Baharumshah, Ahmad Zubaidi and Chan, Tze-Haw and Masih, A. Mansur A. (2005): Financial Integration of East Asian Economies: Evidence from Real Interest Parity.
Download (424kB) | Preview
In this paper, we investigate the financial linkages between the East Asian countries with Japan and the US using the real interest rate parity (RIP) condition. This study offers three important results: first, we find strong (robust) evidence that RIP condition holds in all the Asian countries, except for China. Based on SURADF tests, we conclude that South Korea and the ASEAN-5 countries are financially integrated with the global financial markets namely, Japan and the US. Second, we also confirmed the real interest rate differentials between Japan and the US exhibits strong tendency towards a stationary equilibrium. Third, the analysis drawn on half-life suggests that the US-Asian link has been getting stronger than the Japan-Asian one in post-liberalization era
|Item Type:||MPRA Paper|
|Institution:||Universiti Putra Malaysia|
|Original Title:||Financial Integration of East Asian Economies: Evidence from Real Interest Parity|
|Keywords:||RIP; panel unit root tests; half-lives|
|Subjects:||F - International Economics > F0 - General > F02 - International Economic Order
C - Mathematical and Quantitative Methods > C3 - Multiple or Simultaneous Equation Models; Multiple Variables > C33 - Models with Panel Data; Longitudinal Data; Spatial Time Series
F - International Economics > F3 - International Finance > F36 - Financial Aspects of Economic Integration
|Depositing User:||Tze-Haw Chan|
|Date Deposited:||12. Mar 2007|
|Last Modified:||13. Feb 2013 05:36|
Anoruo, E., Ramchander, S., Thiewe, F.H., 2002. International linkage of interest rates evidence from the emerging economies of Asia. Global Finance Journal. 13, 217– 235.
Awad, M.A., Goodwin, B.K., 1998. Dynamic linkages among real interest rates in international capital market. Journal of International Money and Finance. 17, 881- 907.
Azali, M., Habibullah, M.S., Baharumshah, A.Z. 2001. Does PPP hold between Asian and the Japanese economies: Evidence using panel unit root and panel cointegration, Japan and the World Economy 13, 35-50.
Baharumshah, A.Z., Chan, T.H., Fountas, S., 2005. A panel study on real interest rate parity in East Asian countries: Pre- and post-liberalization era. Global Finance Journal, 16, 69-85. Bahmani-Oskooee, M., 1993. Purchasing power parity based on effective exchange rate and cointegration; 25 LDCs experience with its absolute formulation, World Development 21, 1023-31.
Bergin, P.R., Sheffrin, S.M., 2000. Interest rates, exchange rate and present value models of the current account. Economic Journal. 110, 535-558. Bhoocha-Oom, A., Stansell, S.R., 1990. A study of international financial market integration: An examination of the US, Hong Kong and Singapore markets. Journal of Bus. Fin. Account. 17, 193-212.
Breitung, J., 2000. The local power of some unit root tests for panel data. In: Baltagi B. H. (Ed.) Nonstationary Panels, Panel Cointegration and Dynamics Panels., 161-178. Elsevier, Amsterdam.
Breuer, J.B., McNown, R., Wallace, M.S., 2001. Misleading inferences from panel unit root tests with an illustration from purchasing power parity. Review of International Economics. 9, 482-493.
Breuer, J.B., McNown, R., Wallace, M.S., 2002. Series-specific unit root tests with panel data. Oxford Bulletin of Economics and Statistics. 64, 527-546.
Byun, J-C., Chen, S-N., 1996. International real interest rate parity with error correction models. Global Finance Journal. 7(2), 129-151.
Caner, M., Kilian, L., 1999. Size distortions of tests of the null hypothesis stationarity: Evidence and implication for PPP debate. Working Paper No. 99-05. Department of Economics, University of Michigan.
Chan, T.H., 2001, International capital mobility and financial integration: The Asia Pacific perspective. Master of Science Dissertation. Universiti Putra Malaysia
Chin, H.-G., McDonald, J.A. Chong, J., 2003. Dynamic capital mobility, capital market risk, and contagion: evidence from seven Asian countries.
Chinn, M.D., Frankel, J.A., 1995. Who drives real interest rates around the Pacific Rim: The USA or Japan? Journal of International Money and Finance. 14(6), 801-821.
Choudhry, T., 2005. Asian currency crisis and the generalized PPP: Evidence from the Far East. Asian Economic Journal. 19(2), 137-157.
