Threshold cointegration and threshold dynamics

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Chung, Pin
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Barry Falk
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The Department of Economic Science was founded in 1898 to teach economic theory as a truth of industrial life, and was very much concerned with applying economics to business and industry, particularly agriculture. Between 1910 and 1967 it showed the growing influence of other social studies, such as sociology, history, and political science. Today it encompasses the majors of Agricultural Business (preparing for agricultural finance and management), Business Economics, and Economics (for advanced studies in business or economics or for careers in financing, management, insurance, etc).

The Department of Economic Science was founded in 1898 under the Division of Industrial Science (later College of Liberal Arts and Sciences); it became co-directed by the Division of Agriculture in 1919. In 1910 it became the Department of Economics and Political Science. In 1913 it became the Department of Applied Economics and Social Science; in 1924 it became the Department of Economics, History, and Sociology; in 1931 it became the Department of Economics and Sociology. In 1967 it became the Department of Economics, and in 2007 it became co-directed by the Colleges of Agriculture and Life Sciences, Liberal Arts and Sciences, and Business.

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  • Department of Economic Science (1898–1910)
  • Department of Economics and Political Science (1910-1913)
  • Department of Applied Economics and Social Science (1913–1924)
  • Department of Economics, History and Sociology (1924–1931)
  • Department of Economics and Sociology (1931–1967)

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This study utilized monthly averages of daily rates for the 10-year constant maturity Treasury note, the Ibbotson Bond Index with maturity of 20-year Treasury Index, and Moody's Aaa and Baa seasoned bond indices to investigate the threshold behavior of interest rates pairs. The data covered the period from January 1960 to December 1997 with a total of 456 observations for each variable. Three (Lo-Zivot 2001, Hansen-Seo 2002, and Enders-Siklos 2001) different non-linear, discontinuous, asymmetric time-series econometric alternatives were applied to investigate the dynamics of the four interest rates pairs. Forecasting accuracy evaluation was utilized for model evaluation by applying one-step-ahead up to six-step-ahead forecasts.;Among the findings, it was ascertained that interest spreads are stationary, yet the speeds of adjustment are asymmetric. In a bivariate setting, all of the interest rates pairs followed the threshold cointegration behavior. All the interest rates pairs were shown to be threshold cointegrated. In general, the adjustment speeds were asymmetric and, especially, the threshold estimates were asymmetric in a three-regime environment.;Long run equilibrium relationships existed between Moody's corporate bond indices and Treasury note and Ibbotson bond index. In general, for a one percent increase in Treasury rates (either Treasury note or Ibbotson index), in the long run, it will generate a more than one percent increase in corporate bond indices (Aaa or Baa). Furthermore, the Baa bond index was shown to have a greater sensitivity to interest rate changes than the Aaa bond index.;For the model evaluation side, one-step-ahead forecast to six-step-ahead forecast performance evaluations were conducted for the threshold cointegration models and the counterpart of the linear cointegration models. The results showed that no one particular threshold cointegration model dictated the overall forecasting accuracy. For different interest rates pairs under consideration, different threshold cointegration models offered a better fit. Moreover, all of the linear cointegration models performed relatively less accurate than the threshold cointegration models, which reinforce the empirical applications of the threshold cointegration models.

Wed Jan 01 00:00:00 UTC 2003