Analysis of Asymmetric Linkage between Financial Risk and Economic Risk in Nigeria: Application of Quantile Regression Approach

Abstract

The primary motive for this research is to add to the current literature to assess the economic risk and financial risk nexus by utilizing the innovative quantile regression (QR) technique. The Quantile regression approach is characterized by its capability to identify the heterogeneous influence of covariates at different quantiles of the outcomes, as well as offers more robust and complete estimates in comparison to the mean regression when the normality assumption violated or the existence of outliers and long tails. As a result, the method appears to transform the quantile of one parameter into another, and the results have the pportunities to resolve questions about the interconnection between economic risk nd financial risk at both lower and higher quantiles of time series data. The empirical outcome of the Q-Q method reveals that: (i) the effect of economic risk on financial risk is positive; (ii) the effect of financial risk on economic risk is positive, thereby showing a feedback association between economic risk and financial risk in Nigeria. Furthermore, a robustness check was undertaken using the Quantile regression approach. Finally, the paper suggested policy directions based on the findings for Nigerian policymakers.