Unit Root Tests in Three-Regime SETAR Models

George Kapetanios and Yongcheol Shin

Edinburgh School of Economics Discussion Paper Series from Edinburgh School of Economics, University of Edinburgh

Abstract: This paper proposes a simple testing procedure to distinguish a unit root process from a globally stationary three-regime self-exciting threshold autoregressive process. Following the threshold cointegration literature we assume that the process follows the random walk in the corridor regime, and therefore we propose that the null of a unit root be tested by the Wald statistic for the joint significance of autoregressive parameters in both lower and upper regimes. We establish that when threshold parameters are known, the suggested Wald test has a well-defined asymptotic null distribution free of nuisance parameters. In the general case where threshold parameters are unknown a priori, we consider the three most commonly used summary statistics - average, exponential average and supremum. Assuming that the grid set for thresholds can be selected such that the corridor regime be of finite width both under the null and under the alternative, we can establish both stochastic equicontinuity and uniform convergence of the aforementioned summary statistics. Monte Carlo evidence clearly indicates that the proposed tests are more powerful than the Dickey-Fuller test that ignores the threshold nature under the alternative. We illustrate the usefulness of our proposed tests by examining stationarity of bilateral real exchange rates for the G7 countries.

Keywords: self-exciting threshold autoregressive models; unit roots; globally stationary processes; threshold cointegration; Monte Carlo simulations; real exchange rates; transactions costs; dread of depreciation (search for similar items in EconPapers)
JEL-codes: C12 C13 C32 (search for similar items in EconPapers)
Pages: 24
Date: 2003-11
New Economics Papers: this item is included in nep-ecm, nep-ets and nep-ifn
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

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http://www.econ.ed.ac.uk/papers/id104_esedps.pdf

Related works:
Journal Article: Unit root tests in three-regime SETAR models (2006)
Working Paper: Unit Root Tests in Three-Regime SETAR Models (2002)
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Persistent link: https://EconPapers.repec.org/RePEc:edn:esedps:104

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