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Asymmetric pass-through and risk of interest rate: an empirical exploration of Taiwan and Hong Kong

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  • Kuan-Min Wang
  • Thanh-Binh Nguyen Thi

Abstract

This study employs the asymmetric threshold cointegration test suggested by Enders and Siklos (2001) and creates asymmetric EC-EGARCH(1, 1)- M model to investigate the pass-through of money-market rate to banking retail rates in Taiwan and Hong Kong. It further explores the impact of interest volatility on interest rates. Over the period of February 1988 to December 2004, we find that the interest pass-through mechanism of these two markets is noncomplete. In addition, based on the asymmetric threshold cointegration test, we discover the existence of asymmetric cointegration relationship between retail rates and market rate in both markets. In particular, while employing asymmetric EC-EGARCH (1, 1)-M model to test for the influence of money-market rate adjustment and volatility on retail rates in short-run, we find robust evidence that there exist the upward rigidity in deposit rate and the downward rigidity in lending rate in both Taiwan and Hong Kong. This finding supports the hypothesis of the collusive pricing arrangements. Furthermore, interest volatility should cause a smaller margin of variation for Taiwan's deposit/lending rates and wider margin for Hong Kong's lending rate.

Suggested Citation

  • Kuan-Min Wang & Thanh-Binh Nguyen Thi, 2010. "Asymmetric pass-through and risk of interest rate: an empirical exploration of Taiwan and Hong Kong," Applied Economics, Taylor & Francis Journals, vol. 42(5), pages 659-670.
  • Handle: RePEc:taf:applec:v:42:y:2010:i:5:p:659-670
    DOI: 10.1080/00036840701704444
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    References listed on IDEAS

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    1. Don Bredin & Trevor Fitzpatrick & Gerard O Reilly, 2002. "Retail Interest Rate Pass-Through - The Irish Experience," The Economic and Social Review, Economic and Social Studies, vol. 33(2), pages 223-246.
    2. Mojon, Benoît, 2000. "Financial structure and the interest rate channel of ECB monetary policy," Working Paper Series 0040, European Central Bank.
    3. Manna, Michele & Pill, Huw & Quiros, Gabriel, 2001. "The Eurosystem's Operational Framework in the Context of the ECB's Monetary Policy Strategy," International Finance, Wiley Blackwell, vol. 4(1), pages 65-99, Spring.
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    Cited by:

    1. Ming-Hua Liu & Dimitris Margaritis & Zhuo Qiao, 2016. "The Global Financial Crisis and Retail Interest Rate Pass-Through in Australia," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 19(04), pages 1-32, December.
    2. Phiri, Andrew, 2016. "Asymmetric pass-through effects from monetary policy to housing prices in South Africa," MPRA Paper 70258, University Library of Munich, Germany.
    3. Aristei, David & Gallo, Manuela, 2014. "Interest rate pass-through in the Euro area during the financial crisis: A multivariate regime-switching approach," Journal of Policy Modeling, Elsevier, vol. 36(2), pages 273-295.
    4. Holmes, Mark J. & Iregui, Ana María & Otero, Jesús, 2015. "Interest rate pass through and asymmetries in retail deposit and lending rates: An analysis using data from Colombian banks," Economic Modelling, Elsevier, vol. 49(C), pages 270-277.
    5. Fosten, Jack & Morley, Bruce & Taylor, Tim, 2012. "Dynamic misspecification in the environmental Kuznets curve: Evidence from CO2 and SO2 emissions in the United Kingdom," Ecological Economics, Elsevier, vol. 76(C), pages 25-33.

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