Hostname: page-component-586b7cd67f-r5fsc Total loading time: 0 Render date: 2024-11-20T07:29:03.707Z Has data issue: false hasContentIssue false
  • English
  • Français

MODELING NONLINEAR AND HETEROGENEOUS DYNAMIC LINKS IN INTERNATIONAL MONETARY MARKETS

Published online by Cambridge University Press:  01 May 2012

Mohamed El Hedi Arouri ,
Fredj Jawadi  and
Duc Khuong Nguyen
Mohamed El Hedi Arouri
Affiliation:
EDHEC Business School
Fredj Jawadi
Affiliation:
University of Evry Val d'Essonne
Duc Khuong Nguyen*
Affiliation:
ISC Paris School of Management
*
Address correspondence to: Duc Khuong Nguyen, ISC Paris School of Management, 22 boulevard du Fort de Vaux, 75017 Paris cedex, France; e-mail: [email protected].
Get access Rights & Permissions [Opens in a new window]

Abstract

We use daily short-term interbank interest rates of France, the United Kingdom, and the United States to examine the dynamic links of international monetary markets from 2004 to 2009. Results from vector error-correction models and smooth-transition error-correction models show strong evidence of nonlinear and heterogeneous causalities between the three interest rates. We also find that changes in the U.S. interest rate deviations from the long-run equilibrium led those in France and in the United Kingdom by one to two days. Finally, the national interest rate nexus appears to converge in nonlinear fashion toward a steady state because it is subject to structural change beyond a certain rate threshold. Our findings have important implications for the actions of leading central banks (ECB, Bank of England, and U.S. Fed) because the joint behavior of short-term interest rates can be viewed as an indicator of the degree of central banks' policy interdependence.

Keywords

International Monetary Market RelationshipsShort-Term Interest RatesVector Error-Correction ModelsSmooth-Transition Error-Correction Models
Type
Articles
Information
Macroeconomic Dynamics , Volume 16 , Supplement S2: Time-Varying Modeling with Macroeconomic and Financial Data , September 2012 , pp. 232 - 251
Copyright
Copyright © Cambridge University Press 2012

