Advanced Search
MyIDEAS: Login to save this paper or follow this series

Specifying Smooth Transition Regression Models in the Presence of Conditional Heteroskedasticity of Unknown Form

Contents:

Author Info

  • E Pavlidis
  • I Paya
  • D Peel

Abstract

The specification of Smooth Transition Regression models consists of a sequence of tests, which are typically based on the assumption of i.i.d. errors. In this paper we examine the impact of conditional heteroskedasticity and investigate the performance of several heteroskedasticity robust versions. Simulation evidence indicates that conventional tests can frequently result in finding spurious nonlinearity. Conversely, when the true process is nonlinear in mean the tests appear to have low size adjusted power and can lead to the selection of misspecified models. The above deficiencies also hold for tests based on Heteroskedasticity Consistent Covariance Matrix Estimators but not for the Fixed Design Wild Bootstrap. We highlight the importance of robust inference through empirical applications.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.research.lancs.ac.uk/portal/services/downloadRegister/599041/Document.pdf
Download Restriction: no

Bibliographic Info

Paper provided by Lancaster University Management School, Economics Department in its series Working Papers with number 599040.

as in new window
Length:
Date of creation: 2009
Date of revision:
Handle: RePEc:lan:wpaper:599040

Contact details of provider:
Postal: LANCASTER LA1 4YX
Phone: +44 (1524) 594601
Fax: +44 (1524) 594244
Email:
Web page: http://www.lancaster.ac.uk/lums
More information through EDIRC

Related research

Keywords:

Other versions of this item:

