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Financial integration: some evidence from AustraliaArusha Cooray aa School of Economics, University of Tasmania, Private Bag 85, Hobart 7001, Australia E-mail: arusha.cooray@utas.edu.auPublished online: 04 Jun 2010.

To cite this article: Arusha Cooray (2003) Financial integration: some evidence from Australia, Applied Economics Letters,10:15, 959-966, DOI: 10.1080/1350485032000164396

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Financial integration: some evidence

from Australia

ARUSHA COORAY

School of Economics, University of Tasmania, Private Bag 85, Hobart 7001, AustraliaE-mail: arusha.cooray@utas.edu.au

This paper seeks to examine the efficiency of the Australian foreign exchange marketby using the methods of seemingly unrelated regressions (SUR) and spectral analysis.Uncovered interest rate differentials for five countries, namely the U.S., U.K., Japan,Malaysia and Singapore, are examined with Australia as the ‘home’ country. Thedata covers the post-float period, 1984.1–2000.12. The empirical results indicatethat the restrictions of the hypothesis of uncovered interest parity are rejected. Thespectral densities for the interest rate differentials suggest the absence of systematiccyclical fluctuations.

I . INTRODUCTION

This paper seeks to examine the implications of interest rate

convergence for the Australian economy by testing the

empirical validity of the theory of uncovered interest parity.

The theory of uncovered interest parity asserts that nominal

interest rate differentials of financial assets denominated in

different currencies are exactly equal to the expected change

in exchange rate. Direct tests of uncovered interest parity

involve testing the interest differential as an unbiased

predictor of the expected change in exchange rate given the

assumptions of rational expectations and risk-neutrality—

Cumby and Obstfeld (1981, 1984), MacDonald and Taylor

(1989), Flood and Rose (1996, 2002).

Studies for Australia have been undertaken by Tease

(1988)—the speculative efficiency condition, Turnovsky

and Ball (1983)—covered interest parity and speculative

efficiency, Blundell-Wignall et al. (1993)—uncovered

interest parity. While Turnovsky and Ball find some sup-

port for both conditions for the 1974.9–1981 period, Tease

finds that the speculative hypothesis is rejected for the

30-day market but not the 15-day or 90-day market for

the post-1983 period. Blundell-Wignall et al. fail to find

any support for uncovered interest parity for Australia

over the 1984.1–1992.12 period.

The present paper contributes to this literature by

applying spectral analysis to investigate the properties of

interest rate differentials. The advantage of this method

is that it permits the examination of interest rates in the

frequency domain. If the interest rate differentials exhibit

any periodicities or cyclical variations, it can be concluded

that the Australian financial markets are not efficient. In

addition, the study uses the seemingly unrelated regres-

sion technique (SUR). Monthly data for the period

1984.1–2000.12 is employed. With the adoption of a float-

ing exchange rate system in December 1983 and the chang-

ing pattern of capital inflows experienced by Australia

in the recent past, it would appear reasonable to expect

greater interest rate convergence between Australia and

its trading partners depending of course on the rate of

inflation in each country. The results suggest that the

restrictions of the hypothesis of uncovered interest parity

are rejected. The spectral densities for the interest rate

differentials suggest the absence of any systematic

fluctuations.

The paper is structured as follows. Section II presents the

model being tested. Section III presents the data. Section IV

describes the methodology used to test the hypothesis and

presents the empirical results and Section V summarizes the

main conclusions.

Applied Economics Letters ISSN 1350–4851 print/ISSN 1466–4291 online # 2003 Taylor & Francis Ltdhttp://www.tandf.co.uk/journals

DOI: 10.1080/1350485032000164396

Applied Economics Letters, 2003, 10, 959–966

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II . THE MODEL

UIP is the proposition that nominal interest rate differen-tials of assets denominated in different currencies is exactlyequal to the expected rate of change in the exchangerate. Under the assumption of perfect capital mobility andrisk neutrality, domestic and foreign rates of return areequalized so that

Etstþ1 � st ¼ it � i�t ð1Þ

where Etstþ1¼ nominal exchange rate expectations formedat time t for the period tþ 1; st¼ nominal exchange rate;it¼ the domestic interest rate; and i�t ¼ the foreign interestrate.

