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Three-Regime Asymmetric STAR Modeling and Exchange Rate Reversion

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  • MARIO CERRATO
  • HYUNSOK KIM
  • RONALD MACDONALD

Abstract

The breakdown of the Bretton Woods system and the adoption of generalized floating exchange rates ushered in a new era of exchange rate volatility and uncertainty. This increased volatility leads economists to search for economic models able to describe observed exchange rate behavior. In the present paper, we propose more general STAR transition functions that encompass both threshold nonlinearity and asymmetric effects. Our framework allows for a gradual adjustment from one regime to another and considers threshold effects by encompassing other existing models, such as TAR models. We apply our methodology to three different exchange rate data sets: one for developing countries and official nominal exchange rates, the second for emerging market economies using black market exchange rates, and the third for OECD economies. Copyright (c) 2010 The Ohio State University.

Suggested Citation

  • Mario Cerrato & Hyunsok Kim & Ronald Macdonald, 2010. "Three-Regime Asymmetric STAR Modeling and Exchange Rate Reversion," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 42(7), pages 1447-1467, October.
  • Handle: RePEc:mcb:jmoncb:v:42:y:2010:i:7:p:1447-1467
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    References listed on IDEAS

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    1. repec:spr:stpapr:v:58:y:2017:i:3:d:10.1007_s00362-015-0711-1 is not listed on IDEAS
    2. Cerrato, Mario & Kim, Hyunsok & MacDonald, Ronald, 2015. "Microstructure order flow: statistical and economic evaluation of nonlinear forecasts," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 39(C), pages 40-52.
    3. Aloy, Marcel & Boutahar, Mohamed & Gente, Karine & P├ęguin-Feissolle, Anne, 2011. "Purchasing power parity and the long memory properties of real exchange rates: Does one size fit all?," Economic Modelling, Elsevier, vol. 28(3), pages 1279-1290, May.
    4. Buncic, Daniel, 2017. "Identification and Estimation issues in Exponential Smooth Transition Autoregressive Models," Working Paper Series 344, Sveriges Riksbank (Central Bank of Sweden).
    5. Chen, Shyh-Wei, 2014. "Smooth transition, non-linearity and current account sustainability: Evidence from the European countries," Economic Modelling, Elsevier, vol. 38(C), pages 541-554.

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