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Contemporaneous Threshold Autoregressive Models: Estimation, Testing and Forecasting

Listed author(s):
  • Michael Dueker
  • Martin Sola
  • Fabio Spagnolo

This paper proposes a contemporaneous smooth transition threshold autoregressive model (C-STAR) as a modification of the smooth transition threshold autoregressive model surveyed in Teräsvirta (1998), in which the regime weights depend on the ex ante probability that a latent regime-specific variable will exceed a threshold value. We argue that the contemporaneous model is well-suited to rational expectations applications (and pricing exercises), in that it does not require the initial regimes to be predetermined. We investigate the properties of the model and evaluate its finitesample maximum likelihood performance. We also propose a method to determine the number of regimes based on a modified Hansen (1992) procedure. Furthermore, we construct multiple-step ahead forecasts and evaluate the forecasting performance of the model. Finally, an empirical application of the short term interest rate yield is presented and discussed.

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File URL: http://economia.uniparthenope.it/ise/sito/DP/DP_5_2007.pdf
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Paper provided by D.E.S. (Department of Economic Studies), University of Naples "Parthenope", Italy in its series Discussion Papers with number 5_2007.

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Date of creation: 01 Apr 2007
Handle: RePEc:prt:dpaper:5_2007
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  34. Seo, Byeongseon, 2003. "Nonlinear mean reversion in the term structure of interest rates," Journal of Economic Dynamics and Control, Elsevier, vol. 27(11), pages 2243-2265.
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  36. Zacharias Psaradakis & Nicola Spagnolo, 2006. "Joint Determination of the State Dimension and Autoregressive Order for Models with Markov Regime Switching," Journal of Time Series Analysis, Wiley Blackwell, vol. 27(5), pages 753-766, 09.
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