Rational expectations imply that the nominal rate re-alized at time tþ 1 will differ from the expected nominalrate by a random error term with zero mean,

stþ1 ¼ Etstþ1 þ vtþ1 ð2Þ

The expectational error vtþ 1¼ stþ1�Etstþ1 is uncorrelatedwith information known in period t at the time of expec-tation formation. Replacing Etstþ1 in Equation 1 withstþ1� vtþ1 and shifting vtþ1 to the right-hand side yields:

stþ1 � st ¼ Dstþ1 ¼ �þ �ði � i�Þt þ vtþ1 ð3Þ

Direct tests of UIP involve testing for �¼ 0 and �¼ 1.1 IfDstþ1 is stationary, then it and i�t must be cointegrated.Perfect financial integration in this case would imply thatit¼ i�t .

III . DATA

The hypothesis presented in Section II is tested by usingmonthly data spanning the 1984.1–2000.12 period.Uncovered interest differentials are examined for fivecountries, namely the U.S., U.K., Japan, Malaysia andSingapore, with Australia as the ‘home’ country. Thesefive countries account for approximately 40% ofAustralia’s total exports and imports. All exchange ratesare expressed in terms of Australian dollars per unit offoreign currency.

The three-month treasury bill rate is used for all theforeign countries except Japan. For Japan, the two-month private bond yield is used, as it is assumed to betterreflect market conditions than the government bond yieldfor the period under study. The three-month treasury billrates are preferred to overnight rates due to greater vola-

tility exhibited by the latter. Short-term rates are alsoassumed to reflect more closely the stance of monetarypolicy. The 13-week treasury note rate is used forAustralia given the absence of a three-month treasury billrate. Due to limitations in data availability, the assetsemployed are not strictly comparable.2 They vary interms of risk and maturity. All data are obtained fromthe Reserve Bank of Australia database and the IMF’sInternational Financial Statistics CD-ROM.

Unit root tests

The data are first tested for non-stationarity using both theAugmented Dickey Fuller (ADF, Dickey and Fuller, 1979)and Phillips (1987) tests for unit roots.The ADF test results reported in Table 1 suggest that

the Japanese exchange rate is stationary at the 5% level of

1 Equation 3 has been tested extensively using different econometric techniques. Cumby and Obstfeld (1981), Loopesko (1984)—error orthogonality tests;Taylor (1987)—vector autoregression analysis; Karfakis and Parikh (1994), Bhatti and Moosa (1995)—cointegration analysis. The majority of findings,however, point to the rejection of UIP. Suggestions as to why it might fail have been put forward by: Frenkel and Levich (1975, 1977)—transactions costs;Fama (1984), Mark (1985), Cumby (1988)—risk premia; Aliber (1973), Dooley and Isard (1980)—exchange risk ad political risk.2 See Chinn and Frankel (1994), Glick and Hutchison (1990) for use of similar data series.3 The AIC is computed as: AIC(k)¼ ln|�k|þ (2p2k)/n, where � is the residual covariance matrix; p, the number of variables in the system; n, the number ofobservations and k the order of lag in the VAR.

Table 1. ADF and Phillips tests for the levels of the series

VariableNo trendADF Z(t)

TrendADF Z(t)

Exchange rates:U.S. �2.57 �2.08 �2.80 �3.10U.K. �2.71* �1.64 �2.80 �1.97Japan �3.18** �2.36 �2.88 �2.19Malaysia �2.57 �2.91 �2.93 �3.26*Singapore �2.34 �2.53 �3.46* �3.86**

Interest rates:Australia �1.20 �0.71 �2.48 �1.91U.S. �1.89 �1.25 �1.10 �0.90U.K. �1.88 �1.27 �2.94 �1.40Japan �0.53 �0.35 �1.30 �0.75Malaysia �2.86* �2.85* �2.96 �2.83Singapore �2.27 �3.22** �3.09* �3.72**

