nep-sea New Economics Papers
on South East Asia
Issue of 2010‒11‒27
eighteen papers chosen by
Kavita Iyengar
Asian Development Bank

  1. Does asymmetric information play a role in explaining the Asian currency crisis? Application to Indonesian and Malaysian cases using a two-state Markov Switching model By Trabelsi, Emna
  2. Does asymmetric information play a role in explaining the Asian crisis? Application to Indonesian and Malaysian cases using a two-state Markov Switching model By Emna Trabelsi
  3. An Asian Response to International Financial Reforms By Hoe Ee Khor; Kim Song Tan
  4. Exchange Rate Misalignments and World Imbalances: A Fundamental Equilibrium Exchange Rate Approach for Emerging Countries By Nabil Aflouk; Se-Eun Jeong; Jacques Mazier; Jamel Saadaoui
  5. Firm Characteristic Determinants of SME Participation in Production Networks By Charles HARVIE; Dionisius NARJOKO; Sothea OUM
  6. Changing Commercial Policy in Japan During 1985-2010 By Kawai, Masahiro; Urata, Shujiro
  7. An Empirical Analysis of International Stock Market Volatility Transmission By Indika Karunanayake; Valadkhani, Abbas; O'Brien, Martin
  8. The Term Structure of Interest Rates, the Expectations Hypothesis and International Financial Integration: Evidence from Asian Economies By Mark J. Holmes; Jesús Otero; Theodore Panagiotidis
  9. The rationale for South-South trade; An Alternative Approach By Shafaeddin, Mehdi
  10. Identifying and Measuring Technical Inefficiency Factors:Evidence from Unbalanced Panel Data for Thai Listed Manufacturing Enterprises By Amornkitvikai, Yot; Harvie, Charles
  11. What Determines Firms’ Decisions to Formalize? By Neil McCulloch; Günther G. Schulze; Janina Voss
  12. Bias-Corrected Estimation for Spatial Autocorrelation By Zhenlin Yang
  13. Standardized LM Tests for Spatial Error Dependence in Linear or Panel Regressions By Badi H. Baltagi; Zhenlin Yang
  14. Simulation-based Estimation Methods for Financial Time Series Models By Jun Yu
  15. Asymptotic Distributions of the Least Squares Estimator for Diffusion Processes By Qiankun Zhou; Jun Yu
  16. Corrigendum to “A Gaussian Approach for Continuous Time Models of the Short Term Interest Rate" By Peter C.B. Phillips; Jun Yu
  17. A Conversation with Eric Ghysels Co-President of the Society for Financial Econometrics By Peter C.B. Phillips; Jun Yu
  18. Macroeconomic Effects of Over-investment in Housing in an Aggregative Model of Economic Activity By Hian Teck Hoon

  1. By: Trabelsi, Emna
    Abstract: This paper aims at establishing a relationship between disparity of information and the probability of speculative attack in explaining the Asian crisis. We apply the general framework of Markov-Switching models to the differential of interest rates (DIR), subsequently in Indonesia and Malaysia. We allow dependency of the transition probabilities over the asymmetric information indicators. The Maximum Likelihood estimators results (MLE) are twofold: (1) an increase of information dispersion among speculators leads to a higher probability of a currency crisis (2) there is a significant asymmetric impact of information disparity as measured by difference between fund price and Net Asset Value (NAV) on the transition probability in the case of Indonesia, while the hypothesis is rejected for Malaysia’s case.
    Keywords: Speculative attack ; Global Games ; Asymmetric information ; Markov-Switching Models
    JEL: D82 F31
    Date: 2010–11–12
  2. By: Emna Trabelsi (ISG - Institut Supérieur de Gestion de Tunis - Université de Tunis)
    Abstract: This paper aims at establishing a relationship between disparity of information and the probability of speculative attack in explaining the Asian crisis. We apply the general framework of Markov-Switching models to the differential of interest rates (DIR), subsequently in Indonesia and Malaysia. We allow dependency of the transition probabilities over the asymmetric information indicators. The Maximum Likelihood estimators results (MLE) are twofold: (1) an increase of information dispersion among speculators leads to a higher probability of a currency crisis (2) there is a significant asymmetric impact of information disparity as measured by difference between fund price and Net Asset Value (NAV) on the transition probability in the case of Indonesia, while the hypothesis is rejected for Malaysia's case.
