Factor-augmented forecasting regressions with threshold effects

What drives oil prices? Emerging versus developed economies

Yayi Yan and Tingting Cheng

The Econometrics Journal, 2022, vol. 25, issue 1, 134-154

Abstract: SummaryThis paper introduces a factor-augmented forecasting regression model in the presence of threshold effects. We consider least squares estimation of the regression parameters and establish asymptotic theories for estimators of both slope coefficients and the threshold parameter. Prediction intervals are also constructed for factor-augmented forecasts. Moreover, we develop a likelihood ratio statistic for tests on the threshold parameter and a sup-Wald test statistic for tests on the presence of threshold effects, respectively. Simulation results show that the proposed estimation method and testing procedures work very well in finite samples. Finally, we demonstrate the usefulness of the proposed model through an application to forecasting stock market returns.

Keywords: Factor-augmented regression; forecasting error; likelihood ratio statistic; threshold parameter (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:oup:emjrnl:v:25:y:2022:i:1:p:134-154.

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