Interest rate differential:Australia–U.S. �2.01 �2.60** �3.46* �3.13Australia–U.K. �3.04** �2.63** �3.85** �4.10***Australia–Japan �1.67 �2.51 �2.01 �3.85**Australia–Malaysia �2.75* �2.86* �3.24* �3.53**Australia–Singapore �2.45 �2.76* �3.20* �3.25*

Note: The lag length for the ADF and Phillip (1987) regressionshas been selected to ensure white noise residuals. A fourth-orderautoregressive model is used for the ADF test on the basis of theAIC3 and ten lags on the Bartlett window are used for the Philliptest.Significance levels with trend: 1%, �4.07; 5%, �3.46; 10% �3.16;without trend: 1%, �3.51; 5%, �2.90; 10% �2.58 (Davidson andMacKinnon, 1993).*, **, *** Significant at the 10%, 5% and 1% levels, respectively.

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significance, while the Phillips test suggests that theSingaporean exchange rate and interest rate are stationaryat the 5% level. The data for the interest rate differentialssuggest that all series are I(0) at the 10% level except theJapan–Australia interest rate differential for the no-trendequation. The null hypothesis of non-stationarity cannotbe rejected for the data series in the first differences(see Table 2). In the light of these results, the analysis iscarried out under the assumption that Dstþ1 and (i – i�)t arestationary.

Given that Dstþ1 and (i� i�)t are stationary, the papergoes on to test for uncovered interest parity using SUR. Ifa data series is non-stationary, then its spectral densitybecomes dominated by the value of the spectrum at thezero frequency hiding possible peaks at higher frequencies.In order to avoid this problem a Hodrick–Prescott filter isused to detrend the data for the spectral analysis.

IV. METHODOLOGY AND EMPIRICALRESULTS

Given that all exchange rates are measured relative tothe Australian dollar, the exchange rates are likely tobe contemporaneously correlated across currencies. Suchcontemporaneous correlation across regressions impliesthat the OLS coefficients might not be efficient.

Therefore, following the work of Flood and Rose (1996)

and Fama (1984), Zellner’s (1962) seemingly unrelatedregression (SUR) procedure is employed to improve the

precision of the coefficient estimates. The SUR technique

involves the application of generalized least-squares esti-mation to a system of seemingly unrelated equations. The

equations are related via the non-zero covariances asso-

ciated with error terms across different equations at a givenpoint in time (contemporaneous correlation).

A problem that arises when testing for UIP is that

exchange rate expectations are unobservable. This problemhas been circumvented by assuming rational expectations.

Table 2. ADF and Phillips tests for first differences of the series

No trend Trend

Variable ADF Z(t) ADF Z(t)

Exchange rates:U.S. �13.67*** �13.63*** �13.63*** �13.67***U.K. �12.35*** �6.28*** �12.34*** �6.42***Japan �13.23*** �9.61*** �8.35*** �11.29***Malaysia �14.11*** �12.07*** �14.08*** �12.13***Singapore �9.55*** �9.39*** �9.63*** �9.49***

Interest rates:Australia �9.79*** �8.57*** �10.67*** �8.46***U.S. �10.61*** �6.16*** �10.09*** �6.40***U.K. �17.65*** �6.17*** �17.62*** �6.17***Japan �10.53*** �9.39*** �10.50*** �9.28***Malaysia �18.66*** �8.34*** �18.62*** �8.30***Singapore �14.49*** �13.12*** �14.46*** �13.08***

Interest rate differential:Australia–U.S. �10.08*** �8.78*** �10.09*** �9.17***Australia–U.K. �11.88*** �5.76*** �16.16*** �15.57***Australia–Japan �8.05*** �9.80*** �8.53*** �9.69***Australia–Malaysia �15.01*** �7.51*** �14.97*** �7.48***Australia–Singapore �12.06*** �9.68*** �12.04*** �9.62***

Note: The lag length for the ADF and Phillips (1987) regressions has been selected to ensure white noiseresiduals. A fourth-order autoregressive model is used for the ADF test and ten lags on the Bartlettwindow are used for the Phillips test. Significance levels with trend: 1%, �4.07; 5%, �3.46; 10% �3.16;without trend: 1%, �3.51; 5%, �2.90; 10% �2.58 (Davidson and MacKinnon 1993).*, **, *** Significant at the 10%, 5% and 1% levels, respectively.

