Keywords: Non-linear dynamics, co-integration interest rates, bispectrum
Abstract: Using Hall and Heyde's (1980) representation theorem,
we show that the stationary co-integration relations of
an integrated system are generally non-linear stochastic
processes. We propose a sequential non-parametric
procedure to test stationary co-integration relations for
non-linear dynamics, and apply this procedure to short
term U.S. interest rates as an illustration. We demonstrate
that the weekly federal funds rate is co-integrated with
Treasury bill and commercial paper rates and that the
co-integration relations are non-linear.
Full paper (608 KB PDF)
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Last update: December 21, 1999