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Forecast Performance of Threshold Autoregressive Models - A Monte Carlo Study

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Abstract

Threshold Autoregressive Models (TAR) along with other nonlinear time series models have attracted much attention in recent years in time series analysis. TAR models have been applied to a variety of time series. It has been reported that they have a good in sample fit but like many other non-linear time series models cannot improve out of sample forecast performance. Within a controlled simulation framework, we study the forecast performance under two types of non-linearity: shift in the mean and shift in the volatility of the process. We illustrate that estimation of the lag parameter and threshold value are crucial for forecast performance. Monte Carlo results show that TAR model performs much better than a Random Walk (RW) model; however, it provides no significant improvement over a linear Autoregressive (AR) model. Conclusions on the relative forecast performance of TAR models based on a single data set can be quite different than long run (Monte Carlo) results.

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  • Abdurrahman Bekir Aydemir, 1999. "Forecast Performance of Threshold Autoregressive Models - A Monte Carlo Study," UWO Department of Economics Working Papers 9905, University of Western Ontario, Department of Economics.
  • Handle: RePEc:uwo:uwowop:9905
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    Cited by:

    1. Battigalli, Pierpaolo & Dufwenberg, Martin, 2009. "Dynamic psychological games," Journal of Economic Theory, Elsevier, vol. 144(1), pages 1-35, January.
    2. Fehr, Ernst & Falk, Armin, 2002. "Psychological foundations of incentives," European Economic Review, Elsevier, vol. 46(4-5), pages 687-724, May.
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    4. Faruk Gul & Wolfgang Pesendorfer, 2005. "The Canonical Type Space for Interdependent Preferences," Levine's Bibliography 784828000000000434, UCLA Department of Economics.
    5. Gary Charness & Martin Dufwenberg, 2006. "Promises and Partnership," Econometrica, Econometric Society, vol. 74(6), pages 1579-1601, November.
    6. Rachel Croson & Enrique Fatas & Tibor Neugebauer, 2006. "An Experimental Analysis Of Conditional Cooperation," Working Papers. Serie AD 2006-24, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
    7. Conchita D'Ambrosio & Joachim R. Frick, 2012. "Individual Wellbeing in a Dynamic Perspective," Economica, London School of Economics and Political Science, vol. 79(314), pages 284-302, April.
    8. Wolfgang Pesendorfer & Faruk Gul, 2007. "The Canonical Space for Behavioral Types," Levine's Bibliography 843644000000000345, UCLA Department of Economics.
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