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Financial Integration from a Time-Varying Cointegration Perspective

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  • Xianguo Huang

    (National Graduate Institute for Policy Studies)

  • Roberto Leon-Gonzalez

    (National Graduate Institute for Policy Studies)

  • Somrasri Yupho

    (National Graduate Institute for Policy Studies)

Abstract

This paper applies a time-varying cointegration (TVC) model to study regional financial integration, measured by the drifting cointegration coefficient of the long-term interest rates between Singapore and Malaysia. Conditioned on long-run exchange rate equilibrium, the evolving relation can be used to test the hypothesis of uncovered interest parity (UIP) in the strong and weak forms, and examine how the integration changes over time on the basis of the long-term interest rates measure. In the case of Singapore and Malaysia, the findings show that financial integration first decreased after the 1997 Asian Financial Crisis and then enhanced gradually from late 2001 onward. The shocks to Singapore, characterized by a higher level and a leading effect, are positively correlated with the ones to Malaysia.

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Bibliographic Info

Paper provided by National Graduate Institute for Policy Studies in its series GRIPS Discussion Papers with number 12-07.

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Length: 21 pages
Date of creation: Aug 2012
Date of revision:
Handle: RePEc:ngi:dpaper:12-07

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  1. Geweke, John & Amisano, Gianni, 2007. "Hierarchical Markov normal mixture models with applications to financial asset returns," Working Paper Series 0831, European Central Bank.
  2. Christopher A. Sims & Daniel F. Waggoner & Tao Zha, 2006. "Methods for inference in large multiple-equation Markov-switching models," Working Paper 2006-22, Federal Reserve Bank of Atlanta.
  3. John F. Geweke, 1995. "Bayesian reduced rank regression in econometrics," Working Papers 540, Federal Reserve Bank of Minneapolis.
  4. Koop, Gary & Leon-Gonzalez, Roberto & Strachan, Rodney W., 2011. "Bayesian inference in a time varying cointegration model," Journal of Econometrics, Elsevier, vol. 165(2), pages 210-220.
  5. Bierens, Herman J. & Martins, Luis F., 2010. "Time-Varying Cointegration," Econometric Theory, Cambridge University Press, vol. 26(05), pages 1453-1490, October.
  6. Chib, Siddhartha, 1996. "Calculating posterior distributions and modal estimates in Markov mixture models," Journal of Econometrics, Elsevier, vol. 75(1), pages 79-97, November.
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