REGIME-SENSITIVE COINTEGRATION: THE RELATIONSHIP BETWEEN GOLD AND SILVER

Margherita Gerolimetto and Isabella Procidano

Received July 15, 2009

Abstract

The presence of structural breaks in economic variables is one of the reasons why the cointegration analysis defined by Engle and Granger [4] is not always able to detect the existence of a long run relationship, even when this is supported by the economic theory. In such a view, Granger and Siklos [6] propose the concept of regime-sensitive cointegration. This paper presents further developments on regime-sensitive cointegration to investigate about the existence of a stable equilibrium relationship between the price of gold and silver over the period 1971-2004.

Keywords and phrases: structural breaks, Bai-Perron test, Regime-sensitive cointegration.