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3-Regime symmetric STAR modeling and exchange rate reversion

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Listed author(s):
  • Cerrato, Mario
  • Kim, Hyunsok
  • MacDonald, Ronald

Abstract

The breakdown of the Bretton Woods system and the adoption of generalized oating exchange rates ushered in a new era of exchange rate volatility and uncer- tainty. This increased volatility lead economists to search for economic models able to describe observed exchange rate behavior. In the present paper we propose more general STAR transition functions which encompass both threshold nonlinearity and asymmetric e¤ects. Our framework allows for a gradual adjustment from one regime to another, and considers threshold e¤ects by encompassing other existing models, such as TAR models. We apply our methodology to three di¤erent exchange rate data-sets, one for developing countries, and o¢ cial nominal exchange rates, the sec- ond emerging market economies using black market exchange rates and the third for OECD economies.

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File URL: http://hdl.handle.net/10943/126
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Paper provided by Scottish Institute for Research in Economics (SIRE) in its series SIRE Discussion Papers with number 2009-07.

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Date of creation: 2009
Handle: RePEc:edn:sirdps:126
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Keywords: unit root tests; threshold autoregressive models; purchasing power;

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Find related papers by JEL classification:
  • C16 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Econometric and Statistical Methods; Specific Distributions
  • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
  • F31 - International Economics - - International Finance - - - Foreign Exchange

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  9. Mario Cerrato & Nicholas Sarantis, 2007. "Does purchasing power parity hold in emerging markets? Evidence from a panel of black market exchange rates," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 12(4), pages 427-444.
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