Predicting Output and Inflation in Less Developed Financial Markets Using the Yield Curve: Evidence from Malaysia

This paper investigates the role of the term spread to predict domestic output and inflation in less developed financial market with the focus on Malaysia bond market. By controlling for past values of the dependent variable, this paper finds that the term spread of various bond maturities contain relevant information about future output and inflation at short horizons. Besides that, we employ a probit model to assess the ability for the yield curve to predict future economic slowdown. The results suggest that the term spread has contributed significantly in the probability of predicting future economic slowdown. Despite the under-developed bond market, the findings point to the potential for bond yields to play a greater role in monetary analysis beyond conventional indicators. From the policy point of views, the results from our analysis suggest that there is a significant potential for incorporating more technical and model based approaches using the yield curve beyond the usual indicator analysis.Term spread, Forecasting, Monetary Policy, Malaysia

Measuring Monetary Conditions in A Small Open Economy: The Case of Malaysia

The paper explores the measurement of monetary condition in Malaysia to augment the existing monetary policy framework. As an open economy, Monetary Condition Index (MCI) and Financial Condition Index (FCI) are applicable to understand the monetary condition especially in the era of financial deregulation and liberalisation. The results obtained suggest that the index is most useful when the exchange market exhibits stable conditions, and would be a constructive tool in the simultaneous management of the foreign currency and domestic money markets. However, the frequent experience of instability caused by supply and demand shocks with persistent and large inertia in the economy complicates the practical use of MCI and FCI in Malaysia. While this approach obviously does not provide answers to every question and as a leading indicator for inflation, it nonetheless makes it possible to measure the monetary condition in the Malaysian economy.Monetary condition index, Monetary Policy, Malaysia

Measuring Monetary Conditions in A Small Open Economy: The Case of Malaysia

The paper explores the measurement of monetary condition in Malaysia to augment the existing monetary policy framework. As an open economy, Monetary Condition Index (MCI) and Financial Condition Index (FCI) are applicable to understand the monetary condition especially in the era of financial deregulation and liberalisation. The results obtained suggest that the index is most useful when the exchange market exhibits stable conditions, and would be a constructive tool in the simultaneous management of the foreign currency and domestic money markets. However, the frequent experience of instability caused by supply and demand shocks with persistent and large inertia in the economy complicates the practical use of MCI and FCI in Malaysia. While this approach obviously does not provide answers to every question and as a leading indicator for inflation, it nonetheless makes it possible to measure the monetary condition in the Malaysian economy

Market Structure and Competition in Emerging Market: Evidence from Malaysian Islamic Banking Industry

This paper investigates the market structure of Islamic banking industry in Malaysia during 2001-2005 and evaluates the degree of competition using the H-statistic by Panzar and Rosse (1987). The estimated H-statistics for the whole sample periods are positive ranging from 0.38 to 0.62 and the Wald test for the market structure of monopoly or perfect competition is rejected implying that the Islamic banks in Malaysia earned their revenue in the condition of monopolistic competition.Competition; Panzar-Rosse model; Islamic Bank; Malaysia; Market structure

Consolidation and efficiency: Evidence from non-bank financial institutions in Malaysia

This paper investigates the efficiency changes of finance and merchant banking institutions in Malaysia, during and post-consolidation periods by applying the non-parametric Data Envelopment Analysis (DEA). The evidence suggests that pure technical efficiency is more related to overall efficiency than scale efficiency. On average, 28.7% of finance and merchant banking institutions are operating at CRS, while the majority are scale inefficient. Our results from the Tobit regression analysis further confirmed that the level of equity capital is positively related with the level of efficiency gain. Financial institutions with higher ratio of loans to assets are related to higher level of efficiency. This might reflect the degree of market power exists in the loan markets compared to the other product markets with institutions developed their strategic niche within the market.Non-Bank Financial Institutions, Data Envelopment Analysis (DEA), Malaysia, Tobit

Bank Efficiency and Share Prices in China: Empirical Evidence from a Three-Stage Banking Model

