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Deviations from uncovered interest parity in Malaysia

Author

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  • Soo Khoon Goh
  • Guay Lim
  • Nilss Olekalns

Abstract

This paper applies the Switching ARCH (SWARCH) model of Hamilton and Susmel (1994) to investigate the dynamics of deviations from Uncovered Interest Parity (UIP) for Malaysia for the sample period 1978-2002. In particular, the deviations (or the risk premium) are modelled as a time series subject to discrete regime shifts between two possible states, “high volatility” and “low volatility”. We find that the SWARCH model provides a better description of the data and implies a much lower degree of volatility persistence than conventional ARCH models. Overall, the SWARCH model provides a clearer picture of how the UIP deviations have evolved over time and how the changes in the volatility of the deviations have coincided with major changes in financial liberalisation in Malaysia. This adds credibility to the hypothesis that the shifts are not statistical artefacts but indeed reflect real economic changes.

Suggested Citation

  • Soo Khoon Goh & Guay Lim & Nilss Olekalns, 2006. "Deviations from uncovered interest parity in Malaysia," Applied Financial Economics, Taylor & Francis Journals, vol. 16(10), pages 745-759.
  • Handle: RePEc:taf:apfiec:v:16:y:2006:i:10:p:745-759 DOI: 10.1080/09603100500404231
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    References listed on IDEAS

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    1. Bekaert, Geert & Harvey, Campbell R. & Lumsdaine, Robin L., 2002. "Dating the integration of world equity markets," Journal of Financial Economics, Elsevier, vol. 65(2), pages 203-247, August.
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    4. Goh, S. K. & Alias, M. H. & Olekalns, N., 2003. "New evidence on financial openness in Malaysia," Journal of Asian Economics, Elsevier, vol. 14(2), pages 311-325, April.
    5. Tse Yiu Kuen & Tan Kim Song, 1996. "Interest Parity and Dynamic Capital Mobility: The Experience of Singapore," NBER Chapters,in: Financial Deregulation and Integration in East Asia, NBER-EASE Volume 5, pages 335-357 National Bureau of Economic Research, Inc.
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    Citations

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    Cited by:

    1. Turkhan Ali Abdul Manap & Gairuzazmi M Ghani, 2012. "Malaysia's Time Varying Capital Mobility," Economics Bulletin, AccessEcon, vol. 32(2), pages 1361-1368.
    2. Goh, Soo Khoon & McNown, Robert, 2015. "Examining the exchange rate regime–monetary policy autonomy nexus: Evidence from Malaysia," International Review of Economics & Finance, Elsevier, vol. 35(C), pages 292-303.
    3. Li, Dandan & Ghoshray, Atanu & Morley, Bruce, 2012. "Measuring the risk premium in uncovered interest parity using the component GARCH-M model," International Review of Economics & Finance, Elsevier, vol. 24(C), pages 167-176.
    4. Tang, Kin-Boon, 2011. "The precise form of uncovered interest parity: A heterogeneous panel application in ASEAN-5 countries," Economic Modelling, Elsevier, vol. 28(1-2), pages 568-573, January.
    5. Ai Lian Tan Author_Email: tanal@utar.edu.my & Shiau Mooi Lim & Seow Shin Koong & Ying Yin Koay, 2011. "Exchange Rate And Current Account: Are They Co-Integrated Symmetrically Or Asymmetrically?," Annual Summit on Business and Entrepreneurial Studies (ASBES 2011) Proceeding 2011-019-150, Conference Master Resources.
    6. Maria Grydaki & Stilianos Fountas, 2010. "What Explains Nominal Exchange Rate Volatility? Evidence from the Latin American Countries," Discussion Paper Series 2010_10, Department of Economics, University of Macedonia, revised Jul 2010.
    7. Juan Carlos Cuestas & Fabio Filipozzi & Karsten Staehr, 2015. "Uncovered Interest Parity in Central and Eastern Europe: Sample, Expectations and Structural Breaks," Working Papers 2015014, The University of Sheffield, Department of Economics.
    8. Cavoli, Tony, 2012. "Exploring dimensions of regional economic integration in East Asia: More than the sum of its parts?," Journal of Asian Economics, Elsevier, vol. 23(6), pages 643-653.
    9. Heeho Kim & JooEun Cho, 2011. "A Test of the Revised Interest Parity in China and Asian Emerging Markets," Emerging Markets Finance and Trade, M.E. Sharpe, Inc., vol. 47(0), pages 23-41, September.
    10. Özcan Karahan & Olcay Çolak, 2012. "Does Uncovered Interest Rate Parity Hold in Turkey?," International Journal of Economics and Financial Issues, Econjournals, vol. 2(4), pages 386-394.
    11. repec:bla:reviec:v:25:y:2017:i:4:p:695-710 is not listed on IDEAS
    12. repec:eid:wpaper:02/11 is not listed on IDEAS
    13. Juan Carlos Cuestas & Fabio Filipozzi & Karsten Staehr, 2017. "Uncovered interest parity in Central and Eastern Europe: Expectations and structural breaks," Review of International Economics, Wiley Blackwell, vol. 25(4), pages 695-710, September.
    14. Kim, Heeho, 2011. "The risk adjusted uncovered equity parity," Journal of International Money and Finance, Elsevier, vol. 30(7), pages 1491-1505.
    15. Li, Dandan & Ghoshray, A. & Morley, B., 2011. "Uncovered Interest Parity and the Risk Premium," Department of Economics Working Papers 24072, University of Bath, Department of Economics.
    16. Tang, Kin-Boon, 2011. "The precise form of uncovered interest parity: A heterogeneous panel application in ASEAN-5 countries," Economic Modelling, Elsevier, vol. 28(1), pages 568-573.

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