Convergence of Income in Asian Countries

This study examines convergence of per capita real income for seven Asian countries namely Indonesia, Japan, Korea, Malaysia, the Philippines, Singapore and Thailand during the period 1970-1999. It has been argued that income convergence could be used as one of the criteria to form a single currency area. Utilizing the concepts of deterministic and stochastic convergence, this study uses 3 types of time series techniques, namely the standard ADF test, the Zivot- Andrews endogenously determined break points and the Johansen-Juselius cointegration analysis to test the convergence hypotheses. These time series procedures are able to show whether the convergence hypotheses are supportive of the Slow growth model (deterministic convergence or long run convergence) or augmented So low model (stochastic convergence) or endogenous growth model (divergence). In particular, the empirical findings are presented in two ways. First, convergence between individual country' s log per capita real income and aggregate log per capita real income of the group (relative log per capita real income). Second, convergence between two country's log per capita real income (bivariate differences log per capita real income). The results show that per capita income of Indonesia, Japan, Korea and Malaysia is converging to the aggregate per capita income of the group. However, the findings in bivariate differences log per capita real income show that per capita income of Indonesia, Korea, Malaysia and Singapore are converging toward per capita income of Japan. In addition, the results of Zivot-Andrews endogenously determined break points revealed that the year 1978 which was between the first oil shock (1973-1975) and the second oil shock (1979-1980) was not the cause for concerned. This indicates that supply shock or external shock has minimal impact on Asian's countries growth processes. Overall, this study has shown some initial insights on the possible single currency area among Asian countries based on income convergence hypothesis. This can be explained by the fact that Asian countries is undergoing a relatively high growth potential to converge toward a similar per capita income level either with leading country (Japan) or a group of Asian's countries per capita income. However, it should be noted that income convergence is a necessary condition but not a sufficient determinant to form a single currency area. Thus, a meaningful line of further study could be focused on the achievement of Asian regions against the five keys Maastricht Convergence Criteria namely inflation rate, long term interest rate, exchange rate, debt to GDP ratio and budget deficit to GDP ratio

Income Disparity between Japan and ASEAN-5 Economies: Converge, Catching Up or Diverge?

The objective of this study is to empirically examine the income disparity between Japan and each of the five major economies of South East Asia (ASEAN-5) during the period of 1960 to 1997, utilizing the popular augmented Dickey-Fuller (ADF) unit root test. The results provide evidence of income divergence between Japan and each of the ASEAN-5 economies. To avoid the problem associated with structural break, this study proceeds with the jointly crash and changes in trend model proposed by Zivot and Andrews (1992), and is able to obtain evidence of long run income convergence between the Japanese and Singaporean economies. As for the rest of the four ASEAN countries- Indonesia, Malaysia, the Philippines and Thailand, the earlier results of income divergence remain valid and hence suggest that it would be a more realistic and urgent goal to narrow the income gap among these five core economies of ASEAN.

Is There Any International Diversification Benefits in ASEAN Stock Markets?

This study finds that there is a common force which brings all the five ASEAN stock markets together in the long run by the nonparametric tests. This suggests that shocks from any of these five markets may spillover to the other markets in the same region. The recent Asian financial crisis bears a good testimony to this ‘contagion effect'. Subsequently, there would be no long run gain from international portfolio diversification. Specifically, investors with long run horizons may not benefit from an investment made across the countries in this ASEAN region. One possible explanation for this intra-ASEAN stock markets integration is their strong economic ties, especially intra-ASEAN trade and investment that has indirectly linked their stock indices.

Is MYR/USD a random walk? New evidence from the BDS test

This study empirically investigates the daily MYR/USD exchange rate return series in the light of the random walk hypothesis. Recent breakthroughs pertaining to non-linear dynamics and chaos, coupled with the rapid acceleration in computer power, have made it possible to more robustly test for the random walk in financial and economic data. This study uses a new non-linear statistical test, namely the Brock-Dechert-Scheinkman (BDS) test to examine whether the MYR/USD exchange rate return series are random walk with the property of being independent and identically distributed. The results overwhelmingly reject the hypothesis that the MYR/USD data examined in this study are random, independent and identically distributed since some cycles or patterns show up more frequently than would be expected in a true random series. These results may have implications for the weak form market efficiency, if the underlying structure can be profitably exploitable, which remains an avenue for further research

