Asymmetric pass-through and risk of interest rate: an empirical exploration of Taiwan and Hong Kong
Abstract:This study employs the asymmetric threshold cointegration test suggested by Enders and Siklos (2001) and creates asymmetric EC-EGARCH(1, 1)- M model to investigate the pass-through of money-market rate to banking retail rates in Taiwan and Hong Kong. It further explores the impact of interest volatility on interest rates. Over the period of February 1988 to December 2004, we find that the interest pass-through mechanism of these two markets is noncomplete. In addition, based on the asymmetric threshold cointegration test, we discover the existence of asymmetric cointegration relationship between retail rates and market rate in both markets. In particular, while employing asymmetric EC-EGARCH (1, 1)-M model to test for the influence of money-market rate adjustment and volatility on retail rates in short-run, we find robust evidence that there exist the upward rigidity in deposit rate and the downward rigidity in lending rate in both Taiwan and Hong Kong. This finding supports the hypothesis of the collusive pricing arrangements. Furthermore, interest volatility should cause a smaller margin of variation for Taiwan's deposit/lending rates and wider margin for Hong Kong's lending rate.
Document Type: Research Article
Publication date: 2010-02-01