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Ahmed, M. F. and Satchell, S.

Some Dynamic and Steady-State Properties of Threshold Autoregressions with Applications to Stationarity and Local Explosivity

WP Number: 1906

Abstract: The purpose of this paper is to investigate the dynamics and steady-state properties of threshold autoregressive models with exogenous states that follow Markovian processes; these processes are widely used in applied economics although their statistical properties have not been explored in detail. We use characteristic functions to carry out the analysis and this allows us to describe limiting distributions for processes not considered in the literature previously. We also calculate analytical expressions for some moments. Furthermore, we see that we can have locally explosive processes that are explosive in one regime whilst being strongly stationary overall. This is explored through simulation analysis where we also show how the distribution changes when the explosive state become more frequent although the overall process remains stationary. In doing so, we are able to relate our analysis to asset prices which exhibit similar distributional properties.

Keywords: Threshold Auto-regression, Markov process

JEL Codes: C22 C32 C53

Author links:

PDF: wp1906.pdf

Open Access Link: 10.17863/CAM.38658