Introduction to M-M Processes

University of California at San Diego, Department of Economics Discussion Paper No. 98-18

42 Pages Posted: 26 Feb 1999

See all articles by Clive W. J. Granger

Clive W. J. Granger

University of California, San Diego (UCSD) - Department of Economics; Tinbergen Institute

Namwon Hyung

University of Seoul - Department of Economics

Date Written: July 1998

Abstract

This paper introduces a new type of nonlinear model, the min-max model, and analyzes the properties for a pair of series. Stability conditions of this system are given for the nonlinearly integrated bivariate series. Under these stability conditions, the difference of the two series has a threshold-type nonlinearity. One can construct a threshold error correction model from min-max processes. Neglected nonlinearity tests are applied, to the univariate series and to the system, to detect nonlinearity, and it turns out that the tests using the system have better power. We apply the min-max model to U.S. Treasury bill and commercial paper interest rates. The spread of these interest rates shows a threshold-type nonlinearity, and this model outperforms a linear model in terms of its predictability out-of-sample.

JEL Classification: C32, C51, C53

Suggested Citation

Granger, Clive W. J. and Hyung, Namwon, Introduction to M-M Processes (July 1998). University of California at San Diego, Department of Economics Discussion Paper No. 98-18, Available at SSRN: https://ssrn.com/abstract=145789 or http://dx.doi.org/10.2139/ssrn.145789

Clive W. J. Granger (Contact Author)

University of California, San Diego (UCSD) - Department of Economics ( email )

9500 Gilman Drive
La Jolla, CA 92093-0508
United States
858-534-3383 (Phone)
858-534-7040 (Fax)

Tinbergen Institute ( email )

Burg. Oudlaan 50
Rotterdam, 3062 PA
Netherlands

Namwon Hyung

University of Seoul - Department of Economics ( email )

Seoul, 130-743
Korea

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