Non-linear dependence in the Malaysian stock market

This study empirically investigates the presence of non-linearity in the Malaysian stock market, employing the Brock-Dechert-Scheinkman (BDS) and Hinich bispectrum tests. The BDS results reveal that the characteristics of the returns series in the Malaysian stock market are driven by non-linear mechanisms. Subsequent application of the Hinich bispectrum test confirms the results of the BDS test. The result of the present study has strong implications on the empirical work involving the Malaysian stock market as the existence of non-linearity suggests the inappropriateness of using linear methods for drawing inferences

US balance sheet policy and international capital flows empirical evidence from emerging markets

This paper examines the effect of United States balance sheet policy on different type of capital flows- that is, bond vs equity flows. Panel data approaches were employed to study the determinants of bond and equity flows in emerging market economies (EMEs) namely, Argentina, Brazil, Chile, Mexico, China, India, Indonesia, Malaysia, Philippines, South Korea, and Thailand, over the January 2008 – April 2019 period. This research found that the US unconventional monetary policy has a significant impact on the types of capital flows in emerging markets that are most vulnerable to the changes in the Fed’s balance sheet. However, the determinants of flows can significantly be different across types of flows measured, bond or equity. For the bond flows, the 10-year government bond yield, US balance sheet policy and global risks have a statistically significant impact on capital flows to EMEs. Whereas, for the equity flows, the global risks and federal fund rate have a statistically significant impact on capital flows to EMEs. We found that the bond and equity flows are attributed by different factors. The empirical results from this research could assist the policymakers in crafting relevant policies associated with capital inflows in their respective countries

Linearity and stationarity of South Asian real exchange rates

The linearity and stationarity of the real exchange rates of India, Nepal, Pakistan and Sri Lanka are investigated using formal linearity and the recently developed nonlinear stationary test procedures. Results obtained show that these real exchange rates are stationary albeit the presence of nonlinearity

Non-parametric cointegration analysis of ASEAN-5 real exchange rates

This study employs the Bierens's (1997) non-parametric cointegration methodology to test the Purchasing Power Parity (PPP) hypothesis forfiz~e major ASEAN economies - Indonesia, Malaysia, the Philippines, Singapore and Thailand, with the U.S. and Japan data as base countries. The results provide evidence of mean reversion in dollar denominated real exchange rate for three ASEAN countries - Malaysia, Singapore and Thailand. These findings are in sharp contrast with those earlier studies using Johansen cointegration technique. Consistent with the interpretation of Coakley and Fuertes (2001), the discrepancy between the findings from both approaches is interpreted as a consequence of significant non-linearity in the real exchange rate adjustment to PPP. Further analysis reveals that the evidence of PPP is much stronger with the Japanese yen as the numeraire currency, thus supporting the notion that the choice of numeraire currency can and does matter for testing PPP hypothesis. These results provide strong evidence of the integration between the Japanese economy and those of ASEAN countries, which are closely linked in geographical, economic and trade terms. The increasing role of Japanese yen in the ASEAN region can be taken as providing empirical support for the formation of a yen dominated ASEAN exchange rate system, or a 'yen bloc'

Determinants of financial condition in Malaysia

This research studies the determinants of financial condition in Malaysia. It employs the external financial variables from the United States (U.S.) and domestic financial variables from Malaysia. The research assesses the long-run association among the domestic and external indicators via the ARDL bounds test approach and monthly time series data starting from January 2008 to May 2018. This research also investigates the level of the effect caused by the U.S. financial variables on the financial condition in Malaysia. The empirical findings have proven the validity of the long-run association between the majority of domestic financial indicators with the asset side of the U.S. balance sheet (lnUSTA) and the Fed funds rate (USFUND). Particularly, lnUSTA has appeared as a key determinant to the financial condition in Malaysia, specifically the Kuala Lumpur Composite Index, Malaysian credit spread, Malaysian overnight policy rate, and Malaysian term spread which has the highest level of negative effect at 1.412%. In contrast, USFUND does not show significant long-run influence with the involved domestic financial indicators except with the Malaysian credit spread