Cumby, R.E., Mishkin, M.S., 1986. The international linkage of real interest rates: The European-US connection. Journal of International Money and Finance. 5, 5-23.
Feldstein, M., 1991. Domestic savings and international capital movements in the long run and the short run. NBER working paper 947.
Frankel, J.A., 1979. On the mark: A theory of floating exchange rate based on real interest differentials. American Economic Review. 69, 610–622.
Frankel, J.A., Wei, S.J., 1994. ?????
Ghosh, A., 1995. International capital mobility amongst the major industrialized countries: Too much or too little? Economic Journal. 105, 107-128.
Harris, R.D.F. and Tzavalis, E., 1999. Inferences for unit roots in dynamic panels where the time dimension is fixed. Journal of Econometrics. 91, 201-226.
Husted, S., 1992. The emerging U.S. current account deficit in the 1980s: A cointegration analysis. The Review of Economic and Statistics. 159-166.
Im, K.S., Pesaran, M.H., Shin, Y., 1997. Testing for unit roots in heterogeneous panels. Working Paper. University of Cambridge.
Im, K.S., Pesaran, M.H., Shin, Y., 2003. Testing for unit roots in heterogeneous panels. Journal of Econometrics. 115, 53-74.
Karfakis, C., 1996. Testing the intertemporal model of the current account: Some evidence from Greece. Applied Economics Letters. 3, 759-762.
Kim, J., 2006 Reconsidering real interest parity for traded and nontraded goods. Review of International Economics. 14(2), 306-315.
Kirchgassner, G., Wolters, J., 1993. Does the DM dominate the Euro market? An empirical investigation. Review of Economics and Statistics. 75, 773-778.
Levin, A., Lin, C.F., 1993. Unit root tests in panel data: New results. Discussion Paper No. 56. University of California at San Diego (UCSD).
Levin, A., Lin, F., Chu, C., 2001. Unit root tests in panel data: Asymptotic and finite-sample properties, Mimeo.
Maddala, G.S., Wu, S., 1999. A comparative study of unit root tests with panel data and a new simple test. Oxford Bulletin of Economics and Statistics. 61, 631-652.
Moosa, I., Bhatti, R.H., 1996. Does Europe have an integrated capital market? Evidence from real interest rate parity test. Applied economic Letters. 3, 517-520.
Murray, C.J., Papell, D.H., 2002. The purchasing power parity paradigm. Journal of International Economics. 56, 1-19.
O’Connell, P., 1998. The overvaluation of purchasing power parity. Journal of International Economic. 44, 1-19.
Ogawa, E., Kawasaki, K., 2003. Possibility of creating a common currency basket for East Asia. Discussion Paper No. 5. JBIC Institute, Tokyo, Japan.
Pain, D., Thomas, R., 1997. Real interest rate linkages; Testing got common trends and cycles. Working Paper No. 65. Bank of England.
Phylaktis, K., 1999. Capital market integration in the Pacific Basin region: An impulse response analysis. Journal of International Money and Finance. 18, 267-287.
Phylaktis, K., 1997. Capital market integration in the Pacific Basin countries: An analysis of real interest rate linkages. Pacific-Basin Finance Journal. 5, 195-213.
Rogoff, K., 1996 The purchasing power parity puzzle. Journal of Economic Literature. 34, 647–68.
Rossi, B., 2005. Confidence intervals for half-life deviations from purchasing power parity. Journal of Business and Economic Statistics. (forthcoming).
Sarno, L., Taylor M.P., 1998. Real exchange rates under the recent float: Unequivocal evidence of mean reversion. Economics Letters. 60, 131-137.
Sun, L., 2004. Measuring time-varying capital mobility in East Asia, China Economic Review,
Taylor, M.P., Sarno, L., 1998. The behavior of real exchange rates during the post-Bretton Woods period. Journal of International Economics. 46(2), 281-312.
Taylor, M.P., Peel, D. 1998. Nonlinear mean reversion in real exchange rates: Towards a solution to purchasing power parity puzzles. Manuscript, Oxford University.
Wu, Y., 1996. Are real exchange rates nonstationary? Evidence from a panel-data test. Journal of Money Credit and Banking. 28, 34-6
Wu, J.L., 2000. Mean reversion of the current account: Evidence from the panel data unit-root test. Economics Letters. 66, 215-222.
Available Versions of this Item
- Financial Integration of East Asian Economies: Evidence from Real Interest Parity. (deposited 12. Mar 2007) [Currently Displayed]