Linear cointegration of nonlinear time series with an application to interest rate dynamics
AbstractWe derive a definition of linear cointegration for nonlinear stochastic processes using a martingale representation theorem. The result shows that stationary linear cointegrations can exhibit nonlinear dynamics, in contrast with the normal assumption of linearity. We propose a sequential nonparametric method to test first for cointegration and second for nonlinear dynamics in the cointegrated system. We apply this method to weekly US interest rates constructed using a multirate filter rather than averaging. The Treasury Bill, Commercial Paper and Federal Funds rates are cointegrated, with two cointegrating vectors. Both cointegrations behave nonlinearly. Consequently, linear models will not fully replicate the dynamics of monetary policy transmission.
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Bibliographic InfoPaper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 2007-03.
Date of creation: 2006
Date of revision:
Other versions of this item:
- Nesmith Travis D & Jones Barry E, 2008. "Linear Cointegration of Nonlinear Time Series with an Application to Interest Rate Dynamics," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 12(1), pages 1-18, March.
- C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
- C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
- C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
- C82 - Mathematical and Quantitative Methods - - Data Collection and Data Estimation Methodology; Computer Programs - - - Methodology for Collecting, Estimating, and Organizing Macroeconomic Data; Data Access
- E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
This paper has been announced in the following NEP Reports:
- NEP-ALL-2007-03-31 (All new papers)
- NEP-ECM-2007-03-31 (Econometrics)
- NEP-FMK-2007-03-31 (Financial Markets)
- NEP-MAC-2007-03-31 (Macroeconomics)
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