Noor Azlan Ghazali

A long memory test of the long-run Fisher effect in the G7 countries

The belief that short-term interest rates respond positively to changes in price level, commonly known as the Fisher effect, are currently being investigated extensively by financial researchers. Over the long run the hypothesis implies the presence of an equilibrium relationship between interest rates and inflation. Early evidence favouring the Fisher effect is found not to be consistent in certain time periods and some countries. This paper examines the presence of the effect in the G7 countries. An ARFIMA (Autoregressive Fractionally Integrated Moving Average) model is employed that generalizes the standard ARIMA by allowing fractional differencing. Based on the generalized ARFIMA estimation, the cointegration hypothesis between short-term interest rates and inflation cannot be supported. Interest rates in the G7 countries are not linked to inflation rate in the long run. The puzzling evidence rejecting the Fisher effect remains as the proposed relationship between interest rates and inflation is not real in these countries.

The expectation hypothesis in emerging financial markets: the case of Malaysia

This article deals with the expectation hypothesis of the term structure of interest rates. It is argued that the rapid progress and financial market liberalization that is occurring in emerging financial markets could provide additional evidence for testing the expectation hypothesis. This article employs data from the Malaysian government securities market which represents one of the examples of an emerging financial market. Cointegration and error correction analyses show significant empirical validity for the expectation hypothesis. The long- and short-term interest rates are shown to be cointegrated and subject to a long-run equilibrium path. In addition to shedding some light on the experience of emerging financial market, this article explicitly identifies the process of adjustment towards the long run equilibrium. For the long-run, the results are in favour of the long-to-short version of expectation hypothesis with longer-term interest rates playing a greater role as equilibrium attractor. However, in the short run causal impact runs from short- to long-term interest rates. The empirical findings of the article generally support the proposition of expectation hypothesis.

The price linkages between Malaysian unit trust funds and the stock market: Short run and long run interrelationships

Purpose - The primary objective of the paper is to examine the short and long run price linkages between Malaysian unit trust funds and the stock market index as proxied by the Kuala Lumpur composite index (KLCI) over the period 1996-2000. Design/methodology/approach - Cointegration analyses are used to identify the long run relationship between unit trust funds and the stock market index while Granger causality tests are used to measure the short run price linkages. Findings - Cointegration results show that the long run pricing performance of the unit trust funds differs significantly from that of the KLCI. Interestingly, the findings also reveal that two index funds are found not to be cointegrated with the stock market index. In the short run, one-way Granger causality test shows that changes in the KLCI Granger causes changes in the unit trust funds. This suggests that fund managers are responding to the past changes in the stock market index over the short run. Research limitations/implications - The findings of non-cointegration between passively managed funds and the KLCI are restricted to only two index funds in the sample among other actively managed funds. Since there were not enough index funds available over the study period, future research should include more index funds in the analysis. Practical implications - In the short run, investors may gather information on the changes in their portfolio composition by observing the movement in the KLCI. Originality/value - The paper represents the first evidence on the pricing relationships between unit trust funds and the local stock market index and the findings are important to investors in terms of their investment strategies.

Has the effect of money shocks on interest rates really vanished? Further evidence of the liquidity effect

The liquidity effect of money shocks on the short-term interest rate has been an integral part of traditional macroeconomic policies and has witnessed renewed interest in recent years. The paper reports, contrary to some previous work, extensive evidence of the effect in several non-G7 countries using the single-equation distributed-lag GARCH(p,q) estimation and the systems VAR estimation. The liquidity effect is shown to be alive and well in a sample of nine countries and this will shed much light on policy implications.