Table 3. SUR estimates, (stþ1 – st)¼�þ� (i� i�)tþ v

� � R2 DW

Australia–U.S. �0.002 0.002 0.03 1.8(0.002) (0.001)

Australia–U.K. �0.0007 0.0005 0.004 1.8(0.002) (0.0007)

Australia–Japan �1.73 0.344 0.02 2.0(1.27) (0.25)

Australia–Malaysia 0.010 �0.002 0.00 2.1(0.01) (0.003)

Australia–Singapore 0.002 �0.0003 0.00 1.8(0.005) (0.001)

Wald tests: all �¼ 0 �2(1)¼ 1.81 (0.178)all �¼ 1 �2(1)¼ 6.88 (0.009)

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The estimated � coefficients are significantly below theirhypothesized value of unity. For Malaysia and Singapore,the coefficients are also incorrectly signed, suggesting,perhaps, the omission of time-varying risk premia fromthe regression equations. A Wald test of the hypothesisthat all �¼ 0 cannot be rejected at the 1% level of signifi-cance. This is not surprising, in view of the fact that thecoefficients on the intercept terms are not significantlydifferent from zero. Surprisingly, a Wald test of thehypothesis that all �¼ 1 cannot be rejected. The R2 forthe regression equations are in the range of 0.0 and0.004, suggesting no explanatory power in the regressionequations, while the DW statistics indicate the absenceof serial correlation in the disturbance terms.

Spectral analysis

Spectral analysis is the study of time series in the frequencydomain. The purpose of this analysis is to determine ifthe interest rate differentials exhibit any systematic cyclicalvariation. The sample spectrum is the Fourier Cosine trans-formation of the estimate of the autocovarience function.The Fourier series is a representation of a function as a sumof harmonic terms such that:

f ðxÞ ¼X1�¼1

a� sin �xþ 1=2 a0 þX1�¼1

b� cos �x

or a0=2þX1�¼1

c� sinð�xþ �Þ,

where �¼ time lag and �¼ amplitude of interest ratechanges.

If � is measured in radians per unit of time, sin �x repeatsitself with period 2�/� and therefore the number of cyclesper unit or frequency is �/2�. The period 2�/� is a dimen-sion of t. Spectral analysis permits the identification of anycyclical components in a data series. The angular frequencymeasured in radians per unit is represented by 2�/�. If thefiltered (i� i*)t contains a periodic element of period k andtherefore the frequency, 2�/k, the spectral densities willhave a sharp spike at �¼ �k. If the filtered (i� i*)t doesnot contain any periodicities, the spectral densities will besmooth.

The spectral densities of the filtered interest rate differ-entials are estimated for 150 lags. The spectral densities areestimated as follows:

Fð$jÞ ¼ 1=2� �0C0 þ 2X1k¼0

�kCk cos$jk

" #

$j ¼ �j=m ¼ j ¼ 0, 1, 2, . . . ,m, where m¼ 150 lags.The estimated autocovariance is given by

Ck¼1=n�kXn�k

t¼1

ði�i�Þtði�i�Þtþk�1=n�kXnt¼1þk

ði�i�ÞtXn�k

t¼1

ði�i�Þt

" #

With data, (i� i*)t, t¼ 1, . . . , n and the weights, �k are

dependent upon m. Microfit computes the Bartlett, Tukey

and Parzen estimates. The results are reported in Table A1

in the Appendix.

