A cointegration analysis of the Asian dollar and Eurodollar interest rate transmission mechanism

A cointegration analysis and error correction model are used to investigate the transmission mechanism between the Asian dollar and the Eurodollar markets for the period 1981-1989. Results indicate the absence of reverse causality in the Asian dollar market throughout the 1980s. In the Eurodollar market, reverse causality exists in the first half but disappears in the second half of the decade. Both markets are evolving into rapid incorporation of prior interest rate information into current rates. These results are likely to be due to reduced market regulation, expansion of futures trading, more sophisticated telecommunications, and 24-hour trading practices.