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

Research output: Contribution to journalArticle

12 Citations (Scopus)

Abstract

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.

Original languageEnglish
Pages (from-to)1147-1156
Number of pages10
JournalApplied Economics
Volume34
Issue number9
DOIs
Publication statusPublished - 2002

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Emerging financial markets
Expectations hypothesis
Malaysia
Long-run equilibrium
Long-term interest rates
Financial markets
Short-term interest rates
Testing
Term structure of interest rates
Attractor
Short-run
Securities market
Cointegration
Error correction
Market liberalization
Government

ASJC Scopus subject areas

  • Economics and Econometrics

Cite this

The expectation hypothesis in emerging financial markets : The case of Malaysia. / Ghazali, Noor Azlan; Low, Soo Wah.

In: Applied Economics, Vol. 34, No. 9, 2002, p. 1147-1156.

Research output: Contribution to journalArticle

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