Tests for Asymmetric Threshold Cointegration with an Application to the Term Structure

A number of recent studies have found evidence of a nonlinear term structure relationship in the U.S. This paper extends earlier work and develops tests of the null hypothesis of no cointegration that allow for linear or asymmetric (or symmetric) threshold cointegration under the alternative hypothesis. Applied to the residuals from regressions of long-term interest rates on short-term interest rates for eleven countries, our tests reject the no cointegration hypothesis for eight of the countries in our sample. We find that for a majority of the countries, the adjustment of the long-term rate to disequilibrium is fastest when the equilibrium error is above the upper threshold, and the adjustment of the short-term rate to disequilibrium is fastest when the equilibrium error is below the lower threshold.