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.

South African Market Volatility, Asymmetry and Retail Interest Rates Pass‐through

“…In relation to South Africa, studies of Sander and Kleimeier (2006), Aziakpono (2006) and Aziakpono and Wilson (2010) have supported the presence of these theories. Other authors that support the adverse customer reaction hypothesis and collusive pricing arrangement are Lim (2001), Sander and Kleimeier (2002), Wang and Lee (2009) and Wang and Thi (2010). On the other hand, Iregui et al .…”

“…(2007a,b), Gambacorta (2008), Liu et al . (2008), Wang and Lee (2009), Kwapil and Scharler (2009), Wang and Thi (2010) and Aziakpono and Wilson (2010). Understanding these factors and their influence is important because they may impact on the PT mechanism.…”

“…Through the pass-through (PT) mechanism, the central bank influences and manages the interest rates changes or shocks in order to attain some of its monetary policy goals. The central bank can, for example, manage the retail interest rates by controlling the short-term monetary market rates (Wang andLee, 2009:1270). Accordingly, most central banks use the short-term money market rate as their main instrument of monetary policy, and changes to this short-term interest rate are essential in the transmission of monetary policy.…”

“…The IRPT process is essential to the monetary transmission mechanism because it determines how changes in the money market rates are strongly transmitted to the lending and deposit rates, and ultimately to saving and investment (Raunig and Scharler, 2009). These adjustments are important because they represent the marginal cost of new credit as well as the opportunity cost of funds in an economy (Wang and Lee, 2009). As a result, the central bank influences commercial banks' actions, as they react to changes in the money market rate, by adjusting their retail rates.…”

Interest rate pass through and asymmetries in retail deposit and lending rates: An analysis using data from Colombian banks

“…In addition to this, interest rate adjustments are found to be asymmetric, with more significant adjustments taking place under monetary easing than under monetary tightening. Wang and Thi (2010) find robust evidence that there exist the upward rigidity in the deposit rate and the downward rigidity in the lending rate in both Taiwan and Hong Kong. This is a finding that is consistent with the hypothesis of the collusive pricing arrangements.…”