Integration of Financial Markets in SAARC Countries: Evidence Based on Uncovered Interest rate Parity Hypothesis
AbstractThis paper examines interest rate linkages among four SAARC countries vis-a-vis United State using monthly data over the period 1990M1 to 2006M3. The emperical findings suggest the existance of single cointegrating vector between SAARC countries interest rates and US interest rate. The result further suggest that except India, the coefficient restriction for Pakistan, Sri Lanka and Bangladesh are met segnificantly. However, in the case of India, the coefficient associated with foreign interest rate is far from the predicted value of UIP.The adjustment coefficient indicate no two ways causility. We also impemented the cointegration test within the SAARC countries. The test results suggest the existance of the one cointegrating vector.the existance of one cointegrating vector indicates the low degree of money markets integration in the region. Moreover, in the long run except Indian interest rate, other interest rates exerted positive impact on Pak-interest rate. Short Run Error Correction model is also estimated. the results suggest that Pakistani, Indian and Sri Lankan interest rates act as equlibrating factors in the long run, while no dynamic interaction between Pak-interst rate and Bangladesh-interest rate have been seen so far.
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Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 6751.
Date of creation: 2007
Date of revision:
Publication status: Published in Kashmir Economic Review 1.16(2007): pp. 1-16
Financial markets integration; Interest Parity;
Find related papers by JEL classification:
- F15 - International Economics - - Trade - - - Economic Integration
- G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
- F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-01-19 (All new papers)
- NEP-IFN-2008-01-19 (International Finance)
- NEP-MON-2008-01-19 (Monetary Economics)
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