Shocks in capital markets – phase breakdowns in the wavelet analysis

Abstract

In the wavelet analysis, the basis for the inference on lead/lag times of response of return rates is the phase difference between the components of two time series connected with significant coherence coefficients. In theory, the occurrence of breakdowns in the phase shift signifies interference in the interdependence. The preliminary research results presented in this article aim to address the question whether those breakdowns can be used to identify moments of the occurrence of shocks in financial markets, resulting from the behaviour of return rates in the partner market under examination. The results presented in the article reveal the significance of most square rates of return in the period preceding the occurrence of a phase break in the model for variance and the lack of significance of return rates of those moments to the concurrent change in the expected value. This article presents a methodological approach to identification of shocks.