Threshold Autoregressive (TAR) Models

Movements between regimes governed by an observed variable.

TAR model:

Where s
t-k
is the state determining variable.
The integer k determines with how many lags does the state-
determining variable influences the regime in time t.
When s
t-k
= y
t-k
we have a self-exciting TAR (SETAR) model:



There are many possible variations of this simple model.

> + +
< + +
=


r s if u y
r s if u y
y
k t t t
k t t t
t
2 1 2 2
1 1 1 1
|
|

> + +
< + +
=


r y if u y
r y if u y
y
k t t t
k t t t
t
2 1 2 2
1 1 1 1
|
|
Threshold Autoregressive (TAR) Models
Example: when s
t-k
= y
t-k
we have a self-exciting TAR (SETAR) model:




Consider k = 1. Parameters to be estimated:

1
,
2,
o
1,
o
2,
r
Estimation method: least squares with r estimated by a grid search.

There are many possible variations of this simple model:
Switching in only some of the parameters
More than 2 regimes
Different threshold variables
Alternative dynamic specifications
Can use AIC or other information criteria to select models

> + +
< + +
=


r y if u y
r y if u y
y
k t t t
k t t t
t
2 1 2 2
1 1 1 1
|
|
EXAMPLE: Threshold error correction (cointegration) model
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1960 1965 1970 1975 1980 1985 1990
R3 R120
EXAMPLE: Threshold error correction (cointegration) model
-3
-2
-1
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1960 1965 1970 1975 1980 1985 1990
SPREAD
EXAMPLE: Threshold error correction (cointegration) model
EVIEWS program:

series y = d(r120)
series x = d(r3)
series spread = r120 - r3

scalar th = 3.22
series _d = ( spread(-1) < th )
equation tar.ls y c y(-1) y(-2) x(-1) x(-2) _d*spread(-1) (1-_d)*spread(-1)


EXAMPLE: Threshold error correction (cointegration) model