Nexus between economic risk and political risk in the United Kingdom: Evidence from wavelet coherence and quantile-on-quantile approaches

This study examines the linkage between economic risk and political risk in the United Kingdom. This linkage has attracted the attention of policymakers; however, there is no consequence of the linkage in the existing literature. The study aims to close this gap for the UK case by applying wavelet coherence (WTC) and quantile-on-quantile regression (QQR) approaches and using quarterly data between 1984/Q1 and 2020/Q4. The results of the WTC reveal that there is time-frequency dependency between economic risk and political risk majorly in the medium and low frequencies. Moreover, the direction of the causality changes over time. Furthermore, the outcomes of the WTC show that economic risk leads political risk between 1995 and 2005, whereas political risk leads economic risk from 2006 to 2019. The outcomes of the QQR approach disclose that in the higher tail (0.7-0.95) of political risk and lower and medium tail (0.05-0.60) of economic risk, the effect of political risk on economic risk is positive and strong. On the flip side, at all quantiles (0.05-0.95) of economic risk and lower quantiles (0.10-0.30) of political risk, the effect of political risk on economic risk is positive and strong. The results are also validated by the outcomes of partial wavelet coherence, multiple wavelet coherence, and quantile regression. Hence, the results highlight the importance of political risk (economic risk) for economic risk (political risk) in the UK case.

Automated summary

This study examines the link between economic risk and political risk in the UK and finds that there is time-frequency dependence between the two, with the direction of causality changing over time. The study also reveals that the effect of political risk on economic risk varies across different tails and quantiles. These results highlight the importance of political risk for economic risk in the UK.