This paper studies the dynamics of lending and deposit rates in four emerging markets in Latin

Outliers and nonlinearity may easily be mistaken. This paper uses Monte Carlo methods to examine and compare the behavior of two competing specification procedures for Smooth Transition AutoRegressive [STAR] models under various different circumstances (linear and nonlinear data generating processes, with and without outlier contamination) . The extensive simulation evidence demonstrates that the use of outlierrobust variants of the linearity tests which are involved leads to procedures with more desirable properties. An application to several real exchange rate series illustrates the potential usefulness of the robust specification procedures, especially in case one is not certain whether or not aberrant observations are present. Keywords: Smooth transition autoregression, Lagrange Multiplier test, Specification procedure, Outliers. JEL classification: C12, C22 Correspondence to Dick van Dijk, Tinbergen Institute, P.O. Box 1738, NL-3000 DR Rotterdam, The Netherlands, email...

This paper provides an empirical description of the relationship between the trading system operated by a stock exchange and the transaction costs faced by heterogeneous investors who use the exchange. The recent introduction of SETS in the London Stock Exchange provides an excellent opportunity to study the impact of an electronic trading system upon transaction costs and the time taken to carry out a trade. Using the cost-of-carry model of futures prices we estimate #non-linearly# the transaction costs and trade speeds faced by arbitragers who take advantage of mispricing of FTSE100 futures contracts relative to the spot prices of the stocks that make up the FTSE100 stock index. We divide the sample period into pre-SETS and post-SETS sample periods and conduct a comparative study of arbitrager behaviour under di#erent trading systems. The results indicate that there has been a signi#cant reduction in the level of transaction costs faced by arbitragers and in the degree of transaction cost heterogeneity since the introduction of SETS. Finally, generalised impulse response functions show that both spot and futures prices adjust more quickly in the post-SETS period.

This paper investigates the expectations hypothesis for the Japanese term structure of in-terest rates using vector error correction models with multiple structural breaks, focusing on how the breaks affect volatility, risk premium and speed of the adjustment toward the equilib-rium. Using 1985-2005 data, we find strong evidence of three structural changes. After the second break point, the term structure relationship is found to be weakened with nearly zero percent short-term interest rate. This finding is consistent with the expectations hypothesis since with very low short-term interest rate the risk premium is dominant in determining long rates.

This study investigates the linearity and stationarity properties of government bond returns for the G7 economies. Our results from Luukkonen et al. (1988) linearity test reveal the nonlinear nature of all of the G7 bond returns. Furthermore, we had determined that they are stationary by the Kapetanios et al. (2003) nonlinear unit root test. In sum, it can be concluded that G7 government bond returns are stationary but possess a nonlinear feature. Our findings provide useful information for researchers interested in bond markets. The authors would like to thank the two anonymous reviewers, whose comments have led to a substantially improvement in the presentation of this paper. The remaining errors, if any, are solely the authors. The authors wish to acknowledge a research grant funded by University of

This document is the authors ' final version of the published article.

This paper estimates a variety of models of inflation using quarterly data for the UK between 1965 and 2001. We find that the persistence of inflation is nonlinear since inflation adjusts more rapidly when prices are further from the steady state and when prices are above the steady state. We find that models that assume a uniform speed of adjustment are unreliable in periods of macroeconomic stress, when inflation adjusts more rapidly. Our findings suggest a need for a more sophisticated analysis of optimal monetary policy that allows for variations in the persistence of inflation and highlight the dangers of policymakers not using the best available model of inflation. JEL classification: C51, C52, E31 1.

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This paper provides an empirical description of the behaviour of excess returns on UK government discount bonds in terms of risk factors such as the forward premium, the slope of the term structure, dividend yields and excess stock returns. We identify the existence of a time-varying term structure of expected excess returns. Further, the dynamics of the expected returns are characterised by regime-switching behaviour where the transition from one regime to the other is controlled by the slope of the term structure of interest rates. The first regime, which is characterised by flat or downward sloping term structures, occurs during periods of economic recession. The second regime, which is characterised by upward sloping term structures, occurs during periods of economic expansion. The main risk factors explaining expected returns are the slope of the term structure in the recessionary regime and the excess stock returns in the expansionary regime.

SmThe views expressed in this paper are those of the author. No responsibility for them should be attributed to the Bank of Canada.December 2001