Figures 1–5 plot the spectral densities for the Hodrick–

Prescott filtered interest rate differentials using the Bartlett,

Tukey and Parzen lag windows. A significant feature of all

the figures is the sharp peak that corresponds to the 0.11

frequency (see Table A1 in Appendix). The figures suggest

the absence of systematic short cyclical fluctuations. The

spectrum is relatively flat after j¼ 1 over the entire period.

As the frequency increases the spectrum decreases rapidly.

Fig. 1. Spectral density of filtered interest rate differential:Australia–U.S.

Fig. 2. Spectral density of filtered interest rate differential:Australia–U.K.

Fig. 3. Spectral density of filtered interest rate differential:Australia–Japan

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Hence the spectrum confirms the randomness of the series

and the absence of systematic cyclical variation.

V. CONCLUSION

The purpose of this study was to examine the efficiency of

the Australian foreign exchange market by SUR and spec-

tral densities. The SUR estimates suggest that the restric-

tions imposed by the theory of uncovered interest parity

are rejected. The rejection of the restrictions of uncovered

interest parity need not necessarily imply the absence of

integration. Even with perfect integration, the theory

could fail due to the existence of time-varying risk premia

or the rejection of the assumption of rational expectations.

The rejection of the restrictions imposed by uncovered

interest parity could also stem from other factors, among

them restrictions on capital flows and varying taxation

procedures in addition to irrationality and/or unexploited

profit opportunities in international financial markets.

Given that the spectral densities estimated for the interest

rate differentials confirm the randomness of the series

and absence of systematic cyclical components, suggesting

efficiency of the Australian foreign exchange market, the

rejection of the restrictions of the theory could be attrib-

uted to one or some of the above mentioned factors.

ACKNOWLEDGEMENTS

I wish to thank Jocelyn Horne, David Gruen, RoselynJoyeux and Ryle Perera for an earlier version of this paper.

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2(12), 478–81.

Blundell-Wignall, A., Fahrer, J. and Heath, A. (1993) Major

influences on the Australian dollar exchange rate, Reserve

Bank of Australia Conference Volume 1993.

Chinn, M. D. and Frankel, J. A. (1994) Financial links around

the pacific rim: 1982–1992, in Exchange Rate Policy and

Interdependence: Perspectives from the Pacific Basin (Eds)

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Cumby, R. E. and Obstfeld, M. (1981) Exchange rate expecta-

tions and nominal interest rates: a test of the fisher hypothe-

sis, Journal of Finance, 36(3), 697–707.

Cumby, R. E. and Obstfeld, M. (1984) International interest-rate

and price-level linkages under flexible exchange rates: a

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of Chicago Press, Chicago.

Davidson, R. and MacKinnon, J. G. (1993) Estimation and

Inference in Econometrics, Oxford University Press, Oxford.

Dickey, D. A. and Fuller, W. A. (1979) Autoregressive time series

with a unit root, Journal of the American Statistical

Association, 74(366), 427–31.

Flood, P. and Rose, A. (2002) Uncovered interest parity in crisis,

IMF Staff Papers, 49(2), 252–66.

Flood, P. and Rose, A. (1996) Fixes: of the forward discount

puzzle, Review of Economics and Statistics, 78(4), 748–52.

Frenkel, J. A. and Levich, R. M. (1975) Covered interest

arbitrage: unexploited profits?, Journal of Political

Economy, 83(2), 325–38.

Frenkel, J. A. and Levich, R. M. (1977) Transaction costs and

interest arbitrage: tranquil versus turbulent periods, Journal

of Political Economy, 85(6), 1209–26.

Karfakis, C. I. and Parikh, A. (1994) Uncovered interest parity

hypothesis for major currencies, Manchester School, 62(2),

184–98.

Loopesko, B. E. (1984) Relationships among exchange rates,

intervention and interest rates: an empirical investigation,

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MacDonald, R. and Taylor, M. P. (1989) Interest rate parity:

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Mark, N. C. (1985) On time varying risk premia in the foreign

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Taylor, M. (1987) Risk premia and foreign exchange: a multiple

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Weltwirtschaftliches Archiv, 123(4), 579–91.