Find related papers by JEL classification:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Taylor, Mark P & Peel, David A & Sarno, Lucio, 2001. "Nonlinear Mean-Reversion in Real Exchange Rates: Toward a Solution to the Purchasing Power Parity Puzzles," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 42(4), pages 1015-42, November.
  2. Timo Terasvirta, 2004. "A Time Series Model for an Exchange Rate in a Target Zone with Applications," Econometric Society 2004 Australasian Meetings, Econometric Society 340, Econometric Society.
  3. Engel, C. & Kim, C.J., 1996. "The Long-Run U.S./U.K. real Exchange Rate," Discussion Papers in Economics at the University of Washington, Department of Economics at the University of Washington 96-14, Department of Economics at the University of Washington.
  4. Paul R. Krugman, 1988. "Target Zones and Exchange Rate Dynamics," NBER Working Papers 2481, National Bureau of Economic Research, Inc.
  5. Andrés González & Timo Teräsvirta, 2006. "Simulation-based Finite Sample Linearity Test against Smooth Transition Models," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 68(s1), pages 797-812, December.
  6. Bollerslev, Tim, 1986. "Generalized autoregressive conditional heteroskedasticity," Journal of Econometrics, Elsevier, Elsevier, vol. 31(3), pages 307-327, April.
  7. Deschamps, Philippe J., 2007. "Comparing smooth transition and Markov switching autoregressive models of US Unemployment," DQE Working Papers, Department of Quantitative Economics, University of Freiburg/Fribourg Switzerland 7, Department of Quantitative Economics, University of Freiburg/Fribourg Switzerland, revised 04 Jun 2008.
  8. Emmanuel Flachaire, 2005. "Bootstrapping heteroskedastic regression models: wild bootstrap vs. pairs bootstrap," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00175910, HAL.
  9. Hsieh, David A., 1992. "A nonlinear stochastic rational expectations model of exchange rates," Journal of International Money and Finance, Elsevier, Elsevier, vol. 11(3), pages 235-250, June.
  10. GONÇALVES, Silvia & KILIAN, Lutz, 2003. "Bootstrapping Autoregressions with Conditional Heteroskedasticity of Unknown Form," Cahiers de recherche, Universite de Montreal, Departement de sciences economiques 2003-01, Universite de Montreal, Departement de sciences economiques.
  11. Lawrence R. Glosten & Ravi Jagannathan & David E. Runkle, 1993. "On the relation between the expected value and the volatility of the nominal excess return on stocks," Staff Report, Federal Reserve Bank of Minneapolis 157, Federal Reserve Bank of Minneapolis.
  12. Taylor, Nick & Dijk, Dick van & Franses, Philip Hans & Lucas, Andre, 2000. "SETS, arbitrage activity, and stock price dynamics," Journal of Banking & Finance, Elsevier, Elsevier, vol. 24(8), pages 1289-1306, August.
  13. J. Skalin & T. Teräsvirta, 1996. "Another Look at Swedish Business Cycles, 1861-1988," SFB 373 Discussion Papers 1996,96, Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes.
  14. Blake, Andrew P. & Kapetanios, George, 2007. "Testing for ARCH in the presence of nonlinearity of unknown form in the conditional mean," Journal of Econometrics, Elsevier, Elsevier, vol. 137(2), pages 472-488, April.
  15. Lothian, James R & Taylor, Mark P, 1996. "Real Exchange Rate Behavior: The Recent Float from the Perspective of the Past Two Centuries," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 104(3), pages 488-509, June.
  16. Gallagher, Liam A & Taylor, Mark P, 2001. "Risky Arbitrage, Limits of Arbitrage, and Nonlinear Adjustment in the Dividend-Price Ratio," Economic Inquiry, Western Economic Association International, Western Economic Association International, vol. 39(4), pages 524-36, October.
  17. Ivan Paya & Ioannis A. Venetis & David A. Peel, 2003. "Further Evidence on PPP Adjustment Speeds: the Case of Effective Real Exchange Rates and the EMS," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 65(4), pages 421-437, 09.
  18. M Sensier & D R Osborn & N Öcal, 2002. "Asymmetric Interest Rate Effects for the UK Real Economy," Centre for Growth and Business Cycle Research Discussion Paper Series, Economics, The Univeristy of Manchester 10, Economics, The Univeristy of Manchester.
  19. I Paya & D Peel, 2005. "A new analysis of the determinants of the real dollar-sterling exchange rate: 1871-1994," Working Papers 565953, Lancaster University Management School, Economics Department.
  20. Pradeep K. Yadav & Peter F. Pope & Krishna Paudyal, 1994. "Threshold Autoregressive Modeling In Finance: The Price Differences Of Equivalent Assets," Mathematical Finance, Wiley Blackwell, Wiley Blackwell, vol. 4(2), pages 205-221.
  21. Felix Chan & Michael McAleer, 2002. "Maximum likelihood estimation of STAR and STAR-GARCH models: theory and Monte Carlo evidence," Journal of Applied Econometrics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 17(5), pages 509-534.
  22. Berka, Martin, 2005. "General Equilibrium Model of Arbitrage Trade and Real Exchange Rate Persistence," MPRA Paper 234, University Library of Munich, Germany.
  23. Michael, Panos & Nobay, A Robert & Peel, David A, 1997. "Transactions Costs and Nonlinear Adjustment in Real Exchange Rates: An Empirical Investigation," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 105(4), pages 862-79, August.
  24. Benoit Mandelbrot, 1963. "The Variation of Certain Speculative Prices," The Journal of Business, University of Chicago Press, University of Chicago Press, vol. 36, pages 394.
  25. White, Halbert, 1980. "A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity," Econometrica, Econometric Society, Econometric Society, vol. 48(4), pages 817-38, May.
  26. James G. MacKinnon, 2002. "Bootstrap inference in econometrics," Canadian Journal of Economics, Canadian Economics Association, Canadian Economics Association, vol. 35(4), pages 615-645, November.
  27. Dumas, Bernard, 1992. "Dynamic Equilibrium and the Real Exchange Rate in a Spatially Separated World," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 5(2), pages 153-80.
  28. Nelson, Daniel B, 1991. "Conditional Heteroskedasticity in Asset Returns: A New Approach," Econometrica, Econometric Society, Econometric Society, vol. 59(2), pages 347-70, March.
  29. MacKinnon, James G. & White, Halbert, 1985. "Some heteroskedasticity-consistent covariance matrix estimators with improved finite sample properties," Journal of Econometrics, Elsevier, Elsevier, vol. 29(3), pages 305-325, September.
  30. Granger, Clive W. J. & Terasvirta, Timo, 1993. "Modelling Non-Linear Economic Relationships," OUP Catalogue, Oxford University Press, Oxford University Press, number 9780198773207, October.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Sahin, Afsin, 2013. "Estimating Money Demand Function by a Smooth Transition Regression Model: An Evidence for Turkey," MPRA Paper 46851, University Library of Munich, Germany.
  2. Rico Belda, Paz, 2013. "No linealidad y asimetría en el proceso generador del Índice Ibex35/Nonlinearity and Asymmetry in the Generator Process of Ibex35 Index," Estudios de Economía Aplicada, Estudios de Economía Aplicada, vol. 31, pages 555-576, Septiembr.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:lan:wpaper:599040. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Richard Evans).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.