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This paper proposes a contemporaneous smooth transition threshold autoregressive model (C-STAR) as a modification of the smooth transition threshold autoregressive model surveyed in Terasvirta [1998. Modelling economic relationships with smooth transition regressions. In: Ullah, A., Giles, D.E.A. (Eds.), Handbook of Applied Economic Statistics. Marcel Dekker, New York, pp. 507-552.], in which the regime weights depend on the ex ante probability that a latent regime-specific variable will exceed a threshold value. We argue that the contemporaneous model is well suited to rational expectations applications (and pricing exercises), in that it does not require the initial regimes to be predetermined. We investigate the properties of the model and evaluate its finite-sample maximum likelihood performance. We also propose a method to determine the number of regimes based on a modified Hansen [1992. The likelihood ratio test under nonstandard conditions: testing the Markov switching model of GNP. Journal of Applied Econometrics 7, S61-S82.] procedure. Furthermore, we construct multiple-step ahead forecasts and evaluate the forecasting performance of the model. Finally, an empirical application of the short term interest rate yield is presented and discussed. JEL classification: C22; E31; G12 Keywords: Smooth transition threshold autoregressive; Forecasting; Nonlinear models

This article presents evidence on the relationship between price and financial stability. We construct an annual index of financial conditions for the United States, 1790-1997, and estimate the effect of aggregate price shocks on the index using a dynamic ordered probit model. We find that price-level shocks contributed to financial instability during 1790-1933 and that inflation rate shocks contributed to financial instability during 1980-97. The size of the aggregate price shock needed to alter financial conditions depends on the institutional environment, but we conclude that a monetary policy focused on price stability would contribute to financial stability. (JEL E31, E52, N10, C25), I. INTRODUCTION The notion that central banks should act as lenders of last resort is not controversial. How best to carry out that responsibility is, however, not widely agreed on. [...]

We analyse the dynamic dependence structure between broad stock market indexes from the United States (S&P500), Britain (FTSE100), Brazil (BOVESPA) and Mexico (PCMX). We employ Patton’s [Int. Econ. Rev., 2006,2, 527–556] conditional copula setting and additionally observe the impact of different copula functions on Value at Risk (VaR) estimation. We conclude that the dependence between BOVESPA and the other indexes has intensified since the beginning of 2007. In our case the particular copula form is not crucial for VaR estimation. A goodness-of-fit test based on the parametric bootstrap is also applied. The best fits are obtained via time constant Student-tand time-varying Normal copulas. [ABSTRACT FROM AUTHOR]

In this article, we consider extensions of smooth transition autoregressive (STAR) models to situations where the threshold is a function of variables that affect the separation of regimes of the time series under consideration. Our specification is motivated by the observation that unusually high/low values for an economic variable may sometimes be best thought of in relative terms. State-dependent contemporaneous-threshold STAR and logistic STAR models are introduced and discussed. These models are also used to investigate the dynamics of US short-term interest rates, where the threshold is allowed to be a function of past output growth and inflation. [ABSTRACT FROM AUTHOR]

An unresolved question concerning stochastic depreciation shocks is whether they have to be unrealistically large to have any useful role in a dynamic general equilibrium model economy, as Ambler and Paquet (1994) first suggested. We first consider implied depreciation rates from sectoral data from the Bureau of Economic Analysis. These depreciation rates vary across time solely due to compositional changes within each sector. Hence, they tend to understate the range of fluctuation that would hold if the economic shelf life of capital varied endogenously as in Cooley et al. (1997). We find, however, that if depreciation rates follow a Markov switching process, a low variance of the depreciation rate is sufficient to allow a model economy to match the low correlation between hours worked and productivity observed in the data. White noise and autoregressive depreciation shocks, in contrast, require a counterfactually large variance in the depreciation rate to reduce the hours-productivity correlation. We also illustrate the level effects implied by nonlinear decision rules in simulations of dynamic general equilibrium models that include Markov switching parameters. Linear decision rules, in contrast, imply certainty equivalence and ignore the aversion that agents have to the skewed shock distributions that characterize Markov switching. [ABSTRACT FROM AUTHOR]

The Chicago Board Options Exchange concurrently listed European-style and American-style options on the Standard and Poor's 500 Index from April 2, 1986 through June 20, 1986. This unique time period allows for a direct measurement of the early exercise premium in American-style index options. In this study, using ask quotes, we find average early exercise premiums ranging from 5.04 to 5.90% for calls, and from 7.97 to 10.86% for puts. Additionally. we are able to depict a potentially useful functional form of the early exercise premium. As in previous studies, we find some instances of negative early exercise premiums. However, a trading simulation shows that traders must be able to trade within the bid—ask spread to profit from these apparent arbitrage opportunities. [ABSTRACT FROM AUTHOR]

This article presents a new business cycle index that allows for cycle-to-cycle comparisons of the depth of recessions within a country, cross-country comparisons of business cycle correlation, and simple aggregation to arrive at a measure of a European business cycle. The data augmentation implied by Gibbs sampling generates posterior distributions for a latent coincident business cycle index. Subsample corre- lations between an aggregated "Europe" index and the national business cycle indices from France, Germany, and Italy are consistent with the claim that the European economies are becoming more harmonized. [ABSTRACT FROM AUTHOR]

Provides information on a study which presented two distinct measures of inertia in the target federal funds rate changes. Discrete nature of target changes; Examination of Taylor-rule specification of the target federal funds rate; Conclusions.

Analyzes the Federal Open Market Committee's (FOMC) 1996 policy stances. Immediate objective of FOMC; Implication of the researches figured in the 1996 monetary policy debate; Empirical summary of FOMC policy; Biases in the consumer price index (CPI). INSET: Voting members of the FOMC in 1996..

Tests the predictive power of the yield-curve slope relative to other United States recession predictors. Explanation on why the yield curve tilt before recessions; Quantifying the yield curve slope as a predictor of recessions; The predictive power of a dynamic model; A richer time series approach in predicting recessions; Conclusions. INSET: Coefficient variation via Markov switching in the probit model..

Investigates the twin issues of controllability and indicator quality associated with using one of the monetary aggregates as an intermediate target. Forecasting models used to generate estimates of the error variances in the links between the funds rate; Empirical results; Bartlett tests for equal variance; Policy implications. INSET: Changes in time-varying coefficients..