Can the SupLR test discriminate between different switching
AbstractIn recent years two classes of switching models have been proposed, the Markov switching models, Hamilton (1989) and the Threshold Auto- Regressive Models (TAR), Lim and Tong (1980). These two models have the advantage of being able to modelize and capture asymmetry, sudden changes and irreversibility time observed in many economic and financial time series. Despite these similarities and common points, these models have been envolved, in the literature, largely independently. In this paper, using the $SupLR$ test, we study the possibility of discrimination between these two models. This approach is motivated by the fact that the majority of authors, in applications, use switching models without any statistical justification. We show that when the null hypothesis is rejected it appears that different switching models are significant. Then, using simulation experiments we show that it is very difficult to differenciate between MSAR and SETAR models specially with large samples. The power of the $SupLR$ test seems to be sensitive to the mean, the noise variance and the delay parameter which appear in each model. Finally, we apply this methodology to the US GNP growth rate and the US/UK exchange rate.
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Bibliographic InfoPaper provided by EconWPA in its series International Finance with number 0511002.
Length: 26 pages
Date of creation: 04 Nov 2005
Date of revision:
Note: Type of Document - pdf; pages: 26
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Switching Models; SETAR processes SupLR test; Empirical power; exchange rates;
Find related papers by JEL classification:
- C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
- C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
- F31 - International Economics - - International Finance - - - Foreign Exchange
This paper has been announced in the following NEP Reports:
- NEP-ALL-2005-11-12 (All new papers)
- NEP-ECM-2005-11-12 (Econometrics)
- NEP-ETS-2005-11-12 (Econometric Time Series)
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