First and second order non-linear cointegration models

Theis Lange

CREATES Research Papers from Department of Economics and Business Economics, Aarhus University

Abstract: This paper studies cointegration in non-linear error correction models characterized by discontinuous and regime-dependent error correction and variance specifications. In addition the models allow for autoregressive conditional heteroscedasticity (ARCH) type specifications of the variance. The regime process is assumed to depend on the lagged disequilibrium, as measured by the norm of linear stable or cointegrating relations. The main contributions of the paper are: i) conditions ensuring geometric ergodicity and nite second order moment of linear long run equilibrium relations and differenced observations, ii) a representation theorem similar to Granger's representations theorem and a functional central limit theorem for the common trends, iii) to establish that the usual reduced rank regression estimator of the cointegrating vector is consistent even in this highly extended model, and iv) asymptotic normality of the parameters for xed cointegration vector and regime parameters. Finally, an application of the model to US term structure data illustrates the empirical relevance of the model.

Keywords: Cointegration; Non-linear adjustment; Regime switching; Multivariate ARCH. (search for similar items in EconPapers)
JEL-codes: C13 C32 C51 (search for similar items in EconPapers)
Pages: 35
Date: 2009-02-10
New Economics Papers: this item is included in nep-ets
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Citations: View citations in EconPapers (1)

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