Abstract

We develop a representation of nonlinear integrated vector processes based on the martingale representation theorem of Hall and Heyde (1980). In the representation, linear combinations of the components of the vector process may be stationary, so the system may be linearly cointegrated, yet exhibit nonlinear stationary, or short-run, dynamics. We test for linear cointegration relations with nonlinear dynamics in weekly U.S. interest rates. We find that the individual rates are I(1) and that the system is linearly cointegrated. Furthermore, both cointegration relations exhibit nonlinear dynamics so the the system's short-run dynamics are nonlinear.

Recommended Citation

Travis D. Nesmith and Barry E. Jones (2008) "Linear Cointegration of Nonlinear Time Series with an Application to Interest Rate Dynamics", Studies in Nonlinear Dynamics & Econometrics: Vol. 12: No. 1, Article 6.
http://www.bepress.com/snde/vol12/iss1/art6

Related Files

nesmith_datacode.zip (309 kB)
Data and code