Fig. 5. Spectral density of filtered interest rate differential:Australia–Malaysia

Fig. 4. Spectral density of filtered interest rate differential:Australia–Singapore

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APPENDIX

Table A1. Standardized spectral density functions of the Hodrick–Prescott filtered interest rate differentials

Frequency Period

U.S. U.K. Japan

Bartlett Tukey Parzen Bartlett Tukey Parzen Bartlett Tukey Parzen

0.00 none 1.35(0.577)

1.44(0.656)

2.18(0.840)

0.624(0.267)

0.481(0.218)

1.03(0.398)

1.51(0.650)

2.00(0.911)

3.40(1.30)

0.112 56.0 3.04(0.920)

2.90(0.932)

3.04(0.827)

1.61(0.489)

1.54(0.496)

1.79(0.487)

4.92(1.48)

4.87(1.56)

4.65(1.26)

0.224 28.0 4.57(1.38)

4.88(1.56)

4.39(1.19)

3.39(1.02)

3.57(1.14)

3.18(0.867)

6.57(1.98)

6.85(2.19)

5.68(1.54)

0.336 18.6 4.80(1.45)

4.96(1.59)

4.58(1.24)

3.98(1.20)

4.09(1.31)

3.62(0.986)

3.84(1.16)

4.20(1.34)

4.25(1.15)

0.448 14.0 3.27(0.990)

3.56(1.14)

3.74(1.01)

2.53(0.766)

2.77(0.888)

2.95(0.802)

1.90(0.576)

1.89(0.068)

2.41(0.657)

0.561 11.2 2.88(0.873)

2.98(0.958)

3.00(0.818)

2.17(0.658)

2.24(0.720)

2.38(0.647)

1.73(0.525)

1.65(0.529)

1.71(0.465)

0.673 9.33 2.61(0.791)

2.50(0.804)

2.33(0.636)

2.35(0.711)

2.27(0.729)

2.14(0.582)

1.71(0.517)

1.57(0.505)

1.45(0.396)

0.785 8.00 1.15(0.350)

1.31(0.421)

1.54(0.419)

1.57(0.477)

1.74(0.559)

1.82(0.495)

0.955(0.289)

1.00(0.322)

1.13(0.309)

0.897 7.00 1.25(0.380)

1.07(0.344)

1.06(0.290)

1.66(0.503)

1.57(0.505)

1.50(0.408)

1.06(0.322)

0.966(0.310)

0.984(0.267)

1.00 6.22 0.775(0.234)

0.759(0.243)

0.733(0.199)

1.07(0.324)

1.08(0.347)

1.08(0.295)

0.967(0.292)

0.964(0.309)

0.892(0.242)

1.12 5.6 0.385(0.116)

0.302(0.097)

0.400(0.108)

0.630(0.190)

0.591(0.189)

0.708(0.192)

0.704(0.213)

0.658(0.211)

0.649(0.176)

1.23 5.09 0.312(0.094)

0.233(0.074)

0.269(0.073)

0.657(0.198)

0.565(0.181)

0.577(0.156)

0.372(0.112)

0.321(0.103)

0.380(0.103)

1.34 4.66 0.317(0.096)

0.272(0.087)

0.279(0.076)

0.552(0.167)

0.549(0.176)

0.570(0.155)

0.249(0.075)

0.205(0.065)

0.265(0.072)

1.45 4.30 0.370(0.112)

0.331(0.106)

0.291(0.079)

0.653(0.197)

0.611(0.196)

0.577(0.157)

0.373(0.113)

0.319(0.102)

0.281(0.076)

1.57 4.00 0.263(0.079)

0.226(0.072)

0.221(0.060)

0.548(0.166)

0.531(0.170)

0.511(0.139)

0.297(0.089)

0.267(0.085)

0.243(0.066)

1.68 3.73 0.121(0.036)

0.093(0.029)

0.123(0.033)

0.391(0.118)

0.365(0.117)

0.399(0.108)

0.147(0.044)

0.115(0.037)

0.145(0.039)

