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A New Class of Bivariate Threshold Cointegration Models

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  • Biqing Cai

    ()

  • Jiti Gao

    ()

  • Dag Tjostheim

    ()

Abstract

In this paper, 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 from 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^(1/2), while the convergence rate for the estimators for the coefficients in the middle regime is T^(1/4). Also, we show that the convergence rate of the cointegrating coefficient is T , which is same as 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 Federal funds rate and 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 Tjostheim, 2015. "A New Class of Bivariate Threshold Cointegration Models," Monash Econometrics and Business Statistics Working Papers 1/15, Monash University, Department of Econometrics and Business Statistics.
  • Handle: RePEc:msh:ebswps:2015-1
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    File URL: http://business.monash.edu/econometrics-and-business-statistics/research/publications/ebs/wp01-15.pdf
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    Cited by:

    1. She, Rui & Ling, Shiqing, 2020. "Inference in heavy-tailed vector error correction models," Journal of Econometrics, Elsevier, vol. 214(2), pages 433-450.

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    More about this item

    Keywords

    β-null recurrent; cointegration; Markov chain; threshold VAR models;
    All these keywords.

    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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