Threshold Cointegration between Stock Returns: An application of STECM Models

Fredj Jawadi and Koubaa Yousra
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Koubaa Yousra: Université de Paris10-Nanterre MODEM-CNRS

Econometrics from University Library of Munich, Germany

Abstract: The aim of this paper is to study the efficient capital market hypothesis by using recent developments in nonlinear econometrics. In such a context, we estimate a Smooth Transition Error Correction Model (STECM). We introduce the DowJones as an explanatory variable of the dynamics of the other stock indexes. The error correction term takes into account of the structural changes that occured progressively from both the endogenous and the DowJones series. We note that the Smooth Transition Error Correction Model, for which the dynamics of adjustment is of ESTAR type, is more adequate than the linear ECM model to represent the adjustment of the stock price to the long term equilibrium price. Estimation results reveal the nonlinearity inherent to the adjustment process. In particular, we note that the adjustment is not continuous and that the speed of convergence toward price of equilibrium is not constant but rather function of the size of the disequilibrium.

Keywords: Efficiency; Regime-Switching Models; Threshold Cointegration; STECM. (search for similar items in EconPapers)
JEL-codes: C1 C2 C3 C4 C5 C8 (search for similar items in EconPapers)
Pages: 17 pages
Date: 2004-12-02
New Economics Papers: this item is included in nep-ets, nep-fin and nep-fmk
Note: Type of Document - pdf; pages: 17
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Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:wpa:wuwpem:0412001

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