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Threshold effects In multivariate error correction models

  • Gonzalo, Jesùs
  • Pitarakis, Jean-Yves

In this paper we propose a testing procedure for assessing the presence of threshold effects in nonstationary Vector autoregressive models with or without cointegration. Our approach involves first testing whether the long run impact matrix characterising the VECM type representation of the VAR switches according to the magnitude of some threshold variable and is valid regardless of whether the system is purely I(1), I(1) with cointegration or stationary. Once the potential presence of threshold effects is established we subsequently evaluate the cointegrating properties of the system in each regime through a model selection based approach whose asymptotic and finite sample properties are also established. This subsequently allows us to introduce a novel non-linear permanent and transitory decomposition of the vector process of interest.

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File URL: http://eprints.soton.ac.uk/34547/1/2005-11-16.pdf
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Paper provided by Economics Division, School of Social Sciences, University of Southampton in its series Discussion Paper Series In Economics And Econometrics with number 0501.

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Date of creation: 01 Jan 2005
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Handle: RePEc:stn:sotoec:0501
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  1. Saikkonen, Pentti & Choi, In, 2004. "Cointegrating Smooth Transition Regressions," Econometric Theory, Cambridge University Press, vol. 20(02), pages 301-340, April.
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  12. Gonzalo, Jesus & Pitarakis, Jean-Yves, 2002. "Estimation and model selection based inference in single and multiple threshold models," Journal of Econometrics, Elsevier, vol. 110(2), pages 319-352, October.
  13. Beaudry, Paul & Koop, Gary, 1993. "Do recessions permanently change output?," Journal of Monetary Economics, Elsevier, vol. 31(2), pages 149-163, April.
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  16. Falk, Barry L. & Enders, Walter, 1998. "Threshold-Autoregressive, Median-Unbiased, and Cointegration Tests of Purchasing Power Parity," Staff General Research Papers 1221, Iowa State University, Department of Economics.
  17. Donald W.K. Andrews, 1990. "Tests for Parameter Instability and Structural Change with Unknown Change Point," Cowles Foundation Discussion Papers 943, Cowles Foundation for Research in Economics, Yale University.
  18. Enders, Walter & Granger, C. W. J., 1998. "Unit Root Tests and Asymmetric Adjustment with an Example Using the Term Structure of Interest Rates," Staff General Research Papers 1388, Iowa State University, Department of Economics.
  19. Frederic Bec & Melika Ben Salem & Marine Carrasco, 2004. "Tests for Unit-Root versus Threshold Specification With an Application to the Purchasing Power Parity Relationship," Journal of Business & Economic Statistics, American Statistical Association, vol. 22, pages 382-395, October.
  20. Paul G. J. O'Connell & Shang-Jin Wei, 1997. ""The Bigger They Are, The Harder They Fall": How Price Differences Across U.S. Cities Are Arbitraged," NBER Working Papers 6089, National Bureau of Economic Research, Inc.
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  22. Hansen, Bruce E. & Seo, Byeongseon, 2002. "Testing for two-regime threshold cointegration in vector error-correction models," Journal of Econometrics, Elsevier, vol. 110(2), pages 293-318, October.
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  24. Cragg, John G. & Donald, Stephen G., 1997. "Inferring the rank of a matrix," Journal of Econometrics, Elsevier, vol. 76(1-2), pages 223-250.
  25. Gonzalo, Jesus & Pitarakis, Jean-Yves, 1998. "Specification via model selection in vector error correction models," Economics Letters, Elsevier, vol. 60(3), pages 321-328, September.
  26. Michael, Panos & Nobay, A Robert & Peel, David A, 1997. "Transactions Costs and Nonlinear Adjustment in Real Exchange Rates: An Empirical Investigation," Journal of Political Economy, University of Chicago Press, vol. 105(4), pages 862-79, August.
  27. Mehmet Caner & Bruce E. Hansen, 2001. "Threshold Autoregression with a Unit Root," Econometrica, Econometric Society, vol. 69(6), pages 1555-1596, November.
  28. Johansen, Soren, 1991. "Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models," Econometrica, Econometric Society, vol. 59(6), pages 1551-80, November.
  29. Pippenger, Michael K & Goering, Gregory E, 1993. "A Note on the Empirical Power of Unit Root Tests under Threshold Processes," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 55(4), pages 473-81, November.
  30. Lo, Ming Chien & Zivot, Eric, 2001. "Threshold Cointegration And Nonlinear Adjustment To The Law Of One Price," Macroeconomic Dynamics, Cambridge University Press, vol. 5(04), pages 533-576, September.
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