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Testing for threshold effect in ARFIMA models: Application to US unemployment rate data

  • Amine LAHIANI

    (ESC-Rennes School of Business and EconomiX, University of Paris 10 Nanterre)

  • Olivier SCAILLET

    (Université de Genève HEC and Swiss Finance Institute)

Macroeconomic time series often involve a threshold effect in their ARMA representation, and exhibit long memory features. In this paper we introduce a new class of threshold ARFIMA models to account for this. The threshold effect is introduced in the autoregressive and/or the fractional integration parameters, and can be tested for using LM tests. Monte Carlo experiments show the desirable finite sample size and power of the test with an exact maximum likelihood estimator of the long memory parameter. Simulations also show that a model selection strategy is available to discriminate between the competing threshold ARFIMA models. The methodology is applied to US unemployment rate data where we find a significant threshold effect in the ARFIMA representation and a better forecasting performance relative to TAR and symmetric ARFIMA models.

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Paper provided by Swiss Finance Institute in its series Swiss Finance Institute Research Paper Series with number 08-42.

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Length: 21 pages
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Handle: RePEc:chf:rpseri:rp0842
Contact details of provider: Web page: http://www.SwissFinanceInstitute.ch

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  1. McCracken, Michael W., 2007. "Asymptotics for out of sample tests of Granger causality," Journal of Econometrics, Elsevier, vol. 140(2), pages 719-752, October.
  2. Andersson, Michael K. & Eklund, Bruno & Lyhagen, Johan, 1999. "A simple linear time series model with misleading nonlinear properties," Economics Letters, Elsevier, vol. 65(3), pages 281-284, December.
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  4. Andrews, Donald W K & Ploberger, Werner, 1994. "Optimal Tests When a Nuisance Parameter Is Present Only under the Alternative," Econometrica, Econometric Society, vol. 62(6), pages 1383-1414, November.
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  7. Lo, Andrew W, 1991. "Long-Term Memory in Stock Market Prices," Econometrica, Econometric Society, vol. 59(5), pages 1279-313, September.
  8. Philip Rothman, . "Forecasting Asymmetric Unemployment Rates," Working Papers 9618, East Carolina University, Department of Economics.
  9. Geetesh Bhardwaj & Norman Swanson, 2004. "An Empirical Investigation of the Usefulness of ARFIMA Models for Predicting Macroeconomic and Financial Time Series," Departmental Working Papers 200422, Rutgers University, Department of Economics.
  10. Hansen, Bruce E, 1996. "Inference When a Nuisance Parameter Is Not Identified under the Null Hypothesis," Econometrica, Econometric Society, vol. 64(2), pages 413-30, March.
  11. Diebold, Francis X. & Inoue, Atsushi, 2001. "Long memory and regime switching," Journal of Econometrics, Elsevier, vol. 105(1), pages 131-159, November.
  12. Anas, Jacques & Ferrara, Laurent, 2002. "Un indicateur d'entrée et sortie de récession: application aux Etats-Unis
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    ," MPRA Paper 4043, University Library of Munich, Germany.
  13. van Dijk, Dick & Franses, Philip Hans & Paap, Richard, 2002. "A nonlinear long memory model, with an application to US unemployment," Journal of Econometrics, Elsevier, vol. 110(2), pages 135-165, October.
  14. Diebold, Francis X & Mariano, Roberto S, 1995. "Comparing Predictive Accuracy," Journal of Business & Economic Statistics, American Statistical Association, vol. 13(3), pages 253-63, July.
  15. Sowell, Fallaw, 1992. "Maximum likelihood estimation of stationary univariate fractionally integrated time series models," Journal of Econometrics, Elsevier, vol. 53(1-3), pages 165-188.
  16. repec:cup:cbooks:9780521770415 is not listed on IDEAS
  17. Guay, Alain & Scaillet, Olivier, 2003. "Indirect Inference, Nuisance Parameter, and Threshold Moving Average Models," Journal of Business & Economic Statistics, American Statistical Association, vol. 21(1), pages 122-32, January.
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