Analysing Time-frequency Relationship between Oil price and Sectoral Indices in India using Wavelet Techniques

Abstract

Oil is considered an essential factor of any economy. This paper examines the time-varying correlation between oil price return, BSE SENSEX, and 14 sectoral indexes in India using multiscale wavelet decomposition and wavelet coherence analysis. The maximal wavelet discrete wavelet transform analysis shows a feedback relationship between 13 sectors at higher time horizons (dC4, dC5, and dC6). Based on the wavelet coherence plot, the oil price and sectoral index return show a high co-movement at 32 to 128 weeks. The wavelet coherence plot shows that the oil price and sectoral index return show a high co-movement during the period of Mar-May 2020 (especially during the period of financial crisis widely spread due to the COVID19 pandemic and nationwide lockdown notification announced by the Government of India). We discuss the implications of these studies in detail.

Keywords

• Wavelet Coherence
• Multiscale decomposition
• Lead Lag Relationship
• Sectoral indices