Linear and nonlinear comovement in Southeast Asian local currency bond markets

This paper investigates the existence of long-run comovement in the returns of local currency denominated bonds of ASEAN 5 countries (Indonesia, Malaysia, the Philippines, Singapore, and Thailand). The stationarity of the differentials of Asian local currency bond returns indices is tested by the stepwise multiple testing method, which can identify which differentials are stationary, while dealing with the possible cross-sectional correlation among series and avoiding the over-rejection of the null hypothesis or the multiplicity problem. Moreover, this paper assumes nonlinear as well as linear models in order to capture the more general adjustment process of the differential series towards its mean or linear time trend. Finally, this paper reveals long-term stable relationships among local currency bond returns for some countries; in particular, their firm inter-linkages are evident among Indonesia, Malaysia, and Singapore.