Working Papers 2004 – Abstracts
22/2004
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Random Walk Smooth Transition Autoregressive Models
Heather M. Anderson and Chin Nam Low
This paper extends the family of smooth transition autoregressive
(STAR) models by proposing a specification in which the autoregressive parameters
follow random walks. The random walks in the parameters capture permanent
structural change within a regime switching framework, but in contrast to
the time varying STAR (TV-STAR) specification introduced by Lundbergh et al
(2003), structural change in our random walk STAR (RW-STAR) setting follows
a stochastic process rather than a deterministic function of time. We suggest
tests for RW-STAR behaviour and study the performance of RW-STAR models in
an empirical setting, focussing on interpretation and out of sample forecast
performance.
Keywords: Forecast density evaluation, Non-constant parameters, Permanent
structural change, Random walk smooth transition models, Regime switching,
Time varying smooth transition models
