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Robust Estimation and Inference for Threshold Models with Integrated Regressors

Haiqiang Chen

SFB 649 Discussion Papers from Humboldt University, Collaborative Research Center 649

Abstract: This paper studies the robust estimation and inference of threshold models with integrated regres- sors. We derive the asymptotic distribution of the profiled least squares (LS) estimator under the diminishing threshold effect assumption that the size of the threshold effect converges to zero. Depending on how rapidly this sequence converges, the model may be identified or only weakly identified and asymptotic theorems are developed for both cases. As the convergence rate is unknown in practice, a model-selection procedure is applied to determine the model identification strength and to construct robust confidence intervals, which have the correct asymptotic size irrespective of the magnitude of the threshold effect. The model is then generalized to incorporate endogeneity and serial correlation in error terms, under which, we design a Cochrane-Orcutt feasible generalized least squares (FGLS) estimator which enjoys efficiency gains and robustness against different error specifications, including both I(0) and I(1) errors. Based on this FGLS estimator, we further develop a sup-Wald statistic to test for the existence of the threshold effect. Monte Carlo simulations show that our estimators and test statistics perform well.

Keywords: Threshold effects; Integrated processes; Nonlinear cointegration; Weak identification. (search for similar items in EconPapers)
JEL-codes: C12 C22 C52 (search for similar items in EconPapers)
Pages: 39 pages
Date: 2013-07
New Economics Papers: this item is included in nep-ecm and nep-ets
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Related works:
Journal Article: ROBUST ESTIMATION AND INFERENCE FOR THRESHOLD MODELS WITH INTEGRATED REGRESSORS (2015) Downloads
Working Paper: Robust Estimation and Inference for Threshold Models with Integrated Regressors Downloads
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