Quotation Zörner, Thomas, Huber, Florian. 2019. Threshold cointegration in international exchange rates: A Bayesian approach. International Journal of Forecasting. 35 (2), 458-473.


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Abstract

This paper considers Bayesian estimation of the threshold vector error correction (TVECM) model in moderate to large dimensions. Using the lagged cointegrating error as a threshold variable gives rise to additional difficulties that typically are solved by utilizing large sample approximations. By relying on Markov chain Monte Carlo methods, we are enabled to circumvent these issues and avoid computationally-prohibitive estimation strategies like the grid search. Due to the proliferation of parameters, we use novel global-local shrinkage priors in the spirit of Griffin and Brown (2010). We illustrate the merits of our approach in an application to five exchange rates vis-á-vis the US dollar by means of a forecasting comparison. Our findings indicate that adopting a non-linear modeling approach improves the predictive accuracy for most currencies relative to a set of simpler benchmark models and the random walk.

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Publication's profile

Status of publication Published
Affiliation WU
Type of publication Journal article
Journal International Journal of Forecasting
Citation Index SSCI
WU-Journal-Rating new STRAT-C, VW-D, WH-B
Language English
Title Threshold cointegration in international exchange rates: A Bayesian approach
Volume 35
Number 2
Year 2019
Page from 458
Page to 473
Reviewed? Y
DOI https://doi.org/10.1016/j.ijforecast.2018.07.012
Open Access N

Associations

Projects
Modeling and forecasting exchange rates in an unified econometric framework
People
Zörner, Thomas (Details)
Huber, Florian (Details)
Organization
Institute for Macroeconomics IN (Details)
Research areas (ÖSTAT Classification 'Statistik Austria')
5323 Econometrics (Details)
5335 Political economic theory (Details)
5371 Macroeconomics (Details)
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