Nonlinear error correction models

Abstract

The relationship between cointegration and error correction (EC) models is well characterized in a linear context, but the extension to the nonlinear context is still a challenge. Few extensions of the linear framework have been done in the context of nonlinear error correction (NEC) or asymmetric and time varying error correction models. In this paper, we propose a theoretical framework based on the concept of near epoch dependence (NED) that allows us to formally address these issues. In particular, we partially extend the Granger Representation Theorem to the nonlinear case.