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

Travis D. Nesmith and Barry Edward Jones ()
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Travis D. Nesmith: Federal Reserve Board

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

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)
JEL-codes: C14 C32 C51 C82 E4 (search for similar items in EconPapers)
Date: 2008

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Related works:
Working Paper: Linear cointegration of nonlinear time series with an application to interest rate dynamics (2006)
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Persistent link: http://EconPapers.repec.org/RePEc:bpj:sndecm:v:12:y:2008:i:1:n:6

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