Mean Reversion of Short-Run Interest Rates in Emerging Countries

17 Pages Posted: 8 May 2006

See all articles by Bertrand Candelon

Bertrand Candelon

University of Maastricht - Department of Economics

Luis A. Gil-Alana

University of Navarra - Department of Economics

Abstract

In this paper we examine the stochastic behavior of short-run interest rates in several emerging countries using fractional integration techniques. We allow for a much richer flexibility in the dynamic behavior of the series than the classical representations based on I(0) or I(1) processes. It appears that for Singapore and Thailand nominal interest rates are mean-reverting, whereas for Mexico, Malaysia, the Philippines, and Korea, the presence of a unit-root test depends on the assumptions regarding the residuals' autocorrelation. The results also suggest that uncovered interest parity (UIP) can only hold for two emerging countries. For the other countries, the stabilization policies in the aftermath of the currency crises have led to the rejection of the UIP hypothesis.

Suggested Citation

Candelon, Bertrand and Gil-Alana, Luis A., Mean Reversion of Short-Run Interest Rates in Emerging Countries. Review of International Economics, Vol. 14, No. 1, pp. 119-135, February 2006, Available at SSRN: https://ssrn.com/abstract=875934 or http://dx.doi.org/10.1111/j.1467-9396.2006.00565.x

Bertrand Candelon (Contact Author)

University of Maastricht - Department of Economics ( email )

P.O. Box 616
Maastricht, 6200 MD
Netherlands

Luis A. Gil-Alana

University of Navarra - Department of Economics ( email )

Campus de Arrosadia
Pamplona, 31006
Spain

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