This paper examines for the first time the relationship between China banks’ efficiency and its share price performance. Our analysis consists of three parts. First, we calculate the annual share price returns of the banks for each year between 1997 and 2006. Then we employ Data Envelopment Analysis (DEA) Window Analysis method, first proposed by Charnes et al. (1985) to estimate the efficiency of the banks. Finally, we estimate the annual share price returns over the change in efficiency, while controlling for other bank specific traits. The empirical findings suggest that large China banks have exhibited higher technical and pure technical efficiency levels compared to their small and medium sized bank counterparts, while the medium sized banks have exhibited higher scale efficiency. The relationship between China banks’ efficiency and share price performance suggest that bank efficiency estimates derived from the DEA Window Analysis method contributes significant information towards share price returns beyond that provided by financial information.Bank Efficiency, Share Prices, DEA Window Analysis, China

Bank-characteristics, lending channel and monetary policy in Malaysia: evidence from bank-level data

Based on a bank-level panel dataset for Malaysian banks from 1997 to 2005, this paper analyzes the effects of bank-specific characteristics, bank specialization and portfolio concentrations on the transmission of monetary policy via bank lending channel in a fairly well-developed financial system. The dynamic panel regression results provide evidence in favour of the bank lending channel theory and consistent with other empirical evidences that the bank lending channel operating via small and low liquidity banks. Furthermore, the evidence suggests that the dividing lines between different categories of financial institutions distinguished by differences in both market structure and regulatory, influence the way financial institutions react to monetary policy shock with finance companies react stronger than commercial banks to monetary shock. The results also suggest that banks with higher concentration of corporate loans seem to face greater financial constraint and limited access to other sources finance.Banking Lending; Credit Channels; Monetary Policy; Malaysia

Bank Ownership, Characteristics and Performance: A Comparative Analysis of Domestic and Foreign Islamic Banks in Malaysia

The paper investigates the performance of Malaysian Islamic banking sector during the period of 2001-2005. Several efficiency estimates of individual banks are evaluated using non-parametric Data Envelopment Analysis (DEA). Two different approaches have been employed to differentiate how efficiency scores vary with changes in inputs and outputs. The analysis links the variation in calculated efficiencies to a set of variables, i.e. bank size, ownership, capital, non-performing loans and management quality. The findings suggest that during the period of study, scale inefficiency dominates pure technical inefficiency in the Malaysian Islamic banking sector. We found that foreign banks have exhibited higher technical efficiency compared to its domestic peers. The second stage empirical results based on multivariate Tobit model also suggest that technically more efficient banks are larger, have greater loans intensity, and on average have less non-performing loans.Islamic Banks, Data Envelopment Analysis (DEA), Tobit Regression Analysis

Predicting Output and Inflation in Less Developed Financial Markets Using the Yield Curve: Evidence from Malaysia

This paper investigates the role of the term spread to predict domestic output and inflation in less developed financial market with the focus on Malaysia bond market. By controlling for past values of the dependent variable, this paper finds that the term spread of various bond maturities contain relevant information about future output and inflation at short horizons. Besides that, we employ a probit model to assess the ability for the yield curve to predict future economic slowdown. The results suggest that the term spread has contributed significantly in the probability of predicting future economic slowdown. Despite the under-developed bond market, the findings point to the potential for bond yields to play a greater role in monetary analysis beyond conventional indicators. From the policy point of views, the results from our analysis suggest that there is a significant potential for incorporating more technical and model based approaches using the yield curve beyond the usual indicator analysis

Bank-characteristics, lending channel and monetary policy in Malaysia: evidence from bank-level data

Based on a bank-level panel dataset for Malaysian banks from 1997 to 2005, this paper analyzes the effects of bank-specific characteristics, bank specialization and portfolio concentrations on the transmission of monetary policy via bank lending channel in a fairly well-developed financial system. The dynamic panel regression results provide evidence in favour of the bank lending channel theory and consistent with other empirical evidences that the bank lending channel operating via small and low liquidity banks. Furthermore, the evidence suggests that the dividing lines between different categories of financial institutions distinguished by differences in both market structure and regulatory, influence the way financial institutions react to monetary policy shock with finance companies react stronger than commercial banks to monetary shock. The results also suggest that banks with higher concentration of corporate loans seem to face greater financial constraint and limited access to other sources finance