Impact of global macroeconomic factors on spillovers among Australian sector markets: Fresh findings from a wavelet‐based analysis

Abstract This study investigates the spillover dynamics among 10 Australian sectoral indices and their connectedness to global factors, including the WTI crude oil price, oil market volatility, Australian exchange rate, U.S. stock market volatility index and Infectious Disease Tracker Index. Using data from May 14, 2007 to March 31, 2022, this study applies the time‐varying parameter vector autoregressive model to study their static and dynamic connectedness, wavelet coherence analysis to investigate the time‐frequency co‐movement of global macroeconomic factors with Australian sector stock indices and wavelet decomposition‐based Granger causality. The results show that aggressive stocks (Industrials, Consumer Discretionary and Financials) are net transmitters, while defensive stocks (Health, Information Technology, Communication and Utilities) are net receivers of spillovers. The coronavirus pandemic has increased systemic risk, causing radical changes in net connectedness. Additionally, global macroeconomic factors drive the connectedness of the Australian sectoral indices, with oil and exchange rates moving in phase, and oil volatility, stock volatility and the Infectious Disease Tracker Index moving in antiphase. Global stock and oil market volatility has a significant impact on the Australian sector's returns over short‐, medium‐ and long‐term horizons. This study provides valuable insights to investors and policymakers by carefully examining the relationships between global factors and Australian sectoral indices.