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Econometrics Paper
A Smoothed Least Squares Estimator For Threshold Regression Models
Myunghwan Seo and Oliver Linton
October 2005
Paper No' EM/2005/496:
Full Paper (pdf)

JEL Classification: C12; C13; C14

Tags: index model; sample splitting; segmented regression; smoothing; threshold estimation.

We propose a smoothed least squares estimator of the parameters of a threshold regression model. Our model generalizes that considered in Hansen (2000) to allow the thresholding to depend on a linear index of observed regressors, thus allowing discrete variables to enter. We also do not assume that the threshold e¤ect is vanishingly small. Our estimator is shown to be consistent and asymptotically normal thus facilitating standard inference techniques based on estimated standard errors or standard bootstrap for the threshold parameters themselves. We compare our con…dence intervals with those of Hansen (2000) in a simulation study and show that our methods outperform his for large values of the threshold. We also include an application to cross-country growth regressions.