Review of Quantitative Finance and Accounting, 10 (1998): 193–206
© 1998 Kluwer Academic Publishers, Boston. Manufactured in The Netherlands.
Common Stochastic Trends Among Asian Currencies:
Evidence for Japan, Aseans, and the Asian Tigers
The Edward J. and Louise E. Mellen Chair in Finance, John Carroll University, Cleveland, Ohio 44118
School of Business Administration, Wayne State University, Detroit, MI 48202
Abstract. This study documents that daily changes in Asian exchange rates are signiﬁcantly non-normal,
serially correlated, non-stationary, and have unit roots. Further, accounting for these time series properties and
using a longer time horizon than other similar studies of exchange rates, this study also documents cointegration
between the Japanese Yen and two sets of Asian currencies, i.e., currencies of the ‘Tigers’, Hong Kong, South
Korea, Singapore, and Taiwan; and currencies of the ASEANs, Malaysia, Philippines, Thailand, and Singapore.
These ﬁndings of cointegration among Asian exchange rates are in contrast to the ﬁndings for the major
currencies, and are evidence of nascent Yen blocs in Asia. The results presented here have important implications
for understanding Asian ﬁnancial integration and the international role of the Japanese yen and should be useful
for developing asset allocation, currency overlay, value at risk (VAR), and hedging strategies for investments in
these often illiquid Asian currencies.
JEL Classiﬁcation: F15; F31; or F36
There is much interest in trade and currency blocs and in the impact of increasing
Japanese trade and investment in Asia [e.g., Sato et al, (1994); Frankel and Kahler, (1993)]
and it has been contended that Japanese foreign direct investment is particularly trade
enhancing (Kojima, 1985; Lii, 1994). There has also been much interest in relationships
between exchange rates [e.g., Baillie and Bollerslev, (1994); Diebold et al, (1994); Hakkio
and Rush, (1991)]. As Asia accounts for an increasingly higher proportion of the global
economy and ﬁnancial markets, Asian currency movements are ever more likely to have
contagion effects elsewhere in the world. Thus, it is important to understand the stochastic
properties and international relationships of Asian currencies.
However, prior research on stochastic properties and cointegration of currencies has
focused on the currencies of the major industrial nations and evidence of such cointegra-
tion is at best mixed. Baillie and Bollerslev (1994) review much of this research and note
the need for examining cointegration for longer periods. In spite of the sharply rising
importance of Asia in world trade and investment, there has been relatively little similar
work, or even work related to their stochastic properties, for the currencies of the emerg-
ing Asian markets.
While there are some moves towards deregulation, many Asian cur-
@ats-ss3/data11/kluwer/journals/requ/v10n2art4 COMPOSED: 01/13/98 2:44 pm. PG.POS. 1 SESSION: 12