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Testing for Smooth Transition Nonlinearity in Adjustments of Cointegrating Systems

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  • Nedeljkovic, Milan

    (Department of Economics,University of Warwick)

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    Abstract

    This paper studies testing for the presence of smooth transition nonlinearity in adjustment parameters of the vector error correction model. We specify the generalized model with multiple cointegrating vectors and different transition functions across equations. Given that the nonlinear model is highly complex, this paper proposes an optimal LM test based only on estimation of the linear model. The null asymptotic distribution is derived using empirical process theory and since the transition parameters of the model cannot be identified under the null hypothesis bootstrap procedures are used to approximate the limit. Monte Carlo simulations indicate a good performance of the test.

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    File URL: http://www2.warwick.ac.uk/fac/soc/economics/research/workingpapers/2008/twerp_876.pdf
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    Bibliographic Info

    Paper provided by University of Warwick, Department of Economics in its series The Warwick Economics Research Paper Series (TWERPS) with number 876.

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    Length: 39 pages
    Date of creation: 2008
    Date of revision:
    Handle: RePEc:wrk:warwec:876

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    Keywords: Nonlinearity ; Cointegration ; Empirical process theory ; Bootstrap;

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