Identification and Estimation Issues in Exponential Smooth Transition Autoregressive Models

Sveriges Riksbank Working Paper Series No. 344

Riksbank Research Paper Series No. 168

46 Pages Posted: 14 Aug 2018

See all articles by Daniel Buncic

Daniel Buncic

Stockholm University - Stockholm Business School

Date Written: October 1, 2017

Abstract

Exponential smooth transition autoregressive (ESTAR) models are widely used in the international finance literature, particularly for the modelling of real exchange rates. We show that the exponential function is ill-suited as a regime weighting function because of two undesirable properties. Firstly, it can be well approximated by a quadratic function in the threshold variable whenever the transition function parameter gamma, which governs the shape of the function, is ‘small’. This leads to an identification problem with respect to the transition function parameter and the slope vector, as both enter as a product into the conditional mean of the model. Secondly, the exponential regime weighting function can behave like an indicator function (or dummy variable) for very large values of the transition function parameter gamma. This has the effect of ‘spuriously overfitting’ a small number of observations around the location parameter mu. We show that both of these effects lead to estimation problems in ESTAR models. We illustrate this by means of an empirical replication of a widely cited study, as well as a simulation exercise.

Keywords: exponential STAR, non-linear time series models, identification and estimation issues, exponential weighting function, real exchange rates, simulation analysis

JEL Classification: C13, C15, C50, F30, F44

Suggested Citation

Buncic, Daniel, Identification and Estimation Issues in Exponential Smooth Transition Autoregressive Models (October 1, 2017). Sveriges Riksbank Working Paper Series No. 344, Riksbank Research Paper Series No. 168, Available at SSRN: https://ssrn.com/abstract=3080308 or http://dx.doi.org/10.2139/ssrn.3080308

Daniel Buncic (Contact Author)

Stockholm University - Stockholm Business School

Sweden

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
136
Abstract Views
771
rank
238,288
PlumX Metrics