Is it possible to discriminate between different switching regressions models? An empirical investigation

Lanouar Charfeddine and Dominique Guegan ()
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Dominique Guegan: CES - Centre d'économie de la Sorbonne - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, PSE - Paris School of Economics - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - ENPC - École nationale des ponts et chaussées - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement

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Abstract: In this paper we study, using the sup LR test, the possibility of discrimination between two classes of models: the Markov switching models of Hamilton (1989) and the Threshold Auto-Regressive Models (TAR) of Lim and Tong (1980). This work is motivated by the fact that generally practicians use, in applications, switching models without any statistical justification. Using experiment simulations, we show that it is very difficult to discriminate between the MSAR and the SETAR models specially using large samples. This means that when the null hypothesis is rejected, it appears that different switching models are significant. Moreover, the results show that the power of the sup LR test is sensitive to the mean, the noise variance and the delay parameter. Then, we apply this methodology to two time series: the US GNP growth rate and the US/UK exchange rate. We shall retain retain a Markov switching process for the US GNP growth rate and the US/UK exchange rate (monthly data). For the US/UK exchange rate (quarterly data), we accept the null hypothesis of a random walk.

Keywords: Switching Models; Sup LR test; Empirical power; Exchange rate (search for similar items in EconPapers)
Date: 2008
Note: View the original document on HAL open archive server: https://shs.hal.science/halshs-00368358v1
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Citations: View citations in EconPapers (1)

Published in The Euro-Mediterranean Economics and Finance Review, 2008, 3 (4), pp.54-75

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Related works:
Working Paper: Is it possible to discriminate between different switching regressions models? An empirical investigation (2008)
Working Paper: Is it possible to discriminate between different switching regressions models? An empirical investigation (2008)
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