    Keywords: Speculative attack, Global Games, Asymmetric information, Markov-Switching Models
    Date: 2010–11–12
  3. By: Hoe Ee Khor; Kim Song Tan (School of Economics, Singapore Management University)
    Abstract: Asia has emerged as a much more important player in the global economy after the recent financial crisis. Together with other emerging market economies, Asia is expected to be a key driver for global economic growth in the near to medium term. Along with this, there is a rising chorus for an “Asian approach” to financial reforms in the region and internationally. There are also calls for Asia to play a bigger role in designing the new architecture for the global financial system.
    Date: 2010–10
  4. By: Nabil Aflouk (CEPN - Centre d'économie de l'Université de Paris Nord - CNRS : UMR7115 - Université Paris-Nord - Paris XIII); Se-Eun Jeong (CEPN - Centre d'économie de l'Université de Paris Nord - CNRS : UMR7115 - Université Paris-Nord - Paris XIII); Jacques Mazier (CEPN - Centre d'économie de l'Université de Paris Nord - CNRS : UMR7115 - Université Paris-Nord - Paris XIII); Jamel Saadaoui (CEPN - Centre d'économie de l'Université de Paris Nord - CNRS : UMR7115 - Université Paris-Nord - Paris XIII)
    Abstract: Since the mid-1990s, the world imbalances have increased significantly with a large US current deficit facing Asian surpluses, mainly Chinese. Since 2007, a partial reduction of these imbalances has been obtained, largely thanks to production's decreases, without large exchange rate adjustments. The Asian surpluses have remained important. The objective of this paper is to examine the exchange rate misalignments (ERM) of the main emerging countries in Asia and Latin America since the 1980s, so as to shed light on the 2000s by a long term analysis and compare with the industrialized countries' case. Our results confirm that ERM have been reduced since the mid-2000s at the world level, but the dollar remained overvalued against the East Asian countries, except the yen. Chinese, Indian and Brazilian exchange rate policies have been much contrasted since the 1980s. The Indian rupee has been more often overvalued while a more balance situation prevailed in Brazil only since the 2000s. The Latin American countries have faced wider and more dispersed ERM and current imbalances than East Asian countries. But Argentina, Chile and Uruguay benefits now of undervalued currencies while Mexico is closer to equilibrium.
    Keywords: Equilibrium Exchange Rate, Current Account Balance, Macroeconomic Balance, Emerging Countries
    Date: 2010–05–27
  5. By: Charles HARVIE (Centre for Small Business and Regional Research School of Economics, University of Wollongong, Australia); Dionisius NARJOKO (Economic Research Institute for ASEAN and East Asia (ERIA)); Sothea OUM (Economic Research Institute for ASEAN and East Asia (ERIA))
    Abstract: This paper provides an empirical analysis of small and medium enterprise (SME) participation in production networks. It gauges firm characteristic determinants of SME participation in production networks. The empirical investigation utilizes results obtained from an ERIA Survey on SME Participation in Production Networks, conducted over a three month period at the end 2009 in most ASEAN countries (i.e., Thailand, Indonesia, Malaysia, Philippines, Vietnam, Cambodia, and Laos PDR) and China. The results suggest that productivity, foreign ownership, financial characteristics, innovation efforts, and managerial/entrepreneurial attitudes are the important firm characteristics that determine SME participation in production networks. The paper extends the analysis to identify the determinants that allow SMEs to move from low to high quality or value adding participation in production networks. The results suggest that size, productivity, foreign ownership, and, to some extent, innovation efforts and managerial attitudes, are the important firm characteristics needed by SMEs to upgrade their positions in production networks. The finding suggests that SMEs really exploit competitiveness from economies of scale only when they are able to engage in production networks.
    Date: 2010–10–01
  6. By: Kawai, Masahiro (Asian Development Bank Institute); Urata, Shujiro (Asian Development Bank Institute)
    Abstract: In this paper we examine the changing nature of Japan's commercial policy over the last 25 years while reviewing Japan's changing structure of trade, FDI and economy that underlay policy changes. We argue that until the late 1990s Japan adopted a two-track approach of relying on multilateral liberalization under the GATT/WTO and open regionalism under Asia-Pacific Economic Cooperation (APEC) on the one hand and on the bilateral trade relationship with the US on the other. Although the Japan-US bilateralism sometimes resulted in "managed trade" and encountered negative perceptions of the US approach in Japan, overall, it had a positive impact on the Japanese economy in opening domestic markets through various reforms and deregulation measures. Japan's more recent commercial policy focuses on bilateral and plurilateral economic partnership agreements particularly with-but not limited to-East Asian economies. We argue that agricultural sector liberalization is key to the further integration of Japan with the Asian and global economies.
