Nonlinear cointegration in financial time series

Abstract

In this paper, the concept of linear cointegration as introduced by Engle and Granger [5] is merged into the local paradigm. Adopting a local approach enables the achievement of a local error correction model characterised by dynamic parameters.Another important result obtained using the local paradigm is that the mechanism that leads the dynamic system back to a steady state is no longer a constant: it is a function not defined a priori but estimated point by point.