1.79 3.50 0.125(0.037)

0.076(0.024)

0.083(0.022)

0.368(0.111)

0.334(0.107)

0.351(0.095)

0.119(0.036)

0.078(0.025)

0.096(0.026)

1.90 3.29 0.108(0.032)

0.079(0.025)

0.080(0.021)

0.390(0.032)

0.364(0.116)

0.364(0.099)

0.137(0.041)

0.103(0.033)

0.101(0.027)

2.01 3.11 0.109(0.033)

0.080(0.025)

0.084(0.023)

0.400(0.121)

0.390(0.125)

0.382(0.104)

0.139(0.043)

0.117(0.037)

0.114(0.031)

2.13 2.94 0.119(0.036)

0.098(0.031)

0.090(0.024)

0.406(0.122)

0.386(0.124)

0.372(0.101)

0.145(0.044)

0.121(0.039)

0.113(0.030)

2.24 2.80 0.108(0.032)

0.082(0.026)

0.077(0.020)

0.334(0.101)

0.324(0.104)

0.325(0.088)

0.114(0.034)

0.091(0.029)

0.089(0.024)

2.35 2.66 0.064(0.019)

0.043(0.013)

0.048(0.013)

0.292(0.088)

0.267(0.085)

0.275(0.074)

0.075(0.022)

0.049(0.015)

0.058(0.015)

2.46 2.54 0.051(0.015)

0.021(0.006)

0.013(0.008)

0.260(0.078)

0.240(0.077)

0.250(0.068)

0.065(0.019)

0.039(0.012)

0.051(0.013)

2.58 2.43 0.055(0.016)

0.037(0.012)

0.043(0.011)

0.270(0.081)

0.250(0.080)

0.251(0.068)

0.094(0.028)

0.073(0.023)

0.077(0.020)

2.69 2.33 0.100(0.030)

0.077(0.024)

0.072(0.019)

0.280(0.084)

0.262(0.084)

0.252(0.068)

0.136(0.041)

0.120(0.038)

0.111(0.030)

(continued)

964 A. Cooray

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Table A1. Continued

Frequency Period

U.S. U.K. Japan

Bartlett Tukey Parzen Bartlett Tukey Parzen Bartlett Tukey Parzen

2.80 2.24 0.107(0.032)

0.097(0.031)

0.089(0.024)

0.252(0.076)

0.233(0.074)

0.253(0.064)

0.143(0.043)

0.131(0.042)

0.121(0.033)

2.91 2.15 0.106(0.032)

0.085(0.027)

0.080(0.021)

0.228(0.069)

0.211(0.067)

0.233(0.060)

0.120(0.036)

0.104(0.033)

0.101(0.027)

3.02 2.07 0.069(0.021)

0.054(0.017)

0.057(0.015)

0.276(0.119)

0.237(0.076)

0.237(0.064)

0.084(0.025)

0.064(0.020)

0.070(0.019)

3.14 2.00 0.059(0.025)

0.035(0.015)

0.044(0.017)

0.278(0.119)

0.262(0.119)

0.250(0.096)

0.068(0.029)

0.045(0.020)

0.055(0.021)

Frequency Period

Singapore Malaysia

Bartlett Tukey Parzen Bartlett Tukey Parzen

0.00 none 1.31(0.562)

1.44(0.655)

2.22(0.857)

0.910(0.389)

0.401(0.182)

0.971(0.373)

0.112 56.0 3.10(0.939)

3.02(0.970)

3.04(0.829)

1.38(0.418)

1.42(0.455)

2.07(0.563)

0.224 28.0 4.49(1.35)

4.66(1.49)

4.13(1.12)

4.71(1.42)

5.06(1.62)

4.60(1.25)

0.336 18.6 3.93(1.18)

4.18(1.34)

4.08(1.11)

6.81(2.06)

6.98(2.23)

5.81(1.58)

0.448 14.0 3.21(0.972)

3.42(1.09)

3.52(0.959)

3.69(1.11)

4.26(1.37)

