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Contemporaneous Threshold Autoregressive Models: Estimation, Testing and Forecasting

  • 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 allows the initial regimes does not require 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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Paper provided by Universidad Torcuato Di Tella in its series Department of Economics Working Papers with number 2006-04.

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Length: 37 pages
Date of creation: Apr 2006
Date of revision:
Handle: RePEc:udt:wpecon:2006-04
Contact details of provider: Web page: http://www.utdt.edu/ver_contenido.php?id_contenido=439&id_item_menu=568

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  6. Enders, Walter & Granger, Clive W J, 1998. "Unit-Root Tests and Asymmetric Adjustment with an Example Using the Term Structure of Interest Rates," Journal of Business & Economic Statistics, American Statistical Association, vol. 16(3), pages 304-11, July.
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  26. Michael P. Clements & Hans-Martin Krolzig, 1998. "A comparison of the forecast performance of Markov-switching and threshold autoregressive models of US GNP," Econometrics Journal, Royal Economic Society, vol. 1(Conferenc), pages C47-C75.
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  35. Mehmet Caner & Bruce E. Hansen, 1998. "Threshold Autoregressions with a Near Unit Root," Working Papers 9821, Department of Economics, Bilkent University.
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