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Panel threshold model with covariate-dependent thresholds and its application to the cash flow/investment relationship

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  • Yang Lixiong

    (School of Management, Lanzhou University, Lanzhou, China)

Abstract

This paper introduces a panel threshold model with covariate-dependent and time-varying thresholds (PTCT), which extends the classical panel threshold model of Hansen, B. E. 1999. “Threshold Effects in Non-dynamic Panels: Estimation, Testing, and Inference.” Journal of Econometrics 93: 345–68 to a framework with multiple covariate-dependent and time-varying thresholds. Based on the within-group transformation and Markov chain Monte Carlo (MCMC) technique, we develop methods for estimation and inference for threshold parameters in the proposed panel threshold model. We also suggest test statistics for threshold effect, threshold constancy, and for determining the number of thresholds. Monte Carlo simulations indicate that the estimation, inference and testing procedures work well in finite samples. Empirically, using the same data as in Hansen, B. E. 1999. “Threshold Effects in Non-dynamic Panels: Estimation, Testing, and Inference.” Journal of Econometrics 93: 345–68 we revisit the cash flow/investment relationship and find quite different results.

Suggested Citation

  • Yang Lixiong, 2024. "Panel threshold model with covariate-dependent thresholds and its application to the cash flow/investment relationship," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 28(4), pages 645-659.
    • Handle: RePEc:bpj:sndecm:v:28:y:2024:i:4:p:645-659:n:1001
    DOI: 10.1515/snde-2022-0035
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