Cointegration and Threshold Adjustment
24 Pages Posted: 24 Feb 1998
Date Written: January 1998
Cointegration among interest rates for instruments with different maturities has been widely tested with mixed results. This paper provides an extension to the Engle-granger testing strategy by permitting asymmetry in the adjustment toward equilibrium in two different ways. We demonstrate that our test has good power and size properties over the Engle-Granger test when there are asymmetric departures from equilibrium. Empirical tests using US yields confirm the asymmetric nature of error correction among interest rates of different maturities.
JEL Classification: E43, C22, C50
Suggested Citation: Suggested Citation