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Integration of Financial Markets in SAARC Countries: Evidence Based on Uncovered Interest rate Parity Hypothesis

Listed author(s):
  • Khan, Muhammad Arshad
  • Sajid, Muhammad Zubair

This paper examines interest rate linkages among four SAARC countries vis-a-vis United State using monthly data over the period 1990M1 to 2006M3. The emperical findings suggest the existance of single cointegrating vector between SAARC countries interest rates and US interest rate. The result further suggest that except India, the coefficient restriction for Pakistan, Sri Lanka and Bangladesh are met segnificantly. However, in the case of India, the coefficient associated with foreign interest rate is far from the predicted value of UIP.The adjustment coefficient indicate no two ways causility. We also impemented the cointegration test within the SAARC countries. The test results suggest the existance of the one cointegrating vector.the existance of one cointegrating vector indicates the low degree of money markets integration in the region. Moreover, in the long run except Indian interest rate, other interest rates exerted positive impact on Pak-interest rate. Short Run Error Correction model is also estimated. the results suggest that Pakistani, Indian and Sri Lankan interest rates act as equlibrating factors in the long run, while no dynamic interaction between Pak-interst rate and Bangladesh-interest rate have been seen so far.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 6751.

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Date of creation: 2007
Publication status: Published in Kashmir Economic Review 1.16(2007): pp. 1-16
Handle: RePEc:pra:mprapa:6751
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  1. Ross Levine, 1997. "Financial Development and Economic Growth: Views and Agenda," Journal of Economic Literature, American Economic Association, vol. 35(2), pages 688-726, June.
  2. Townsend, Robert M, 1994. "Risk and Insurance in Village India," Econometrica, Econometric Society, vol. 62(3), pages 539-591, May.
  3. Zoran Hodjera, 1973. "International Short-Term Capital Movements: A Survey of Theory and Empirical Analysis (Les mouvements internationaux de capitaux à court terme: étude de théorie et d'analyse empirique) (Movimientos ," IMF Staff Papers, Palgrave Macmillan, vol. 20(3), pages 683-740, November.
  4. Nieh, Chien-Chung & Yau, Hwey-Yun, 2004. "Time series analysis for the interest rates relationships among China, Hong Kong, and Taiwan money markets," Journal of Asian Economics, Elsevier, vol. 15(1), pages 171-188, February.
  5. McCallum, Bennett T., 1994. "A reconsideration of the uncovered interest parity relationship," Journal of Monetary Economics, Elsevier, vol. 33(1), pages 105-132, February.
  6. Muhammad Arshad Khan & Abdul Qayyum & Saeed Ahmed Sheikh, 2005. "Financial Development and Economic Growth: The Case of Pakistan," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 44(4), pages 819-837.
  7. Imad Moosa & Razzaque Bhatti, 1997. "Are Asian Markets Integrated? Evidence for Six Countries Vis-A-Vis Japan," International Economic Journal, Taylor & Francis Journals, vol. 11(1), pages 51-67.
  8. Surbhi Jain & N.R. Bhanumurthy, 2005. "Financial markets integration in India," Asia-Pacific Development Journal, United Nations Economic and Social Commission for Asia and the Pacific (ESCAP), vol. 12(2), pages 15-32, December.
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