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Transaction Costs and Nonlinear Adjustment Towards Equilibrium in the US Treasury Bill Market[Note 1. I am grateful to Nathan Balke, Vince Geraci, Clive ...]
Author(s) -
Anderson Heather M.
Publication year - 1997
Publication title -
oxford bulletin of economics and statistics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.131
H-Index - 73
eISSN - 1468-0084
pISSN - 0305-9049
DOI - 10.1111/1468-0084.00078
Subject(s) - disequilibrium , treasury , economics , transaction cost , econometrics , sample (material) , portfolio , aggregate (composite) , nonlinear system , database transaction , microeconomics , financial economics , computer science , medicine , chemistry , materials science , physics , archaeology , chromatography , quantum mechanics , ophthalmology , programming language , composite material , history
This paper uses nonlinear error correction models to study yield movements in the US Treasury Bill Market. Nonlinear error correction arises because portfolio adjustment is an ‘on‐off’ process, which occurs only when disequilibrium in the bill market is large enough to induce investors to incur the transaction costs associated with buying/selling bills. This, together with heterogeneity of transaction costs, implies that the strength of aggregate error correction depends on both the distribution of costs and the extent of disequilibrium in the market. Smooth transition models are used to describe an aggregate adjustment process which is strong when the market is distant from equilibrium, but becomes weaker as the market approaches equilibrium. Linearity tests indicate that the types of nonlinearities that would be induced by transactions costs are statistically significant, and estimated models which incororate these nonlinearities outperform their linear counterparts, both in sample and out of sample.