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TESTING FOR COINTEGRATION IN NONLINEAR SMOOTH TRANSITION ERROR CORRECTION MODELS

Published online by Cambridge University Press:  09 February 2006

George Kapetanios ,
Yongcheol Shin  and
Andy Snell
George Kapetanios
Affiliation:
Queen Mary, University of London
Yongcheol Shin
Affiliation:
Leeds University Business School
Andy Snell
Affiliation:
Edinburgh School of Economics, University of Edinburgh
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Abstract

This paper proposes a new testing procedure to detect the presence of a cointegrating relationship that follows a globally stationary smooth transition process. In the context of nonlinear smooth transition error correction models (ECMs) we provide two simple operational versions of the tests. First, we obtain the associated nonlinear ECM-based tests. Second, we derive the nonlinear analogue of the residual-based test for cointegration in linear models. We derive the asymptotic distributions of the proposed tests. Monte Carlo simulation exercises confirm that our proposed tests have much better power than the linear counterparts against the alternative of a globally stationary nonlinear cointegrating process. In an application to the price-dividend relationship, our test is able to find cointegration, whereas the linear-based tests fail to do so.We are grateful to an associate editor, two anonymous referees, Richard Baillie, In Choi, Atanas Christev, Hira Koul, Richard Harris, Cheng Hsiao, Changjin Kim, Joon Park, Peter Schmidt, Yoonjae Whang, Jeff Wooldridge, and seminar participants at University of Edinburgh, Heriot-Watt University, Korea University, University of Leeds, Michigan State University, University of Newcastle, and Sungkunkwan University for their helpful comments. Partial financial support from the ESRC (grant R000223399) is gratefully acknowledged. The usual disclaimer applies.

Type
Research Article
Information
Econometric Theory , Volume 22 , Issue 2 , April 2006 , pp. 279 - 303
Copyright
© 2006 Cambridge University Press

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