A Comment on Tests for Asymmetric Threshold Cointegration with an Application to the Term Structure: Cointegration Methods Matter

Wohar and Sollis (2007) test for asymmetric threshold cointegration in the term structure of interest rates for several OECD countries. They use the Engle-Granger (1987) method to construct the error correction term, and this estimated error correction term is then used to test for asymmetric threshold cointegration. The Engle-Granger method is commonly used in the term structure and pass-through literature. However, we show that different cointegration tests and methods may potentially lead to different error correction terms. As noted by Cook (2008), the Engle-Granger method leads to severe downward bias in the long-run (cointegration) parameter. These parameters are then used in the second stage to test for asymmetries. We test for cointegration using the Engle-Granger and the Johansen (1991) methods. Using the same sample period for a subset of countries used in Wohar and Sollis, our results suggest substantial downward bias in the Engle-Granger method, which may potentially alter any asymmetric adjustment and/or threshold cointegration results.