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Determining the Number of Regimes in a Threshold Autoregressive Model Using Smooth Transition Autoregressions

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Author Info

  • Strikholm, Birgit

    ()
    (Dept. of Economic Statistics, Stockholm School of Economics)

  • Teräsvirta, Timo

    ()
    (Dept. of Economic Statistics, Stockholm School of Economics)

Abstract

In this paper we propose a method for determining the number of regimes in threshold autoregressive models using smooth transition autoregression as a tool. As the smooth transition model is just an approximation to the threshold autoregressive one, no asymptotic properties are claimed for the proposed method. Tests available for testing the adequacy of a smooth transition autoregressive model are applied sequentially to determine the number of regimes. A simulation study is performed in order to find out the finite-sample properties of the procedure and to compare it with two other procedures available in the literature. We find that our method works reasonably well for both single and multiple threshold models.

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Bibliographic Info

Paper provided by Stockholm School of Economics in its series Working Paper Series in Economics and Finance with number 578.

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Length: 28 pages
Date of creation: 11 Jan 2005
Date of revision: 11 Feb 2005
Publication status: Published in Econometrics Journal, 2006, pages 472-491.
Handle: RePEc:hhs:hastef:0578

Note: This is an early version of the paper published under a different title in Econometrics Journal 9, 472-491 (2006).
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Keywords: Model specification; model selection criterion; nonlinear modelling; sequential testing; switching regression;

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References

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  1. Jushan Bai & Pierre Perron, 2003. "Computation and analysis of multiple structural change models," Journal of Applied Econometrics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 18(1), pages 1-22.
  2. George Kapetanios, 2003. "Threshold models for trended time series," Empirical Economics, Springer, Springer, vol. 28(4), pages 687-707, November.
  3. Stephen Godfeld & Richard Quandt, 1973. "The Estimation Of Structural Shifts By Switching Regressions," NBER Chapters, National Bureau of Economic Research, Inc, in: Annals of Economic and Social Measurement, Volume 2, number 4, pages 473-483 National Bureau of Economic Research, Inc.
  4. Eitrheim, Oyvind & Terasvirta, Timo, 1996. "Testing the adequacy of smooth transition autoregressive models," Journal of Econometrics, Elsevier, Elsevier, vol. 74(1), pages 59-75, September.
  5. repec:cup:etheor:v:13:y:1997:i:3:p:315-52 is not listed on IDEAS
  6. Bai, Jushan, 1997. "Estimating Multiple Breaks One at a Time," Econometric Theory, Cambridge University Press, Cambridge University Press, vol. 13(03), pages 315-352, June.
  7. Kapetanios, G., 1999. "Threshold Models for Trended Time Series," Cambridge Working Papers in Economics, Faculty of Economics, University of Cambridge 9905, Faculty of Economics, University of Cambridge.
  8. Hansen, Bruce E., 1999. "Threshold effects in non-dynamic panels: Estimation, testing, and inference," Journal of Econometrics, Elsevier, Elsevier, vol. 93(2), pages 345-368, December.
  9. Andres Gonzalez & Timo Terasvirta & Dick van Dijk, 2005. "Panel Smooth Transition Regression Models," Research Paper Series, Quantitative Finance Research Centre, University of Technology, Sydney 165, Quantitative Finance Research Centre, University of Technology, Sydney.
  10. Hansen,B.E., 1999. "Testing for linearity," Working papers, Wisconsin Madison - Social Systems 7, Wisconsin Madison - Social Systems.
  11. Koop, Gary & Potter, Simon M, 1999. "Dynamic Asymmetries in U.S. Unemployment," Journal of Business & Economic Statistics, American Statistical Association, American Statistical Association, vol. 17(3), pages 298-312, July.
  12. Bruce E. Hansen, 2000. "Sample Splitting and Threshold Estimation," Econometrica, Econometric Society, Econometric Society, vol. 68(3), pages 575-604, May.
  13. Hansen, Bruce E, 1996. "Inference When a Nuisance Parameter Is Not Identified under the Null Hypothesis," Econometrica, Econometric Society, Econometric Society, vol. 64(2), pages 413-30, March.
  14. Perron, P. & Bai, J., 1995. "Estimating and Testing Linear Models with Multiple Structural Changes," Cahiers de recherche, Centre interuniversitaire de recherche en économie quantitative, CIREQ 9552, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
  15. Russell Davidson & James MacKinnon, 2000. "Bootstrap tests: how many bootstraps?," Econometric Reviews, Taylor & Francis Journals, Taylor & Francis Journals, vol. 19(1), pages 55-68.
  16. Mehmet Caner & Bruce E. Hansen, 2001. "Threshold Autoregression with a Unit Root," Econometrica, Econometric Society, Econometric Society, vol. 69(6), pages 1555-1596, November.
  17. Medeiros, Marcelo & Veiga, Alvaro & Resende, Mauricio, 2000. "A Combinatorial Approach to Piecewise Linear Time Series Analysis," Working Paper Series in Economics and Finance, Stockholm School of Economics 393, Stockholm School of Economics.
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Citations

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Cited by:
  1. Strikholm, Birgit, 2006. "Determining the number of breaks in a piecewise linear regression model," Working Paper Series in Economics and Finance, Stockholm School of Economics 648, Stockholm School of Economics.
  2. Chang, Ya-Kai & Chen, Yu-Lun & Chou, Robin K. & Gau, Yin-Feng, 2013. "The effectiveness of position limits: Evidence from the foreign exchange futures markets," Journal of Banking & Finance, Elsevier, Elsevier, vol. 37(11), pages 4501-4509.
  3. Matteo Modena, 2008. "The Term Structure and the Expectations Hypothesis: a Threshold Model," Working Papers, Business School - Economics, University of Glasgow 2008_36, Business School - Economics, University of Glasgow.
  4. Ana Beatriz C. Galvao, 2006. "Structural break threshold VARs for predicting US recessions using the spread," Journal of Applied Econometrics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 21(4), pages 463-487.
  5. Galvão, Ana Beatriz, 2013. "Changes in predictive ability with mixed frequency data," International Journal of Forecasting, Elsevier, Elsevier, vol. 29(3), pages 395-410.
  6. Teräsvirta, Timo, 2005. "Forecasting economic variables with nonlinear models," Working Paper Series in Economics and Finance, Stockholm School of Economics 598, Stockholm School of Economics, revised 29 Dec 2005.
  7. Lazzarini, S. G. & Madalozzo, R. C & Artes, R. & Siqueira, J. O., 2004. "Measuring trust: An experiment in Brazil," Insper Working Papers, Insper Working Paper, Insper Instituto de Ensino e Pesquisa wpe_42, Insper Working Paper, Insper Instituto de Ensino e Pesquisa.

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