Name: Vicente David Capriles Barraza.

Variables: dloil: First difference of log(oil).

1) Do a simple Test for nonlinearity

Answer: the nonlinearity test was the “likelihood ratio test” this test estimates the model
under the H0: linear and gets the residuals white noise and saves them in the SSR way.

Later, estimating the model under the H1: no linear. The residuals must be white noise save
them, in the SSR way. Generate a series of the subtracting both of them and regress that
variable to a constant; if we reject the null, then it is not linear.

2) Estimate a nonlinear AR(p) model

The model is
dloil = c B1dloil(-
1) + B2dloil(-
1)*dloil(-2)

The output
shows that the
parameters are
significative
linear and not
linear too. (This
is consistent
with the
likelihood test).

Residuals are white noise.

3) Estimate a TAR(p) model Note: Comparing many lags, Arkaike was best in lag 7.

TAR MODEL
One regime is if the value is less than
-0.0518 (59 observations in this regime), and the second regime is the opposite with
197 observations.

This is a valid nonlinear model.

R^2= 0.217 Akaike = -1.87 Residuals are
white noise.

This test is to
see how many thresholds have it, in
this case, critical values are bigger in 0 vs. 1 confirming there is 1
threshold but smaller for 2 thresholds so just 1 threshold.
 4) Estimate a STAR(P) model
This linearity test is to see if the model is
linear or not linear, the test shows that H0:
linear is rejected. Then looking at Escribano
– the Jorda test, p-value is minimum when
rejects H0E, so is logistic smooth transition
model.

5) Estimate an LSTAR or an ESTAR model

The interpretation of the coefficients is the linear part with a value -0.228501 in the first
regime and for the second 0.5146, analyzing the slope we have a value of 108 but is not
significant and threshold is also not significant R^2= 0.189 Akaike = -1.82

It´s necessary to validate the model that the residuals are white noise, and in this case, the
residuals are, in
fact white noise.
 6) Which one is your best nonlinear model?

TAR is the significance and has a higher

R^2 and smallest variance in Akaike, is
logic because the Oil price is very volatile,
it means in monthly data, it is possible to
have suddenly break.

The graphs show how the logistic

function tries hard to look like a
threshold.

7) Is the preferred model linear or nonlinear?

Intuition: In Oil´s price the volatility is very common so, it will be hard to approximate
it by a linear model, and the threshold looks very useful, even do, linear
approximations are not bad, they can explain a lot, even get white noise.
The R^2 = 0.0718 and Akaike is -1.72, worst than the nonlinear model.