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A Comment on Tests for Asymmetric Threshold Cointegration with an Application to the Term Structure: Cointegration Methods Matter

Author

Listed:
  • Natalie Hegwood

    (Sam Houston State University)

  • M.H. Tuttle

    (Sam Houston State University)

Abstract

Wohar and Sollis (2007) test for asymmetric threshold cointegration in the term structure of interest rates for several OECD countries. They use the Engle-Granger (1987) method to construct the error correction term, and this estimated error correction term is then used to test for asymmetric threshold cointegration. The Engle-Granger method is commonly used in the term structure and pass-through literature. However, we show that different cointegration tests and methods may potentially lead to different error correction terms. As noted by Cook (2008), the Engle-Granger method leads to severe downward bias in the long-run (cointegration) parameter. These parameters are then used in the second stage to test for asymmetries. We test for cointegration using the Engle-Granger and the Johansen (1991) methods. Using the same sample period for a subset of countries used in Wohar and Sollis, our results suggest substantial downward bias in the Engle-Granger method, which may potentially alter any asymmetric adjustment and/or threshold cointegration results.

Suggested Citation

  • Natalie Hegwood & M.H. Tuttle, 2013. "A Comment on Tests for Asymmetric Threshold Cointegration with an Application to the Term Structure: Cointegration Methods Matter," Journal of Economic Insight, Missouri Valley Economic Association, vol. 39(1), pages 73-77.
  • Handle: RePEc:mve:journl:v:39:y:2013:i:1:p:73-77
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    Cited by:

    1. Bumpass, Donald & Ginn, Vance & Tuttle, M.H., 2015. "Retail and wholesale gasoline price adjustments in response to oil price changes," Energy Economics, Elsevier, vol. 52(PA), pages 49-54.

    More about this item

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects

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