Linear Cointegration of Nonlinear Time Series with an Application to Interest Rate Dynamics

Travis Dean Nesmith () and Barry Edward Jones ()

Studies in Nonlinear Dynamics & Econometrics, 2008, vol. 12, issue 1, pages 1468-1468

Abstract: We develop a representation of nonlinear integrated vector processes based on the martingale representation theorem of Hall and Heyde (1980). In the representation, linear combinations of the components of the vector process may be stationary, so the system may be linearly cointegrated, yet exhibit nonlinear stationary, or short-run, dynamics. We test for linear cointegration relations with nonlinear dynamics in weekly U.S. interest rates. We find that the individual rates are I(1) and that the system is linearly cointegrated. Furthermore, both cointegration relations exhibit nonlinear dynamics so the the system's short-run dynamics are nonlinear.

Keywords: cointegration; nonlinearity; interest rates; martingale theory; nonparametric estimation (search for similar items in EconPapers)
Date: 2008
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Working Paper: Linear cointegration of nonlinear time series with an application to interest rate dynamics (2006)
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