Tests of forecast encompassing are used to evaluate one-step-ahead forecasts of S&P Composite index returns and volatility. It is found that forecasts over the 1990s made from models that include macroeconomic variables tend to be encompassed by those made from a benchmark model which does not...

This paper investigates the existence of threshold cointegration between real exchange rates and real interest rate differentials. Unlike previous work, which generally fails to find evidence of a long-run relationship employing linear models, we employ tests of the null hypothesis of no...

This study investigates changes in the persistence of the S&P Composite dividend-price ratio. Recently developed tests are employed that allow for breaks between periods in which the data are integrated of order zero, I(0), and integrated of order one, I(1). One of the tests finds a break from...

Previous empirical work employing smooth transition autoregressive (STAR) models has found that U.S. dollar real exchange rates are nonlinear mean reverting processes. We utilise tests developed from time-varying smooth transition autoregressive (TV-STAR) models to re-examine dollar-based rates....

Purpose – A misplaced reliance on value at risk (VaR) has been focused on in the media as one of the main reasons for the current financial crisis, and the recently published Turner Review by the UK Financial Services Authority concurs. The purpose of this paper is to present an introductory...

Recently developed methodology to allow the possibility of a stochastic unit root process as an alternative to a fixed parameter unit root model is applied to six national indices of stock market prices. Evidence supporting the stochastic unit root hypothesis is found. However, the...

This paper investigates solving the spurious regression problem using an autocorrelation correction. It is shown that if the relevant data generation processes contain higher-order terms, this solution is not as effective as in the first-order case.

This paper investigates the finite-sample power of STAR-based unit root tests when the data generation process is a globally stationary three-regime TAR model. Unit root tests are proposed derived from STAR models that nest TAR models.