Wavelet Coherence Analysis of Returns, Volatility and Interdependence of the US and the EU Money markets: Pre & Post Crisis

North American Journal of Economics and Finance. 2021. Vol. 58. No. 2021. Article 101457.

Vukovic D., Lapshina K., Moinak M.

This research analyse the US and the EU money markets interdependence from 2004
to 2018. The study explains to what extent the volatility of the chosen money markets
instruments in two regions is inter-correlated before, during and after the financial
crisis of 2008. We apply the econometric analysis and estimate time-series models of
class GARCH to study the historical dynamics of interbank rates and bond returns.
The study demonstrates that correlation between returns of analogous money market
instruments in the EU and US is not stable over time. We find that correlation rises in
periods when countries are exposed to the same external shocks as global financial
crisis. Wavelet coherence analysis suggests that investors do not get any advantages
of portfolio diversification investing only in US treasuries with different maturities
for more than 256 days and do not get any advantages at all investing only in
European bonds.

Keywords: financial crisis, correlation, money market, GARCH modelling, wavelet coherence analysis