Cointegration and Threshold Adjustment

Posted: 26 Feb 2001

See all articles by Walter Enders

Walter Enders

University of Alabama - Department of Economics, Finance and Legal Studies

Pierre L. Siklos

Wilfrid Laurier University - School of Business & Economics; Balsillie school of international affairs

Multiple version iconThere are 2 versions of this paper

Date Written: September 2000

Abstract

The Engle-Granger test for cointegration is extended by assuming that the error correction terms are asymmetric. Two variants are considered: a simple threshold autoregressive (TAR) model, where the positive and negative disequilibria are the error corrections, and the momentum threshold autoregressive model (M-TAR),where positive and negative changes in the disequilibria are the error corrections. The M-TAR model, in particular, has good power over the Engle-Granger test. We also consider an application where we test for cointegration between long and short US interest rates. Conventional cointegration testing (i.e., Engle-Granger, Johansen) concludes that interest rates are not cointegrated while we do find cointegration in the presence of asymmetric adjustment. We provide an economic rationale for such a finding.

Keywords: asymmetric adjustment, Monte Carlo, nonlinear autoregression, cointegration

JEL Classification: E43, C22, C50

Suggested Citation

Enders, Walter and Siklos, Pierre L., Cointegration and Threshold Adjustment (September 2000). Available at SSRN: https://ssrn.com/abstract=243554

Walter Enders

University of Alabama - Department of Economics, Finance and Legal Studies ( email )

P.O. Box 870244
200 Alston Hall
Tuscaloosa, AL 35487
United States
205-348-8972 (Phone)
205-348-0590 (Fax)

Pierre L. Siklos (Contact Author)

Wilfrid Laurier University - School of Business & Economics ( email )

Department of Economics
75 University Avenue W.
Waterloo, Ontario N2L 3C5
Canada
519-884-0710 Ext.. 3491 (Phone)

HOME PAGE: http://pierrelsiklos.com

Balsillie school of international affairs ( email )

67 Erb Street West
Waterloo, ON N2L 6C2
Canada

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