Abstract
A multivariate threshold vector error correction model (TVECM) 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, for the number of cointegrating relations and for the presence of threshold effects 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. The results conclude that all the three possible cointegrating relations are accepted. This is consistent with both the UIRP and the EHTS hypothesis. A strong evidence for a threshold effect is also found.
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Krishnakumar, J., Neto, D. (2008). Testing Uncovered Interest Rate Parity and Term Structure Using Multivariate Threshold Cointegration. In: Kontoghiorghes, E.J., Rustem, B., Winker, P. (eds) Computational Methods in Financial Engineering. Springer, Berlin, Heidelberg. https://doi.org/10.1007/978-3-540-77958-2_10
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