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Regime-Sensitive Cointegration With An Application To Interest-Rate Parity

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Author Info
SIKLOS, PIERRE L.
GRANGER, CLIVE W.J.

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Abstract

There exist a variety of reasons for the failure to find a uniquecointegrating relationship between economic time series where onewould normally be expected on the basis of economic theory. Amongthese are the testing procedure, the span of the data set, the choiceof lag length in generating the test statistic, the presence ofstructural breaks, and the presence of cointegration only beyond somethreshold. We propose the concept of regime-sensitive cointegrationwhereby the underlying series need not be cointegrated at all times.We show that cointegration can be switched off when a commonstochastic trend is added. Alternatively, cointegration can beswitched on or off because series normally believed to contain a unitactually do not. This implies that a linear combination of suchvariables need not be cointegrated. To illustrate the conceptempirically, we test the hypothesis of interest-rate parity, andrelated hypotheses, using daily Eurorates for the United States andCanada.

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Publisher Info
Article provided by Cambridge University Press in its journal Macroeconomic Dynamics.

Volume (Year): 1 (2005)
Issue (Month): 03 (March)
Pages: 640-657
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Handle: RePEc:cup:macdyn:v:1:y:2005:i:03:p:640-657_00

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  1. Yann Schorderet, 2002. "A Nonlinear Generalization of Cointegration : A Note on Hidden Cointegration," Cahiers du Département d'Econométrie 2002.03, Département d'Econométrie, Université de Genève. [Downloadable!]
  2. Maghyereh, Aktham, 2003. "Financial Liberalization and Stability Demand for Money in Emerging Economies: Evidence from Jordan," Applied Econometrics and International Development, Euro-American Association of Economic Development, vol. 3(2). [Downloadable!] (restricted)
  3. Lucio Sarno & Daniel L. Thornton, 2002. "The dynamic relationship between the federal funds rate and the Treasury bill rate: an empirical investigation," Working Papers 2000-032, Federal Reserve Bank of St. Louis. [Downloadable!]
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  4. Aleš Bulir, 2004. "Liberalized Markets Have More Stable Exchange Rates: Short-Run Evidence from Four Transition Countries," IMF Working Papers 04/35, International Monetary Fund. [Downloadable!]
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  5. Hugo Oliveros & Luisa Fernanda Silva, . "La Demanda por Importaciones en Colombia," Borradores de Economia 187, Banco de la Republica de Colombia. [Downloadable!]
  6. Ales Bulir, 2003. "Some Exchange Rates Are More Stable than Others; Short-Run Evidence from Transition Countries," Working Papers 2003/05, Czech National Bank, Research Department. [Downloadable!]
  7. Costas Milas & Jesus Otero, 2000. "Modelling official and parallel exchange rates in Colombia under alternative regimes: a non-linear approach," BORRADORES DE INVESTIGACIÓN 003231, UNIVERSIDAD DEL ROSARIO - FACULTAD DE ECONOMÍA. [Downloadable!]
    Other versions:
  8. Yann Schorderet, 2003. "Asymmetric Cointegration," Cahiers du Département d'Econométrie 2003.01, Département d'Econométrie, Université de Genève. [Downloadable!]
  9. Jesus Otero & Costas Milas, 2000. "Modelling official and parallel exchange rates in Colombia under alternative regimes: a non-linear approach (Corrected version)," BORRADORES DE INVESTIGACIÓN 003232, UNIVERSIDAD DEL ROSARIO - FACULTAD DE ECONOMÍA. [Downloadable!]
  10. Sarno, Lucio & Valente, Giorgio & Wohar, Mark E, 2003. "Monetary Fundamentals and Exchange Rate Dynamics under Different Nominal Regimes," CEPR Discussion Papers 3983, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  11. Tigran Poghosyan & Jakob de Haan, 2007. "Interest Rate Linkages in EMU Countries: A Rolling Threshold Vector Error-Correction Approach," CESifo Working Paper Series CESifo Working Paper No. , CESifo GmbH. [Downloadable!]
  12. Zacharias Psaradakis & Martin Sola & Fabio Spagnolo, 2004. "On Markov error-correction models, with an application to stock prices and dividends," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 19(1), pages 69-88. [Downloadable!]
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