Linear Cointegration of Nonlinear Time Series with an Application to Interest Rate Dynamics
نویسندگان
چکیده
We derive a de nition of linear cointegration for nonlinear stochastic processes using a martingale representation theorem. The result shows that stationary linear cointegrations can exhibit nonlinear dynamics, in contrast with the normal assumption of linearity. We propose a sequential nonparametric method to test rst for cointegration and second for nonlinear dynamics in the cointegrated system. We apply this method to weekly US interest rates constructed using a multirate lter rather than averaging. The Treasury Bill, Commercial Paper and Federal Funds rates are cointegrated, with two cointegrating vectors. Both cointegrations behave nonlinearly. Consequently, linear models will not fully replicate the dynamics of monetary policy transmission. JEL Classi cation: C14; C32; C51; C82; E4
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