Testing Uncovered Interest Rate Parity and Term Structure using Three-Regime Threshold Unit Root VECM

In this paper a three-regime multivariate threshold vector error correction model (TVECM) with a "band of inaction" is formulated to examine the expectation hypothesis of the term structure (EHTS) of interest rates and uncovered interest rate parity (UIRP) for U.S. and Swiss rates. Tests for no cointegration and for the number of cointegrating relationships are discussed within the framework of this TVECM with more than one cointegrating relationship, allowing for the possibility of a fewer number of cointegrating relations in one regime compared to the other. Our results conclude that all the three possible cointegrating relations are accepted that is consistent with both the UIRP and EHTS hypotheses.