    Keywords: japan commercial policy; economy; trade; gatt; wto; fta
    JEL: F13 F14 F50
    Date: 2010–11–19
  7. By: Indika Karunanayake (University of Wollongong); Valadkhani, Abbas (University of Wollongong); O'Brien, Martin (University of Wollongong)
    Abstract: This paper examines the interplay between stock market returns and their volatility, focus ingon the Asian and global financial crises of 1997-98 and 2008-09 for Australia, Singapore, the UK, and the US. We use a multivariate generalised autoregressive conditional heteroskedasticity (MGARCH) model and weekly data (January 1992-June 2009). Based on the results obtained from the mean return equations, we could not find any significant impact on returns arising from the Asian crisis and more recent global financial crises across these four markets. However, both crises significantly increased the stock return volatilities across all of the four markets. Not surprisingly, it is also found that the US stock market is the most crucial market impacting on the volatilities of smaller economies such as Australia. Our results provide evidence of own and cross ARCH and GARCH effects among all four markets, suggesting the existence of significant volatility and cross volatility spillovers across all four markets. A high degree of time-varying co-volatility among these markets indicates that it is riskier for investors to diversify their financial portfolio by acquiring stocks withinthese four countries only.
    Keywords: Financial crises, Stock market volatility transmission, Multivariate GARCH model
    JEL: G15
    Date: 2010
  8. By: Mark J. Holmes (Department of Economics, Waikato University, New Zealand); Jesús Otero (Facultad de Economía, Universidad del Rosario, Colombia); Theodore Panagiotidis (Department of Economics, University of Macedonia, Greece; RCEA, Italy)
    Abstract: The validity of the expectations hypothesis of the term structure is examined for a sample of Asian countries. A panel stationarity testing procedure is employed that addresses both structural breaks and cross-sectional dependence. Asian term structures are found to be stationary and supportive of the expectations hypothesis. Further analysis suggests that international financial integration is associated with interdependencies between domestic and foreign term structures insofar as cross-term structures based on differentials between domestic (foreign) short- and foreign (domestic) long-rates are also stationary.
    Keywords: Correlation, Heterogeneous dynamic panels, term structure, mean reversion, panel stationarity test
    JEL: C33 F31 F33 G15
    Date: 2010–01
  9. By: Shafaeddin, Mehdi
    Abstract: Arguing that the theoretical literature on South-South trade is not satisfactory, the author provides an alternative framework and rationale for the South-South trade as a vehicle for industrialization and development of developing countries. He also applies this framework to developing countries in the Asia-Pacific region. In particular, showing that the low-income countries of the region are not benefiting much from the dynamism of the China market for their industrialization, he proposes, inter alia, industrial collaboration among the low-income countries as a necessary condition for benefiting from the potential role of China as a “pole” of industrialization and development of the countries of the region.
    Keywords: International trade; South-South cooperation; industrial collaboration; production sharing; East Asia
    JEL: O1 F1 O14
    Date: 2010–10
  10. By: Amornkitvikai, Yot; Harvie, Charles (University of Wollongong)
    Abstract: This study employs stochastic frontier analysis (SFA) and two-stage DEA approaches to predict firm technical efficiency and analyse an inefficiency effects model. Aggregate translog stochastic frontier production functions are estimated under the SFA approach using an unbalanced panel data of 178 Thai manufacturing enterprises listed in the Stock Exchange of Thailand (SET), covering the period 2000 to 2008. The maximum-likelihood Tobit model is used to conduct the second-stage of the two-stage DEA model to investigate the relationship between technical inefficiency and environmental variables. Both parametric and nonparametric approaches are found to produce consistent results. The empirical evidence from both approaches highlight that Thai listed manufacturing firms had been operating under decreasing returns to scale over the period 2000 to 2008. The SFA approach reports that technical progress decreased over time, and relied on labour input. Both estimation approaches suggest that leverage (financial constraints), executive remuneration, managerial ownership, exports, some types of listed firms (i.e., family-owned firm and foreign-owned firm), and firm size have a negative (positive) and significant effect on technical inefficiency (technical efficiency). The empirical results obtained from both approaches also suggest that liquidity, external financing, and research & development (R&D) have a significantly positive (negative) effect on technical inefficiency (technical efficiency)
    Keywords: Stochastic Frontier Analysis (SFA); Data Envelopment Analysis (DEA);Technical Efficiency; Manufacturing; Thailand
    JEL: C14 C23 D24
    Date: 2010
  11. By: Neil McCulloch; Günther G. Schulze; Janina Voss (Department of International Economic Policy, University of Freiburg)
    Abstract: In this paper we analyze the decision of small and micro firms to formalize, i.e. to obtain business and other licenses in rural Indonesia. We use the rural investment climate survey (RICS) that consists of non-farm rural enterprises, most of them microenterprises, and analyze the effect of formalization on tax payments, corruption, access to credit and revenue, taking into account the endogeneity of the formalization decision to such benefits and costs. We show, contrary to most of the literature, that formalization reduces tax and corruption payments. The benefits of formalization, and therefore the likelihood of being formal, also depend on characteristics such as firm size, as well as the education and ethnicity of the owner.
