Tests for Asymmetric Threshold Cointegration With An Application to the Term Structure

Abstract

A number of recent studies have found evidence of a nonlinear term structurerelationship in the U.S. This paper extends earlier work and develops tests of the nullhypothesis of no cointegration that allow for linear or asymmetric (or symmetric) thresholdcointegration under the alternative hypothesis. Applied to the residuals from regressionsof long-term interest rates on short-term interest rates for eleven countries, our tests rejectthe no cointegration hypothesis for eight of the countries in our sample. We find that fora majority of the countries, the adjustment of the long-term rate to disequilibrium is fastestwhen the equilibrium error is above the upper threshold, and the adjustment of the shortterm rate to disequilibrium is fastest when the equilibrium error is below the lowerthreshold. (C22; E43)