Structural Threshold Regression

66 Pages Posted: 15 Jun 2009 Last revised: 2 May 2016

See all articles by Andros Kourtellos

Andros Kourtellos

University of Cyprus - Department of Economics; University of Bologna - Rimini Center for Economic Analysis (RCEA)

Thanasis Stengos

University of Guelph - Department of Economics

Chih Ming Tan

University of North Dakota - College of Business & Public Administration - Department of Economics

Date Written: July 21, 2014

Abstract

This paper introduces the structural threshold regression model that allows for an endogenous threshold variable as well as for endogenous regressors. This model provides a parsimonious way of modeling nonlinearities and has many potential applications in economics and fi…nance. Our framework can be viewed as a generalization of the simple threshold regression framework of Hansen (2000) and Caner and Hansen (2004) to allow for the endogeneity of the threshold variable and regime speci…fic heteroskedasticity. Our estimation of the threshold parameter is based on a concentrated least squares method that involves an inverse Mills ratio bias correction term in each regime. We derive its asymptotic distribution and propose a method to construct bootstrap confidence intervals. We also provide inference for the slope parameters based on GMM. Finally, we investigate the performance of the asymptotic approximations and the bootstrap using a Monte Carlo simulation that indicates the applicability of the method in fi…nite samples.

Keywords: Threshold regression, nonlinear regression, instrumental variables

JEL Classification: C13, C51

Suggested Citation

Kourtellos, Andros and Stengos, Thanasis and Tan, Chih Ming, Structural Threshold Regression (July 21, 2014). Econometric Theory, Forthcoming, Available at SSRN: https://ssrn.com/abstract=1105931 or http://dx.doi.org/10.2139/ssrn.1105931

Andros Kourtellos

University of Cyprus - Department of Economics ( email )

75 Kallipoleos Street
P.O. Box 20537
1678 Nicosia
Cyprus

University of Bologna - Rimini Center for Economic Analysis (RCEA) ( email )

Via Patara, 3
Rimini (RN), RN 47900
Italy

Thanasis Stengos

University of Guelph - Department of Economics ( email )

50 Stone Road East
Guelph, Ontario N1G 2W1
Canada

Chih Ming Tan (Contact Author)

University of North Dakota - College of Business & Public Administration - Department of Economics ( email )

293 Centennial Drive Stop 8369
Grand Forks, ND 58202-8369
United States

HOME PAGE: http://sites.google.com/site/chihmingtan/home

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