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Testing Uncovered Interest Rate Parity and Term Structure Using a Three‐regime Threshold Unit Root VECM: An Application to the Swiss ‘Isle’ of Interest Rates *
Author(s) -
Krishnakumar Jaya,
Neto David
Publication year - 2012
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/j.1468-0084.2011.00644.x
Subject(s) - cointegration , econometrics , unit root , economics , error correction model , term (time) , interest rate , parity (physics) , multivariate statistics , interest rate parity , yield curve , regime shift , mathematics , statistics , monetary economics , physics , ecology , particle physics , quantum mechanics , ecosystem , biology
In this article, a three‐regime multivariate threshold vector error correction model with a ‘band of inaction’ is formulated to examine uncovered interest rate parity (UIRP) and expectation hypothesis of the term structure (EHTS) of interest rates for Switzerland. Combining both UIRP and EHTS in a model that allows for nonlinearities, we investigate whether the Swiss advantage is disappearing with respect to Europe. Our results favour threshold cointegration and show that both hypotheses hold, at least in one of the three regimes of the process for Switzerland/Germany. The same is not true between Switzerland and the United States.