Contemporaneous Threshold Autoregressive Models: Estimation, Forecasting and Rational Expectations Applications

Abstract

This paper proposes a contemporaneous smooth transition threshold autoregressive model (C-STAR) as a modification of the smooth transition threshold autoregressive model surveyed in Terasvirta (1998). Because it uses a forward-looking approach to weight the regimes, in contrast to the typical lagged threshold model, the C-STAR model is well-suited to forward looking rational expectations applications, such as bond pricing. We present an application to the pricing of bonds under the Expectations Hypothesis with a C-STAR driving process for the short-term rate.

Keywords: Smooth transition threshold autoregressive, rational expectations, forecasting

JEL Classification: C22, E31, G12