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Testing for Smooth Transition Nonlinearity in the Presence of Outliers

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  • Van Dijk, Dick
  • Franses, Philip Hans
  • Lucas, Andre

Abstract

Regime-switching models, like the smooth transition autoregressive (STAR) model, are typically applied to time series of moderate length. Hence, the nonlinear features that these models intend to describe may be reflected in only a few observations. Conversely, neglected outliers in a linear time series of moderate length may incorrectly suggest STAR (or other) type(s of) nonlinearity. In this article, the authors propose outlier robust tests for STAR-type nonlinearity. These tests are designed such that they have a better level and power behavior than standard nonrobust tests in situations with outliers. They formally derive local and global robustness properties of the new tests. Extensive Monte Carlo simulations show the practical usefulness of the robust tests. An application to several quarterly industrial production indexes illustrates that apparent nonlinearity in time series sometimes seems due to only a few outliers.

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Bibliographic Info

Article provided by American Statistical Association in its journal Journal of Business and Economic Statistics.

Volume (Year): 17 (1999)
Issue (Month): 2 (April)
Pages: 217-35

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Handle: RePEc:bes:jnlbes:v:17:y:1999:i:2:p:217-35

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  1. Peracchi, Franco, 1991. "Robust M-Tests," Econometric Theory, Cambridge University Press, vol. 7(01), pages 69-84, March.
  2. Nathan S. Balke & Thomas B. Fomby, 1991. "Large shocks, small shocks, and economic fluctuations: outliers in macroeconomic times series," Research Paper 9101, Federal Reserve Bank of Dallas.
  3. Granger, Clive W. J. & Terasvirta, Timo, 1993. "Modelling Non-Linear Economic Relationships," OUP Catalogue, Oxford University Press, number 9780198773207, September.
  4. Ritva LUUKKONEN & Timo TERASVIRTA, 1991. "Testing Linearity of Economic Time Series against Cyclical Asymmetry," Annales d'Economie et de Statistique, ENSAE, issue 20-21, pages 125-142.
  5. Hoek, Henk & Lucas, Andre & van Dijk, Herman K., 1995. "Classical and Bayesian aspects of robust unit root inference," Journal of Econometrics, Elsevier, vol. 69(1), pages 27-59, September.
  6. Terasvirta, T & Anderson, H M, 1992. "Characterizing Nonlinearities in Business Cycles Using Smooth Transition Autoregressive Models," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 7(S), pages S119-36, Suppl. De.
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