Estimating threshold vector error-correction models with multiple cointegrating relationships

Abstract

Hansen and Seo (2002) outline procedures to test for threshold cointegration, and to estimate a bi-variate model. However, in their conclusion they note that future research will have to find a way of estimating larger systems with multiple cointegrating vectors. This paper proposes a new algorithm that can be used to estimate such models. Simulation experiments are used to compare the algorithm´s performance with that of Hansen and Seo, and a practical application to the term structure of UK interest rates is also presented