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Testing for Smooth Transition Nonlinearity in the Presence of Outliers

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  • van Dijk, D.J.C.
  • Franses, Ph.H.B.F.
  • Lucas, A.

Abstract

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.

Suggested Citation

  • van Dijk, D.J.C. & Franses, Ph.H.B.F. & Lucas, A., 1996. "Testing for Smooth Transition Nonlinearity in the Presence of Outliers," Econometric Institute Research Papers EI 9622-/A, Erasmus University Rotterdam, Erasmus School of Economics (ESE), Econometric Institute.
  • Handle: RePEc:ems:eureir:1382
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    References listed on IDEAS

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    1. Terasvirta, T & Anderson, H M, 1992. "Characterizing Nonlinearities in Business Cycles Using Smooth Transition Autoregressive Models," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 7(S), pages 119-136, Suppl. De.
    2. Balke, Nathan S & Fomby, Thomas B, 1994. "Large Shocks, Small Shocks, and Economic Fluctuations: Outliers in Macroeconomic Time Series," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 9(2), pages 181-200, April-Jun.
    3. Hoek, Henk & Lucas, Andre & van Dijk, Herman K., 1995. "Classical and Bayesian aspects of robust unit root inference," Journal of Econometrics, Elsevier, vol. 69(1), pages 27-59, September.
    4. Peracchi, Franco, 1991. "Robust M-Tests," Econometric Theory, Cambridge University Press, vol. 7(01), pages 69-84, March.
    5. repec:adr:anecst:y:1991:i:20-21:p:06 is not listed on IDEAS
    6. Granger, Clive W. J. & Terasvirta, Timo, 1993. "Modelling Non-Linear Economic Relationships," OUP Catalogue, Oxford University Press, number 9780198773207.
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    Keywords

    nonlinearity; outliers; robust estimation;

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