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A New Class of Bivariate Threshold Cointegration Models

Author

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  • Biqing Cai
  • Jiti Gao
  • Dag Tjøstheim

Abstract

In this article, we introduce a new class of bivariate threshold VAR cointegration models. In the models, outside a compact region, the processes are cointegrated, while in the compact region, we allow different kinds of possibilities. We show that the bivariate processes form a 1/2-null recurrent system. We also find that the convergence rate for the estimators for the coefficients in the outside regime is T$\sqrt{T}$, while the convergence rate for the estimators for the coefficients in the middle regime is T1/4. Moreover, we show that the convergence rate of the cointegrating coefficient is T, which is same as for the linear cointegration model. The Monte Carlo simulation results suggest that the estimators perform reasonably well in finite samples. Applying the proposed model to study the dynamic relationship between the federal funds rate and the 3-month Treasury bill rate, we find that cointegrating coefficients are the same for the two regimes while the short run loading coefficients are different.

Suggested Citation

  • Biqing Cai & Jiti Gao & Dag Tjøstheim, 2017. "A New Class of Bivariate Threshold Cointegration Models," Journal of Business & Economic Statistics, Taylor & Francis Journals, vol. 35(2), pages 288-305, April.
    • Handle: RePEc:taf:jnlbes:v:35:y:2017:i:2:p:288-305
    DOI: 10.1080/07350015.2015.1062385
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    Cited by:

    1. Bravo, Francesco & Li, Degui & Tjøstheim, Dag, 2021. "Robust nonlinear regression estimation in null recurrent time series," Journal of Econometrics, Elsevier, vol. 224(2), pages 416-438.
    2. She, Rui & Ling, Shiqing, 2020. "Inference in heavy-tailed vector error correction models," Journal of Econometrics, Elsevier, vol. 214(2), pages 433-450.
    3. James A. Duffy & Sophocles Mavroeidis & Sam Wycherley, 2022. "Cointegration with Occasionally Binding Constraints," Papers 2211.09604, arXiv.org, revised Sep 2025.
    4. Timo Teräsvirta, 2017. "Nonlinear models in macroeconometrics," CREATES Research Papers 2017-32, Department of Economics and Business Economics, Aarhus University.
    5. Biqing Cai & Dag Tjøstheim, 2015. "Nonparametric Regression Estimation for Multivariate Null Recurrent Processes," Econometrics, MDPI, vol. 3(2), pages 1-24, April.

    More about this item

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G01 - Financial Economics - - General - - - Financial Crises

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