Proceedings of 6th Annual American Business Research Conference
9 - 10 June 2014, Sheraton LaGuardia East Hotel, New York, USA, ISBN: 978-1-922069-52-8
Financial Integration via Panel Cointegration Approaches; Case of
South East Asian Countries
Behrooz Gharleghi, Najla Shafighi and Benjamin Chan Yin Fah
The main purpose of this study is to investigate whether there is any long-run equilibrium
among real output, exchange rate, interest rate and level of prices as an indication of the
possibility of financial integration among ASEAN-5 members and some East Asian
countries including China, Japan, Korea, Taiwan, and Hong Kong. To address this issue,
we have two objectives in the paper, first is the identification of possible long-run
relationship among aforementioned variables via Pedroni panel cointegration and FisherJohansen panel cointegration approaches. Second is the determination of the short term
causality among these variables using a panel-based vector error correction model. The
latter model is further used for comparison purposes. The analysis will be performed with
quarterly data for the period 1999Q1 – 2013Q4. IPS and LLC panel unit root tests are also
applied to ensure that the data are stationary. The long-run relationship is estimated using
dynamic ordinary least square (DOLS) technique. For the ten countries under
consideration, the empirical result supports the long-run equilibrium relation between real
output, exchange rate, interest rate, and level of prices, and that cointegration relation
implies unidirectional causality from exchange rate to the real output. This result is
favorable to a model that contains real output as dependent variable and exchange rate,
interest rate, and level of prices as explanatory variables. The result of panel-based VEC
shows that there is no evidence of short-run causality from exchange rate towards real
output. In addition, evidence on long-run cointegration and statistical significance of
exchange rate is observed in panel data, but not in time series. This shows the advantage
of panel data over time series data.
----------------------------------------------------------------------------------------------------------------------------- -----------------Dr Behrooz Gharleghi, Faculty of Business and Management, Asia Pacific University of Technology and Innovation,
Bukit Jalil, 57000, Kuala Lumpur, Malaysia, E-mail : Behrooz@apu.edu.my
Najla Shafighi, Faculty of Economics and Management, Universiti Kebangsaan Malaysia, 43600, Bangi, Malaysia,
Email: Shafighi_nab@yahoo.com
Dr Benjamin Chan Yin Fah, Faculty of Business and Management, Asia Pacific University of Technology and
Innovation, Bukit Jalil, 57000, Kuala Lumpur, Malaysia, E-mail: Benjamin_chan@apu.edu.my