Contemporaneous Threshold Autoregressive Models: Estimation, Testing and Forecasting

FRB of St. Louis Working Paper No. 2003-024C

38 Pages Posted: 13 May 2006

See all articles by Michael Dueker

Michael Dueker

Federal Reserve Banks - Federal Reserve Bank of St. Louis

Martín Sola

Universidad Torcuato Di Tella; University of London - Economics, Mathematics and Statistics

Fabio Spagnolo

Brunel University London - Economics and Finance

Date Written: May 2006

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 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 does not require the initial regimes to be predetermined. We investigate the properties of the model and evaluate its finite-sample 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.

Keywords: Smooth Transition Threshold Autoregressive, Forecasting, Nonlinear Models

JEL Classification: C22, E31, G12

Suggested Citation

Dueker, Michael and Sola, Martín and Spagnolo, Fabio, Contemporaneous Threshold Autoregressive Models: Estimation, Testing and Forecasting (May 2006). FRB of St. Louis Working Paper No. 2003-024C, Available at SSRN: https://ssrn.com/abstract=900636 or http://dx.doi.org/10.2139/ssrn.900636

Michael Dueker (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of St. Louis ( email )

411 Locust St
Saint Louis, MO 63011
United States

Martín Sola

Universidad Torcuato Di Tella ( email )

Minones 2159
1428 Buenos Aires, 1428
Argentina
5411 4784 0080 (Phone)
5411 4784 9807 (Fax)

University of London - Economics, Mathematics and Statistics ( email )

Malet Street
London, WC1E 7HX
United Kingdom
+44 20 7631 6411 (Phone)
+44 20 7631 6416 (Fax)

HOME PAGE: http://www.econ.bbk.ac.uk/faculty/sola/

Fabio Spagnolo

Brunel University London - Economics and Finance ( email )

Uxbridge UB8 3PH
United Kingdom
+44 1895 816383 (Phone)
+44 1895 203303 (Fax)

HOME PAGE: http://www.brunel.ac.uk/depts/ecf/Staff/SpagnoloF/Main.htm

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