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Markov-Switching Mean Reversion in Short-Term Interest Rates: Evidence from East Asian Economies

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  • CHEW LIAN CHUA
  • SANDY SUARDI

Abstract

This paper employs a Markov-switching approach to model the dynamics of East Asian short rates. Regime changes are incorporated in standard unit root test to reveal periodic changes in the stationarity property of interest rates. There is evidence that three of the five short rates follow a random walk process in tranquil and low rates episodes but mean-revert in periods when rates are high and volatile. Singapore short rates are characterised by a random walk process, whereas the Philippines rates behave as a mean-reverting process in both regimes. Factors such as exchange rates, monetary policy and interest rate differentials vis-à-vis US interest rates influence the likelihood of short rates being in a volatile state. The regime switching dynamics of interest rates carry important implications for policy-makers. Copyright © 2007 The Economic Society of Australia.

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  • Chew Lian Chua & Sandy Suardi, 2007. "Markov-Switching Mean Reversion in Short-Term Interest Rates: Evidence from East Asian Economies," The Economic Record, The Economic Society of Australia, vol. 83(263), pages 383-397, December.
  • Handle: RePEc:bla:ecorec:v:83:y:2007:i:263:p:383-397
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    Cited by:

    1. Cevik, Emrah Ismail & Dibooglu, Sel, 2013. "Persistence and non-linearity in US unemployment: A regime-switching approach," Economic Systems, Elsevier, vol. 37(1), pages 61-68.
    2. Chan, Wing Hong & Young, Denise, 2009. "A New Look at Copper Markets: A Regime-Switching Jump Model," Working Papers 2009-13, University of Alberta, Department of Economics.
    3. Jan Willem van den End, 2011. "Statistical evidence on the mean reversion of interest rates," DNB Working Papers 284, Netherlands Central Bank, Research Department.
    4. Ozge Kandemir Kocaaslan, 2016. "Regime Nonstationarity and Nonlinearity in the Turkish Output Level," International Journal of Economics and Financial Issues, Econjournals, vol. 6(2), pages 503-507.
    5. repec:eee:intfin:v:50:y:2017:i:c:p:36-51 is not listed on IDEAS

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