    Keywords: Formalization, rural development, rural investment climate, informal sector
    JEL: O17 O18
    Date: 2010–11
  12. By: Zhenlin Yang (School of Economics, Singapore Management University)
    Abstract: The biasedness issue arising from the maximum likelihood estimation of the spatial autoregressive model (SAR) is further investigated under a broader set-up than that in Bao and Ullah (2007a). A major difficulty in analytically evaluating the expectations of ratios of quadratic forms is overcome by a simple bootstrap procedure. With that, the corrections on bias and variance of the spatial estimator can easily be made up to third-order, and once this is done, the estimators of other model parameters become nearly unbiased. Compared with the analytical approach, the new approach is much simpler, and can easily be extended to other models of a similar structure. Extensive Monte Carlo results show that the new approach performs excellently in general.
    Keywords: Third-order bias; Third-order variance; Bootstrap; Concentrated estimating equation; Monte Carlo; Quasi-MLE; Spatial layout.
    JEL: C10 C21
    Date: 2010–10
  13. By: Badi H. Baltagi (Department of Economics and Center for Policy Research, Syracuse University); Zhenlin Yang (School of Economics, Singapore Management University)
    Abstract: The robustness of the LM tests for spatial error dependence of Burridge (1980) for the linear regression model and Anselin (1988) for the panel regression model are examined. While both tests are asymptotically robust against distributional misspecification, their finite sample behavior can be sensitive to the spatial layout. To overcome this shortcoming, standardized LM tests are suggested. Monte Carlo results show that the new tests possess good finite sample properties. An important observation made throughout this study is that the LM tests for spatial dependence need to be both mean and variance-adjusted for good finite sample performance to be achieved. The former is, however, often neglected in the literature.
    Keywords: Distributional misspecification; Group interaction; LM test; Moran’s I Test; Robustness; Spatial panel models.
    JEL: C23 C5
    Date: 2010–09
  14. By: Jun Yu (School of Economics, Singapore Management University)
    Abstract: This chapter overviews some recent advances on simulation-based methods of estimating financial time series models that are widely used in financial economics. The simulation-based methods have proven to be particularly useful when the likelihood function and moments do not have tractable forms, and hence, the maximum likelihood (ML) method and the generalized method of moments (GMM) are diffcult to use. They are also capable of improving the finite sample performance of the traditional methods. Both frequentist's and Bayesian simulation-based methods are reviewed. Frequentist's simulation-based methods cover various forms of simulated maximum likelihood (SML) methods, the simulated generalized method of moments (SGMM), the efficient method of moments (EMM), and the indirect inference (II) method. Bayesian simulation-based methods cover various MCMC algorithms. Each simulation-based method is discussed in the context of a specific financial time series model as a motivating example. Empirical applications, based on real exchange rates, interest rates and equity data, illustrate how the simulation-based methods are implemented. In particular, SML is applied to a discrete time stochastic volatility model, EMM to estimate a continuous time stochastic volatility model, MCMC to a credit risk model, the II method to a term structure model.
    Keywords: Generalized method of moments, Maximum likelihood, MCMC, Indirect Inference, Credit risk, Stock price, Exchange rate, Interest rate..
