a one-for-one link between growth of M3 and house price inflation is an argument for the monetary pillar of the European Central Bank. The present study contributes significantly to the literature by introducing a novel application of a continuous wavelet transform to study the housing prices in relation to money, credit and quantitative easing. The article uses a long-term dataset covering a period of almost half a century to analyse their varying relationship in the short-run to the long-run and from the historical perspective.

Section: Literature Reviewmentioning

confidence: 99%

mentioning

confidence: 99%

Money, Credit, House Prices and Quantitative Easing – The Wavelet Perspective From 1970 to 2016

Journal of Business Economics and Management

2019

“…Ultimately, CWT seems to be a promising tool for the purposes of the article, and indeed wavelets are recently receiving increasing attention in the economics literature. The first papers that applied CWT to study asset prices are relatively new (Tiwari et al, 2016;Bruzda, 2017), although the authors have not investigated money and credit developments against stock prices.…”

Section: Methodsmentioning

confidence: 99%

“…Empirical studies typically confirm that financial indicators play an important role in predicting asset price cycles (Gerdesmeier et al, 2010) that impact the real economy stance. The explanation of their considerable role may stem from the international simultaneity of business cycles (Osińska et al, 2016;Bruzda, 2015) and asset price cycles (Alessi & Detken, 2011) as well as significant co-movements of domestic financial and real business cycles (Bruzda, 2017). In particular, Alessi and Detken (2011) found that the global measures of liquidity, especially the global private credit gap, are the best indicators of asset price cycles.…”

Section: Stock Prices Money and Credit During A Business Cyclementioning

confidence: 99%

The Interconnectedness of Stock Prices, Money, and Credit Across Time and Frequency From 1970 to 2016

Technological and Economic Development of Economy

Zinecker

2022

This article applies continuous wavelet and maximal overlap discrete wavelet transforms to study the co-movements and the direction of causality between money (M3 and M2), bank credit, credit from all sectors vs. stock price dynamics across time and frequency for 12 developed countries. The time-varying linkages were significant typically for credit rather than money developments. Particularly, these linkages appeared during phases of house and stock price boom and bust at a business cycle frequency. The discovered lead-lag patterns give relatively much time for monetary policy authorities to support their financial stability objectives by imposing restrictions on credit. Closing the channel through which credit and stock prices interact may counteract the rising financial imbalances. This finding holds also for the euro area where the monetary pillar is based on broad money. The new application of wavelets allowed discovering the varying linkages that were not necessarily evident in the standard methods of analysing data.

“…2 For example, the applications of wavelets in economics receive recently a growing attention (Bruzda 2017), but the joint interdependencies between money and credit have not been investigated with wavelets to our knowledge. The non-wavelet evidence on the linkage between money and credit is discussed in the following part of Sect.…”

Section: The Theoretical Background Of the Decoupling Of Money And Crmentioning

confidence: 99%

Money and credit during normal times and house price booms: evidence from time-frequency analysis

2019

Empirica

I analyse the link between money and credit for twelve industrialized countries in the time period from 1970 to 2016. The euro area and Commonwealth Countries have rather strong co-movements between money and credit at longer frequencies. Denmark and Switzerland show weak and episodic effects. Scandinavian countries and the US are somewhere in between. I find strong and significant longer run comovements especially around booming house prices for all of the sample countries. The analysis suggests the expansionary policy that cleans up after the burst of a bubble may exacerbate the risk of a new house price boom. The interrelation is hidden in the short run, because the co-movements are then rarely statistically significant. According to the wavelet evidence, developments of money and credit since the Great Recession or their decoupling in Japan suggest that it is more appropriate to examine the two variables separately in some circumstances.