Analysis of Wavelet Coherence: Service Sector Index and Economic Growth in an Emerging Market

Abstract

The present study aims to shed some light on the causal link between the Service Sector Index in the Turkish stock market and economic growth using a wavelet coherence approach. Thus, the present study determines whether the Service Sector Index leads to economic growth in Turkey and/or vice versa. Based on our aim, we use the wavelet coherence approach, which allows us to capture long-run and short-run causal linkages between the Service Sector Index and economic growth in Turkey, since the approach combines both time domain causality and frequency domain causality tests. The findings from wavelet coherence reveal that there is one-way causality running from the Service Sector Index to economic growth in Turkey at different frequencies and different periods between 1997 and 2017.