    Date: 2010–10
  15. By: Qiankun Zhou (School of Economics, Singapore Management University); Jun Yu (School of Economics, Singapore Management University)
    Abstract: The asymptotic distributions of the least squares estimator of the mean reversion parameter (κ) are developed in a general class of diffusion models under three sampling schemes, namely, longspan, in-fill and the combination of long-span and in-fill. The models have an affine structure in the drift function, but allow for nonlinearity in the diffusion function. The limiting distributions are quite different under the alternative sampling schemes. In particular, the in-fill limiting distribution is non-standard and depends on the initial condition and the time span whereas the other two are Gaussian. Moreover, while the other two distributions are discontinuous at κ = 0, the in-fill distribution is continuous in κ. This property provides an answer to the Bayesian criticism to the unit root asymptotics. Monte Carlo simulations suggest that the in-fill asymptotic distribution provides a more accurate approximation to the finite sample distribution than the other two distributions in empirically realistic settings. The empirical application using the U.S. Federal fund rates highlights the difference in statistical inference based on the alternative asymptotic distributions and suggests strong evidence of a unit root in the data.
    Keywords: Vasicek Model, One-factor Model, Mean Reversion, In-fill Asymptotics, Long-span Asymptotics, Unit Root Test
    JEL: C12 C22 G12
    Date: 2010–01
  16. By: Peter C.B. Phillips (Yale University); Jun Yu (School of Economics, Singapore Management University)
    Abstract: An error is corrected in Yu and Phillips (2001) (Econometrics Journal, 4, 210-224) where a time transformation was used to induce Gaussian disturbances in the discrete time equivalent model. It is shown that the error process in this model is not a martingale and the Dambis, Dubins-Schwarz (DDS) theorem is not directly applicable. However, a detrended error process is a martingale, the DDS theorem is applicable, and the corresponding stopping time correctly induces Gaussianity. We show that the two stopping time sequences differ by O(a2), where a is the pre-specified normalized timing constant.
    Keywords: Nonlinear Diffusion, Normalizing Transformation, Level Effect, DDS Theorem.
    Date: 2010–10
  17. By: Peter C.B. Phillips (Yale University); Jun Yu (School of Economics, Singapore Management University)
    Abstract: Eric Ghysels is the Bernstein Distinguished Professor of Economics and Professor of Finance at University of North Carolina at Chapel Hill. In 2008, Eric Ghysels and Robert Engle (2003 Nobel co-Laureate in Economic Science with Clive Granger) founded the Society for Financial Econometrics (SoFiE), establishing a global network of academics and practitioners dedicated to the fast-growing field of financial econometrics. In June 2010, Eric visited the Centre for Financial Econometrics (CoFiE) and the Sim Kee Boon Institute (SKBI) of Financial Economics at Singapore Management University. During his visit we conversed with him about SoFiE and the growing toolroom of financial econometric research, what it has to offer industry practice, and how it might assist central banks and regulators in their daunting task of surveillance of financial markets following the turbulence of the last three years.
    Date: 2010–10
  18. By: Hian Teck Hoon (School of Economics, Singapore Management University)
    Abstract: Is there a theoretical basis for the view that the end of a period of over-investment necessarily leads to a period of below-normal employment as the excess capital stock is run down? We study the repercussions of a false boom in housing driven by prior expectations of future housing prices not justified by fundamentals. When these expectations are corrected, the result is a precipitous drop in housing prices and, on that account alone, some drop in employment. There is also a bulge in the housing stock. In the closed economy case, the downward shift of the term structure of interest rates due to the excess housing stock props up housing prices above the normal steady-state level, so the drop of housing prices “undershoots.” Although this transient elevation of housing prices has a positive demand-wage effect on employment, we show that the wealth effect from owning a higher housing stock and a negative Hicks-Lucas-Rapping effect of lower interest rates dominate, so employment drops initially to a below-normal level. The slump gradually subsides as the housing overhang wears off. In the case of a small open economy that faces a world of perfect capital mobility and takes as given the world interest rate, there are two possibilities. If housing services are instantaneously tradeable and perfect substitutes for foreign ones, so purchasing power parity holds, the end of the bubble causes housing prices to drop precisely to the steady-state level. Since there is no undershooting, the wealth effect of the housing overhang is unopposed and the slump is deeper. If domestic and foreign housing services are imperfect substitutes, the country will suffer a period with a weak real exchange rate, thus to a drop of housing prices that “overshoots” the normal level. Here the slump in employment is worsened by the exaggerated fall in housing prices below the steady-state level.
    Keywords: Housing stock, housing prices, over-investment, employment
    JEL: E13 E22 E23 E24 R21 R31
    Date: 2010–10

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