A comparison of tests of non-linear cointegration with an application to the predictability of US interest rates using the term structure

Clements, M. P. ORCID: https://orcid.org/0000-0001-6329-1341 and Galvao, A. B. (2004) A comparison of tests of non-linear cointegration with an application to the predictability of US interest rates using the term structure. International Journal of Forecasting, 20 (2). pp. 219-236. ISSN 0169-2070 doi: 10.1016/j.ijforecast.2003.09.001

Abstract/Summary

We test whether there are nonlinearities in the response of short- and long-term interest rates to the spread in interest rates, and assess the out-of-sample predictability of interest rates using linear and nonlinear models. We find strong evidence of nonlinearities in the response of interest rates to the spread. Nonlinearities are shown to result in more accurate short-horizon forecasts, especially of the spread.