Statistics and Its Interface

Volume 4 (2011)

Number 2

A review of threshold time series models in finance

Pages: 167 – 181

DOI: https://dx.doi.org/10.4310/SII.2011.v4.n2.a12

Authors

Cathy W. S. Chen (Department of Statistics, Feng Chia University, Taichung, Taiwan)

Feng-Chi Liu (Department of Statistics, Feng Chia University, Taichung, Taiwan)

Mike K. P. So (Department of Information Systems, The Hong Kong University of Science & Technology, Clear Water Bay, Hong Kong)

Abstract

Since the pioneering work by Tong (1978, 1983), threshold time series modelling and its applications have become increasingly important for research in economics and finance. A number of books and a vast number of research papers published in this area have been motivated by Tong’s threshold models. The goal of this paper is to give a through review on the development of the family of threshold time series model in finance and to provide a streamlined approach to financial time series analysis. It covers threshold modeling, nonlinearity tests, statistical inference, diagnostic checking, and model selection, as well as applications of the threshold autoregressive model and its generalizations in finance.

Keywords

asymmetry, heteroskedasticity, MCMC, Markov switching, smooth transition, nonlinearity, volatility models

Published 22 June 2011