Testing for nonlinear cointegration under heteroskedasticity

This article discusses Shin (Citation1994, Econometric Theory)-type tests for nonlinear cointegration in the presence of variance breaks. We build on cointegration test approaches under heteroskedasticity (Cavaliere and Taylor, Citation2006, Journal of Time Series Analysis) and nonlinearity, serial correlation, and endogeneity (Choi and Saikkonen, Citation2010, Econometric Theory) to propose a bootstrap test and prove its consistency. A Monte Carlo study shows the approach to have satisfactory finite-sample properties in a variety of scenarios. We provide an empirical application to the environmental Kuznets curves (EKC), finding that the cointegration test provides little evidence for the EKC hypothesis. Additionally, we examine a nonlinear relation between the US money demand and the interest rate, finding that our test does not reject the null of a smooth transition cointegrating relation.