Scandinavian Working Papers in Economics

SSE/EFI Working Paper Series in Economics and Finance,
Stockholm School of Economics

No 578: Determining the Number of Regimes in a Threshold Autoregressive Model Using Smooth Transition Autoregressions

Birgit Strikholm () and Timo Teräsvirta ()
Additional contact information
Birgit Strikholm: Dept. of Economic Statistics, Stockholm School of Economics, Postal: Stockholm School of Economics, P.O. Box 6501, SE-113 83 Stockholm, Sweden
Timo Teräsvirta: Dept. of Economic Statistics, Stockholm School of Economics, Postal: Stockholm School of Economics, P.O. Box 6501, SE-113 83 Stockholm, Sweden

Abstract: In this paper we propose a method for determining the number of regimes in threshold autoregressive models using smooth transition autoregression as a tool. As the smooth transition model is just an approximation to the threshold autoregressive one, no asymptotic properties are claimed for the proposed method. Tests available for testing the adequacy of a smooth transition autoregressive model are applied sequentially to determine the number of regimes. A simulation study is performed in order to find out the finite-sample properties of the procedure and to compare it with two other procedures available in the literature. We find that our method works reasonably well for both single and multiple threshold models.

Keywords: Model specification; model selection criterion; nonlinear modelling; sequential testing; switching regression

JEL-codes: C22; C51

28 pages, First version: January 11, 2005. Revised: February 11, 2005.

Note: This is an early version of the paper published under a different title in Econometrics Journal 9, 472-491 (2006).

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