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Testing Uncovered Interest Rate Parity and Term Structure using Three-Regime Threshold Unit Root VECM

  • Jaya Krishnakumar
  • David Neto

In this paper a three-regime multivariate threshold vector error correction model (TVECM) with a "band of inaction" is formulated to examine the expectation hypothesis of the term structure (EHTS) of interest rates and uncovered interest rate parity (UIRP) for U.S. and Swiss rates. Tests for no cointegration and for the number of cointegrating relationships are discussed within the framework of this TVECM with more than one cointegrating relationship, allowing for the possibility of a fewer number of cointegrating relations in one regime compared to the other. Our results conclude that all the three possible cointegrating relations are accepted that is consistent with both the UIRP and EHTS hypotheses.

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Paper provided by Institut d'Economie et Econométrie, Université de Genève in its series Research Papers by the Institute of Economics and Econometrics, Geneva School of Economics and Management, University of Geneva with number 2009.06.

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Length: 22 pages
Date of creation: Jan 2009
Date of revision:
Handle: RePEc:gen:geneem:2009.06
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  23. Seo, Myunghwan, 2006. "Bootstrap testing for the null of no cointegration in a threshold vector error correction model," Journal of Econometrics, Elsevier, vol. 134(1), pages 129-150, September.
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