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Vol. 65, No. 1, pp. 56-85 (2014)

“The Comovement in Stock Price Indexes of Japan, United States, and China: Estimation of a Nonlinear Cointegration Model”
Kazumi Asako (Institute of Economic Research, Hitotsubashi University), Yan Zhang (The International College of Arts and Sciences, Fukuoka Women's University), Zhentao Liu (Institute for Financial and Accounting Studies, Xiamen University)

This paper proposes and estimates a statistical model of nonlinear cointegration with applications to the stock markets of Japan, United States, and China. We define nonlinear cointegration as a long-run stable relationship between two time series variables even in the presence of temporary nonlinear divergence from this long-run relationship. More concretely, extending the bubble model of Asako and Liu (2013) to stock price ratio variables, both upward and downward divergent bubble processes are estimated at a time. We conclude that, although no pair of stock price series among the three is linearly cointegrated, they are considered to be cointegrated nonlinearly.