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Testing for Nonlinearities in Economic and Financial Time Series

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  • Maurice Peat

    (Discipline of Finance, University of Sydney)

  • Max Stevenson

    (Discipline of Finance, University of Sydney)

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    Abstract

    Cyclical asymmetry has been recognised as a nonlinear phenomenon in numerous recent studies examining various economic and financial time series. If the nonlinear phenomena can be modelled by a nonlinear stochastic structure like the bilinear (BL), exponential autoregressive (EAR), smooth transition autoregressive (STAR), or self-exciting threshold autoregressive (SETAR) types, then we need tests to enable us to identify these various nonlinear models. In this paper we suggest modifications to the Tsay (1991) general test for identifying nonlinearities of the BL, EAR, and SETAR types as they occur in time series. Our testing procedure is simulated to determine its empirical properties.

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    File URL: http://www.finance.uts.edu.au/research/wpapers/wp48.pdf
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    Bibliographic Info

    Paper provided by Finance Discipline Group, UTS Business School, University of Technology, Sydney in its series Working Paper Series with number 48.

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    Length: 27 pages
    Date of creation: 01 Sep 1995
    Date of revision:
    Handle: RePEc:uts:wpaper:48

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    1. repec:att:wimass:9520 is not listed on IDEAS
    2. Philip Rothman, . "Forecasting Asymmetric Unemployment Rates," Working Papers 9618, East Carolina University, Department of Economics.
    3. Charles Engel & James D. Hamilton, 1989. "Long Swings in the Exchange Rate: Are they in the Data and Do Markets Know It?," NBER Working Papers 3165, National Bureau of Economic Research, Inc.
    4. Brock, William A. & Sayers, Chera L., 1988. "Is the business cycle characterized by deterministic chaos?," Journal of Monetary Economics, Elsevier, vol. 22(1), pages 71-90, July.
    5. Cao, C Q & Tsay, R S, 1992. "Nonlinear Time-Series Analysis of Stock Volatilities," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 7(S), pages S165-85, Suppl. De.
    6. Baillie, Richard T & Bollerslev, Tim, 1989. " Common Stochastic Trends in a System of Exchange Rates," Journal of Finance, American Finance Association, vol. 44(1), pages 167-81, March.
    7. Schwert, G.W., 1989. "Stock Volatility And The Crash Of '87," Papers 89-01, Rochester, Business - General.
    8. Bollerslev, Tim & Chou, Ray Y. & Kroner, Kenneth F., 1992. "ARCH modeling in finance : A review of the theory and empirical evidence," Journal of Econometrics, Elsevier, vol. 52(1-2), pages 5-59.
    9. James M. Poterba & Lawrence H. Summers, 1984. "The Persistence of Volatility and Stock Market Fluctuations," Working papers 353, Massachusetts Institute of Technology (MIT), Department of Economics.
    10. Francis X. Diebold & Marc Nerlove, 1986. "The dynamics of exchange rate volatility: a multivariate latent factor ARCH model," Special Studies Papers 205, Board of Governors of the Federal Reserve System (U.S.).
    11. Ashley, Richard A & Patterson, Douglas M, 1989. "Linear versus Nonlinear Macroeconomies: A Statistical Test," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 30(3), pages 685-704, August.
    12. French, Kenneth R. & Schwert, G. William & Stambaugh, Robert F., 1987. "Expected stock returns and volatility," Journal of Financial Economics, Elsevier, vol. 19(1), pages 3-29, September.
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    Cited by:
    1. Maurice Peat & Max Stevenson, 1994. "Asymmetry in the Business Cycle: Evidence from the Australian Labour Markets," Working Paper Series 37, Finance Discipline Group, UTS Business School, University of Technology, Sydney.
    2. D. Jones & Maurice Peat & Max Stevenson, 1996. "Does the Process of Spatial Aggregation of U.K. Unemplyment Rate Series Serve to Induce or Remove Evidence of Asymmetry in the Business Cycle," Working Paper Series 67, Finance Discipline Group, UTS Business School, University of Technology, Sydney.

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