Covered Interest Parity and Market Volatility: Asian Evidence

Abstract

This paper presents some empirical evidence on the covered interest parity and a dynamic GARCH model to gauge the degree of capital mobility and its volatility in seven East Asia economies. The results show that Hong Kong and Singapore have fairly mobile capital markets while the other economies exhibit financial openness only to a certain extent. The results also indicate that financial integration has been broadly enhanced among these markets following their liberalizations. However, except for Hong Kong, the degree of capital mobility in all markets has not yet returned to the level before the Asian financial crisis.

Keywords: East Asia, Capital mobility, Covered interest parity, GARCH model

JEL Classification: F21, F36