A New Class of Bivariate Threshold Cointegration Models

Biqing Cai (), Jiti Gao and Dag Tjostheim ()

No 1/15, Monash Econometrics and Business Statistics Working Papers from Monash University, Department of Econometrics and Business Statistics

Abstract: In this paper, we introduce a new class of bivariate threshold VAR cointegration models. In the models, outside a compact region, the processes are cointegrated, while in the compact region, we allow different kinds of possibilities. We show that the bivariate processes from a 1/2-null recurrent system. We also find that the convergence rate for the estimators for the coefficients in the outside regime is T^(1/2), while the convergence rate for the estimators for the coefficients in the middle regime is T^(1/4). Also, we show that the convergence rate of the cointegrating coefficient is T , which is same as linear cointegration model. The Monte Carlo simulation results suggest that the estimators perform reasonably well in finite samples. Applying the proposed model to study the dynamic relationship between Federal funds rate and 3-month Treasury bill rate, we find that cointegrating coefficients are the same for the two regimes while the short run loading coefficients are different.

Keywords: β-null recurrent; cointegration; Markov chain; threshold VAR models (search for similar items in EconPapers)
JEL-codes: C11 C58 G01 (search for similar items in EconPapers)
Pages: 35
Date: 2015
New Economics Papers: this item is included in nep-ecm, nep-ets and nep-ore
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Journal Article: A New Class of Bivariate Threshold Cointegration Models (2017)
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