The Fourier approach and testing for cointegration in LSTAR model

Article type: Research Article

Authors: Sedefoğlu, Gülşah^{a; *} | Güriş, Burak^b

Affiliations: [a] Department of Statistics, Istanbul Ticaret University, Istanbul, Türkiye | [b] Department of Econometrics, Istanbul University, Istanbul, Türkiye

Correspondence: [*] Corresponding author: Gülşah Sedefoğlu, Department of Statistics, Istanbul Ticaret University, Istanbul, Türkiye. E-mail: gsedefoglu@ticaret.edu.tr.

Abstract: This paper proposes a new logistic smooth transition autoregressive (LSTAR) cointegration test by combining the Fourier function to catch the structural changes that occur over time and the LSTAR model to consider the nonlinearity. Logistic and exponential functions are the main transition functions defining the nonlinearity in STAR models since the exponential smooth transition autoregressive (ESTAR) and LSTAR models can explain the different structures of economic variables. The Fourier approach is a simple and effective way to model the structural changes in time series as an alternative to dummy variables. The most significant advantage of the method is that it does not require prior knowledge about the date, number of breaks, or forms. Monte Carlo simulation results show that the proposed test has good size and power properties for different sample sizes and parameters. The results also revealed that the power performance of the proposed test and the Fourier ESTAR test offered by Güriş and Sedefoğlu (2022) are close to each other. The steps of the Fourier-based tests are illustrated by providing an empirical example of testing the validity of the purchasing power parity (PPP) hypothesis in Türkiye.

Keywords: Cointegration, fourier approach, LSTAR model, structural changes

DOI: 10.3233/MAS-231468

Journal: Model Assisted Statistics and Applications, vol. 19, no. 1, pp. 71-79, 2024