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Threshold Cointegration between Stock Returns : An application of STECM Models

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Author Info

  • Jawadi Fredj

    (Université de Paris10-Nanterre MODEM-CNRS)

  • Koubaa Yousra

    (Université de Paris10-Nanterre MODEM-CNRS)

Abstract

The aim of this paper is to study the efficient capital market hypothesis by using recent developments in nonlinear econometrics. In such a context, we estimate a Smooth Transition Error Correction Model (STECM). We introduce the DowJones as an explanatory variable of the dynamics of the other stock indexes. The error correction term takes into account of the structural changes that occured progressively from both the endogenous and the DowJones series. We note that the Smooth Transition Error Correction Model, for which the dynamics of adjustment is of ESTAR type, is more adequate than the linear ECM model to represent the adjustment of the stock price to the long term equilibrium price. Estimation results reveal the nonlinearity inherent to the adjustment process. In particular, we note that the adjustment is not continuous and that the speed of convergence toward price of equilibrium is not constant but rather function of the size of the disequilibrium.

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Bibliographic Info

Paper provided by EconWPA in its series Econometrics with number 0412001.

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Length: 17 pages
Date of creation: 02 Dec 2004
Date of revision:
Handle: RePEc:wpa:wuwpem:0412001

Note: Type of Document - pdf; pages: 17
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Web page: http://128.118.178.162

Related research

Keywords: Efficiency; Regime-Switching Models; Threshold Cointegration; STECM.;

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References

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  1. Anderson, Heather M, 1997. "Transaction Costs and Non-linear Adjustment towards Equilibrium in the US Treasury Bill Market," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 59(4), pages 465-84, November.
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  8. Fama, Eugene F, 1970. "Efficient Capital Markets: A Review of Theory and Empirical Work," Journal of Finance, American Finance Association, vol. 25(2), pages 383-417, May.
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  10. Nathan S. Balke & Thomas B. Fomby, 1992. "Threshold cointegration," Research Paper 9209, Federal Reserve Bank of Dallas.
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  14. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
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  16. repec:att:wimass:9520 is not listed on IDEAS
  17. Lin, Chien-Fu Jeff & Terasvirta, Timo, 1994. "Testing the constancy of regression parameters against continuous structural change," Journal of Econometrics, Elsevier, vol. 62(2), pages 211-228, June.
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