Our paper has several distinctive features. First, we do not assume symmetric adjustment of cointegration errors, but instead use threshold cointegration methods. We get strong evidence of cointegration between the exchange rate series and the expected rates series. When the forecast error is positive, we may observe a different autoregressive coefficient than when negative. While unit-root tests cannot reject the null hypothesis of unit roots, we find clear evidence of asymmetric adjustments in about 25 per cent of the cases.
Structural shifts are important to the economics and econometrics of our investigation.
Despite evidence of structural shifts, the cointegration evidence remains very compelling. Fourth, in work still underway, we are investigating several issues raised by our results. We are probing the extent to which structural shifts may masquerade as threshold behavior. Paper provided by Society for Computational Economics in its series Computing in Economics and Finance '99 with number 1112. To our knowledge, this item is not available for download.