Testing for Smooth Transition Nonlinearity in the Presence of Outliers
Regime-switching models, like the smooth transition autoregressive (STAR) model are typically applied to time series of moderate length. Hence, the nonlinear features which these models intend to describe may be reflected in only a few observations. Conversely, neglected outliers in a linear time series of moderate length may incorrectly suggest STAR type nonlinearity. In this paper we propose outlier robust tests for STAR type nonlinearity. These tests are designed such that they have a better level and power behavior than standard nonrobust tests in situations with outliers. We formally derive local and global robustness properties of the new tests. Extensive Monte Carlo simulations show the practical usefulness of the robust tests. An application to several quarterly industrial production indices illustrates that apparent nonlinearity in time series sometimes seems due to only a small number of outliers.
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9101, Federal Reserve Bank of Dallas.
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