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

REFERENCES

Anderson, H.M. (1997) Transaction costs and nonlinear adjustment towards equilibrium in the US Treasury bill market. Oxford Bulletin of Economics and Statistics 59, 465–484.CrossRefGoogle Scholar
Anoruo, E., Sanjay, R., and Thiewes, H.F. (2002) International linkage of interest rates: Evidence from the emerging economies of Asia. Global Finance Journal 13, 217–235.CrossRefGoogle Scholar
Awad, M.A. and Goodwin, B.K. (1998) Dynamic linkages among real interest rates in international capital markets. Journal of International Money and Finance 17, 881–907.CrossRefGoogle Scholar
Balke, N.S. and Fomby, T. (1997) Threshold cointegration. International Economic Review 38, 627–643.CrossRefGoogle Scholar
Barassi, M.R., Caporale, G.M., and Hall, S.G. (2005) Interest rate linkages: A Kalman filter approach to detecting structural change. Economic Modelling 22, 253–284.CrossRefGoogle Scholar
Baum, C. and Barkoulas, J. (2006) Dynamics of intra-EMS interest rate linkages. Journal of Money, Credit and Banking 38, 469–482.CrossRefGoogle Scholar
Benigno, P. (2002) A simple approach to international monetary policy coordination. Journal of International Economics 57, 177–196.CrossRefGoogle Scholar
Bernanke, B. and Kuttner, K.N. (2005) What explains the stock market's reaction to Federal Reserve policy. Journal of Finance 60, 1221–1257.CrossRefGoogle Scholar
Bremnes, H., Gjerde, O., and Soettem, F. (2001) Linkage among interest rates in the United States, Germany and Norway. Scandinavian Journal of Economics 103, 127–145.CrossRefGoogle Scholar
Chen, S.S. (2007) Does monetary policy have asymmetric effects on stock returns? Journal of Money 39, 667–668.Google Scholar
Cuaresma, J.C. and Wójcik, C. (2006) Measuring monetary independence: Evidence from a group of new EU member countries. Journal of Comparative Economics 34, 24–43.CrossRefGoogle Scholar
Cumby, R.E. and Mishkin, M.S. (1986) The international linkage of real interest rates: The European–US connection. Journal of International Money and Finance 5, 5–23.CrossRefGoogle Scholar
Dickey, D.A. and Fuller, W.A. (1981) Likelihood ratio statistics for autoregressive time series with a unit root. Econometrica 49, 1057–1072.CrossRefGoogle Scholar
Engle, R.F. and Granger, C.W.J. (1987) Cointegration and error correction: Representation, estimation and testing. Econometrica 55, 251–276.CrossRefGoogle Scholar
Escribano, A. (1997) Nonlinear Error-Correction: The Case of Money Demand in the UK (1878–1970). Working paper 96–55, Universidad Carlos III De Madrid.Google Scholar
Franses, P.H. and Van Dijk, D. (2000) Non-linear Time Series Models in Empirical Finance, 1st ed. Cambridge, UK: Cambridge University Press.CrossRefGoogle Scholar
Granger, C.W.J. (1981) Cointegrating Variables and Error Correcting Models. Working paper, University of California, San Diego.Google Scholar
Granger, C.W.J. and Teräsvirta, T. (1993) Modeling Nonlinear Economic Relationships, 1st ed. New York: Oxford University Press.CrossRefGoogle Scholar
Holmes, M.J. and Maghrebi, N. (2004) Asian real interest rates, nonlinear dynamics, and international parity. International Review of Economics and Finance 13, 387–405.CrossRefGoogle Scholar
Ioannidis, C. and Kontonikas, A. (2007) The impact of monetary policy on stock prices. Journal of Policy Modeling 30, 33–53.CrossRefGoogle Scholar
Jawadi, F., Bruneau, C., and Sghaier, N. (2009) Nonlinear cointegration relationships between non-life insurance premium and financial markets. Journal of Risk and Insurance 76, 753–783.CrossRefGoogle Scholar
Jawadi, F. and Prat, G. (2012) Arbitrage costs and nonlinear adjustment in the G7 stock markets. Applied Economics 44, 1561–1582.CrossRefGoogle Scholar
Johansen, S. (1988) Statistical analysis of cointegration vectors. Journal of Economic Dynamics and Control 12, 231–254.CrossRefGoogle Scholar
Kirchgassner, G. and Wolters, J. (1993) Does the DM dominate the Euro market? An empirical investigation. Review of Economics and Statistics 75, 773–778.CrossRefGoogle Scholar
Liu, Y. (2001) Modelling Mortgage Rate Changes with a Smooth Transition Error Correction Model. Working paper 23, Bank of Canada.Google Scholar
Lumsdaine, R.L. and Papell, D.H. (1997) Multiple trend breaks and the unit-root hypothesis. Review of Economics and Statistics 79, 212–218.CrossRefGoogle Scholar
Mancuso, A.J., Goodwin, B.K., and Grennes, T.J. (2003) Nonlinear aspects of capital market integration and real interest rate equalization. International Review of Economics and Finance 12, 283–303.CrossRefGoogle Scholar
Mark, N.C. (1985) Some evidence on the international inequality of real interest rates. Journal of International Money and Finance 4, 189–208.CrossRefGoogle Scholar
Michael, P., Nobay, A.R., and Peel, D.A. (1997) Transactions costs and nonlinear adjustment in the real exchange rates: An empirical investigation. Journal of Political Economy 105, 862–879.CrossRefGoogle Scholar
Mishkin, F.S. (1984) Are real interest rates equal across countries? An empirical investigation of international parity conditions. Journal of Finance 39, 1345–1357.CrossRefGoogle Scholar
Peel, D.A. and Taylor, M.P. (2000) Nonlinear adjustment, long-run equilibrium and exchange rates fundamentals. Journal of International Money and Finance 19, 33–53.Google Scholar
Phillips, P.C.B. and Perron, P. (1988) Testing for unit root in a time series regression. Biometrika 75, 335–346.CrossRefGoogle Scholar
Poghosyan, T. and de Haan, J. (2007) Interest Rate Linkages in EMU Countries: A Rolling Threshold Vector Error-Correction Approach. CESifo working paper series.CrossRefGoogle Scholar
Rigobon, R. and Sack, B. (2003) Measuring the reaction of monetary policy to the stock market. Quarterly Journal of Economics 118, 639–669.CrossRefGoogle Scholar
Rogoff, K. (1996) The purchasing power parity puzzle. Journal of Economic Literature 34, 647–668.Google Scholar
Rothman, P., Van Dijk, D., and Franses, P.H. (2001) A multivariate STAR analysis of the relationships between money and output. Macroeconomic Dynamics 5, 506–532.CrossRefGoogle Scholar
Scotti, C. (2006) A Bivariate Model of Fed and ECB Main Policy Rates. International finance discussions paper, Board of Governors of the Federal Reserve System.CrossRefGoogle Scholar
Teräsvirta, T. (1994) Specification, estimation and evaluation of smooth transition autoregressive models. Journal of the American Statistical Association 89, 208–218.Google Scholar
Teräsvirta, T. and Anderson, H.M. (1992) Characterizing nonlinearities in business cycles using smooth transition autoregressive models. Journal of Applied Econometrics 7, 119–136.CrossRefGoogle Scholar
Uctum, M. (1999) European integration and asymmetry in the EMS. Journal of International Money and Finance 18, 769–798.CrossRefGoogle Scholar
Van Dijk, D., Teräsvirta, T., and Franses, P.H. (2002) Smooth transition autoregressive models—A survey of recent developments. Econometric Reviews 21, 1–47.CrossRefGoogle Scholar
Wang, Z., Yang, J., and Li, Q. (2007) Interest rate linkages in the Eurocurrency market: Contemporaneous and out-of-sample Granger causality tests. Journal of International Money and Finance 26, 86–103.CrossRefGoogle Scholar
Yamada, H. (2002) On the linkage of real interest rates between the US and Canada: Some additional empirical evidence. Journal of International Financial Markets, Institutions and Money 12, 279–289.CrossRefGoogle Scholar
Zhou, S. (2003) Interest rate linkages within the European monetary system: New evidence incorporating long-run trends. Journal of International Money and Finance 22, 571–590.CrossRefGoogle Scholar
Zivot, E. and Andrews, D.W.K. (1992) Further evidence on the great crash, the oil price shock and the unit root hypothesis. Journal of Business and Economic Statistics 10, 251–270.Google Scholar