We are grateful to two anonymous referees and the associate editor for many valuable comments. This work was supported by a grant from the Swiss National Fund for Scientific Research.
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*
Article first published online: 11 JUL 2011
© Blackwell Publishing Ltd and the Department of Economics, University of Oxford, 2011
Oxford Bulletin of Economics and Statistics
Volume 74, Issue 2, pages 180–202, April 2012
How to Cite
Krishnakumar, J. and Neto, D. (2012), 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. Oxford Bulletin of Economics and Statistics, 74: 180–202. doi: 10.1111/j.1468-0084.2011.00644.x
- Issue published online: 9 FEB 2012
- Article first published online: 11 JUL 2011
- Final Manuscript Received: January 2011.
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.