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Nonlinear Error-Correction Models for Interest rates in the Netherlands

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Author Info
Van Dijk, D.
Franses, P.H.

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Abstract

In this chapter we investigate empirical specification of smooth transition error correction models (STECMs). These models can be used to describe linear long-run relationships between nonstationary variables where adjustment towards equilibrium is nonlinear and can depend on exogenous variables. The various steps involved in specifying an appropriate model are discussed for a monthly bivariate interest rate series for The Netherlands. Using simulations we first establish that standard (linearity-based) cointegration tests can be used to examine joint long-run properties. Second, we apply various tests for nonlinearity to decide on an appropriate function for the adjustment of disequilibrium errors. When we estimate an STECM, we find indications that nonlinearity is due to only two observations. We investigate the relevance of these data points by applying robust test for linearity and by considering less aggregated, i.e. weekly, data. We conclude with some suggestions for practitioners.

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Publisher Info
Paper provided by Erasmus University of Rotterdam - Econometric Institute in its series Papers with number 9704/a.

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Length: 26 pages
Date of creation: 1997
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Handle: RePEc:fth:erroem:9704/a

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Keywords: LINEAR MODELS ; INTEREST RATE;

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Find related papers by JEL classification:
C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General - - - Hypothesis Testing
C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions

References listed on IDEAS
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    Other versions:
  2. Engle, Robert F & Granger, Clive W J, 1987. "Co-integration and Error Correction: Representation, Estimation, and Testing," Econometrica, Econometric Society, vol. 55(2), pages 251-76, March. [Downloadable!] (restricted)
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    Other versions:
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  6. Phillips, Peter C B & Ouliaris, S, 1990. "Asymptotic Properties of Residual Based Tests for Cointegration," Econometrica, Econometric Society, vol. 58(1), pages 165-93, January. [Downloadable!] (restricted)
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  7. Granger, C. W. J., 1981. "Some properties of time series data and their use in econometric model specification," Journal of Econometrics, Elsevier, vol. 16(1), pages 121-130, May. [Downloadable!] (restricted)
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  10. Johansen, Soren, 1991. "Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models," Econometrica, Econometric Society, vol. 59(6), pages 1551-80, November. [Downloadable!] (restricted)
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  12. Hall, Anthony D & Anderson, Heather M & Granger, Clive W J, 1992. "A Cointegration Analysis of Treasury Bill Yields," The Review of Economics and Statistics, MIT Press, vol. 74(1), pages 116-26, February. [Downloadable!] (restricted)
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  1. Michael P. Clements & Philip Hans Franses & Norman R. Swanson, 2003. "Forecasting economic and financial time-series with non-linear models," Departmental Working Papers 200309, Rutgers University, Department of Economics. [Downloadable!]
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  2. Theo Panagiotidis & Mark J Holmes, 2005. "Sustainability and Asymmetric Adjustment: Some New Evidence Concerning Behaviour of the US Current Account," Money Macro and Finance (MMF) Research Group Conference 2005 29, Money Macro and Finance Research Group. [Downloadable!]
  3. Boriss Siliverstovs, 2005. "The Bi-parameter Smooth Transition Autoregressive model," Economics Bulletin, Economics Bulletin, vol. 3(23), pages 1-11. [Downloadable!]
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  4. D. van Dijk & T. Terasvirta & P.H. Franses, 2000. "Smooth transition autoregressive models - A survey of recent developments," Econometric Institute Report 200, Erasmus University Rotterdam, Econometric Institute. [Downloadable!]
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  5. Maximo Camacho, 2002. "Nonlinear stochastic trends and economic fluctuations," Computing in Economics and Finance 2002 274, Society for Computational Economics. [Downloadable!]
  6. Jawadi Fredj & Koubaa Yousra, 2004. "Threshold Cointegration between Stock Returns : An application of STECM Models," Econometrics 0412001, EconWPA. [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!]
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  8. Christopher Martin & Michael Arghyrou & Costas Milas, 2004. "Nonlinear inflation dynamics: evidence from the UK," Money Macro and Finance (MMF) Research Group Conference 2003 59, Money Macro and Finance Research Group. [Downloadable!]
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