Financial Integration from a Time-Varying Cointegration Perspective
This paper applies a time-varying cointegration (TVC) model to study regional financial integration, measured by the drifting cointegration coefficient of the long-term interest rates between Singapore and Malaysia. Conditioned on long-run exchange rate equilibrium, the evolving relation can be used to test the hypothesis of uncovered interest parity (UIP) in the strong and weak forms, and examine how the integration changes over time on the basis of the long-term interest rates measure. In the case of Singapore and Malaysia, the findings show that financial integration first decreased after the 1997 Asian Financial Crisis and then enhanced gradually from late 2001 onward. The shocks to Singapore, characterized by a higher level and a leading effect, are positively correlated with the ones to Malaysia.
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