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A note regarding ARCH and threshold processes: results from a Monte Carlo study

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  • Gregory Goering
  • Michael Pippenger

Abstract

Many economic relationships are non-linear. Hence, when analysing economic data it is important to identify any non-linearity. The primary type of non-linearity examined by economists is the ARCH-class model. However, other types of non-linear processes may be expected in economic and financial data. One of these is the threshold-class autoregressive process. This paper finds that the power of standard ARCH pre-test procedures for detecting threshold type non-linearity is very poor under certain parameter specifications; and that ARCH may be 'detected' in a significant number of cases even though the true process is of the threshold class. Thus care should be taken when interpreting ARCH pre-tests in economic series that are likely to contain threshold boundaries.

Suggested Citation

  • Gregory Goering & Michael Pippenger, 1994. "A note regarding ARCH and threshold processes: results from a Monte Carlo study," Applied Economics Letters, Taylor & Francis Journals, vol. 1(11), pages 210-213.
    • Handle: RePEc:taf:apeclt:v:1:y:1994:i:11:p:210-213
    DOI: 10.1080/135048594357907
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    References listed on IDEAS

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    1. Richard E. Baldwin, 1990. "Re-Interpreting the Failure of Foreign Exchange Market Efficiency Tests:Small Transaction Costs, Big Hysteresis Bands," NBER Working Papers 3319, National Bureau of Economic Research, Inc.
    2. Davidson, Russell & MacKinnon, James G., 1993. "Estimation and Inference in Econometrics," OUP Catalogue, Oxford University Press, number 9780195060119, Decembrie.
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    1. Michael Pippenger & Gregory Goering, 1998. "Exchange Rate Forecasting: Results from a Threshold Autoregressive Model," Open Economies Review, Springer, vol. 9(2), pages 157-170, April.
    2. Michael Pippenger & Gregory Goering, 2000. "Additional results on the power of unit root and cointegration tests under threshold processes," Applied Economics Letters, Taylor & Francis Journals, vol. 7(10), pages 641-644.

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