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Market volatility and retail interest rate pass-through

  • Wang, Kuan-Min
  • Lee, Yuan-Ming

Using the asymmetric threshold cointegration test proposed by Enders and Siklos [Enders, W., Siklos, P., 2001. Cointegration and threshold adjustment. Journal of Business and Economic Statistics 19, 166-176] and the EC-EGARCH (1, 1)-M model, this study examines the interest rate pass-through mechanism between the money market rate and the retail interest rate. In addition, we also investigate the impact of the interest rate volatility on the interest rates of the U.S. and nine Asian countries. We find that the complete pass-through only exists in the U.S. deposit rate. The threshold cointegration test results show that the asymmetric cointegration relation exists in the deposit interest rate in five countries and in the lending rate in three countries. The symmetric cointegration relation exists in two countries. Besides, an estimation of the conditional means using the EC-EGARCH (1, 1)-M model shows that the effect of interest rate volatility on the retail interest rate differs from country to country. Among the eight countries that exhibit asymmetric adjustments in the short run, five of them are found to have upwards rigid adjustments in the deposit interest rate and three downwards rigid adjustments in the lending rate. The empirical results of Hong Kong, Taiwan, and the Philippines support the hypothesis of collusive pricing arrangements. As to the estimation of the conditional variance, among the seven countries that exhibit asymmetric volatility, the leverage effect in the lending rate exists in two of them.

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Article provided by Elsevier in its journal Economic Modelling.

Volume (Year): 26 (2009)
Issue (Month): 6 (November)
Pages: 1270-1282

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Handle: RePEc:eee:ecmode:v:26:y:2009:i:6:p:1270-1282
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/30411

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