4.41(1.20)

0.561 11.2 3.08(0.931)

3.14(1.00)

2.99(0.814)

2.32(0.702)

2.32(0.745)

2.63(0.716)

0.673 9.33 2.26(0.685)

2.27(0.729)

2.22(0.605)

1.81(0.548)

1.63(0.526)

1.58(0.431)

0.785 8.00 1.18(0.357)

1.21(0.390)

1.04(0.381)

0.627(0.189)

0.639(0.205)

0.862(0.234)

0.897 7.00 1.04(0.316)

0.908(0.291)

0.946(0.257)

0.711(0.215)

0.544(0.174)

0.596(0.162)

1.00 6.22 0.730(0.220)

0.700(0.224)

0.713(0.194)

0.658(0.199)

0.602(0.193)

0.541(0.147)

1.12 5.6 0.599(0.181)

0.519(0.166)

0.548(0.149)

0.423(0.130)

0.361(0.116)

0.405(0.112)

1.23 5.09 0.478(0.144)

0.439(0.140)

0.463(0.126)

0.320(0.097)

0.291(0.093)

0.336(0.091)

1.34 4.66 0.474(0.143)

0.439(0.141)

0.437(0.118)

0.462(0.139)

0.390(0.125)

0.360(0.098)

1.45 4.30 0.465(0.140)

0.425(0.136)

0.389(0.105)

0.359(0.108)

0.353(0.113)

0.355(0.966)

1.57 4.00 0.281(0.085)

0.257(0.082)

0.274(0.074)

0.354(0.107)

0.326(0.104)

0.324(0.088)

1.68 3.73 0.197(0.059)

0.157(0.050)

0.177(0.048)

0.330(0.099)

0.294(0.094)

0.264(0.071)

1.79 3.50 0.175(0.053)

0.129(0.041)

0.133(0.036)

0.162(0.049)

0.133(0.042)

0.164(0.044)

1.90 3.29 0.134(0.040)

0.107(0.034)

0.122(0.033)

0.127(0.038)

0.095(0.030)

0.124(0.033)

2.01 3.11 0.172(0.052)

0.140(0.045)

0.140(0.038)

0.210(0.063)

0.168(0.054)

0.154(0.041)

2.13 2.94 0.187(0.056)

0.168(0.054)

0.159(0.043)

0.194(0.058)

0.175(0.056)

0.180(0.049)

2.24 2.80 0.176(0.053)

0.158(0.050)

0.153(0.041)

0.213(0.064)

0.199(0.063)

0.211(0.057)

2.35 2.66 0.150(0.045)

0.127(0.040)

0.122(0.033)

0.288(0.087)

0.274(0.088)

0.250(0.068)

(continued)

Financial integration 965

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Table A1. Continued

Frequency Period

Singapore Malaysia

Bartlett Tukey Parzen Bartlett Tukey Parzen

2.46 2.54 0.097(0.029)

0.073(0.023)

0.085(0.023)

0.267(0.080)

0.251(0.080)

0.234(0.063)

2.58 2.43 0.087(0.026)

0.064(0.020)

0.074(0.020)

0.175(0.053)

0.161(0.051)

0.181(0.049)

2.69 2.33 0.118(0.035)

0.091(0.029)

0.089(0.024)

0.174(0.052)

0.152(0.049)

0.174(0.047)

2.80 2.24 0.121(0.036)

0.106(0.034)

0.105(0.028)

0.239(0.072)

0.229(0.073)

0.213(0.057)

2.91 2.15 0.138(0.041)

0.118(0.037)

0.120(0.032)

0.261(0.079)

0.239(0.076)

0.216(0.058)

3.02 2.07 0.148(0.045)

0.038(0.044)

0.137(0.037)

0.162(0.049)

0.156(0.050)

0.167(0.045)

3.14 2.00 0.171(0.073)

0.153(0.069)

0.145(0.056)

0.150(0.064)

0.116(0.052)

0.137(0.052)

Asymptotic standard errors in parenthesis.

966 A. Cooray

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