LITERATURE REVIEW Recently, threshold models have attracted a considerable attention for modeling nonlinearity.

This is due to the fact that linear models generally fail to capture measurable patterns in time series data especially for cases like limit cycles, persistency and jump. Nonlinear modeling has been perceived as a more realistic method for the data generating mechanism of economic and financial data. The threshold autoregressive model which is developed by Tong (1978) has paved the way for the application of nonlinear modeling and has been extended in Tong and Lim (1980) and Tong (1983). Tsay (1989) proposed a model-building methodology for threshold autoregression. In this methodology, a statistic reproduced from simple linear regression is used to test nonlinearity and the identification of threshold is conducted through graphical tools. The results are assessed with a simulation and real-data analysis for finite-sample case. The asymptotic distribution of the likelihood ratio test is examined by Chan (1991) and the least squares estimate of the threshold is found to be consistent in Chan(1993). Hansen (1996) states that the test of nonlinearity has a non-standard distribution for threshold models. The findings of this study suggest that an asymptotic distribution can be generated with a simulation through a conditional probability measure. The existing literature concentrates on the application of threshold autoregressive models to macroeconomic and financial variables. Business cycle is a primary application area of nonlinear
time series models. As an early study, Beaudry and Koop (1993) analyze the persistency of

positive and negative shocks to GNP and they find that negative shocks are more persistent than positive ones to GNP. Enders, Falk and Siklos (2007) build confidence intervals for the estimates of the threshold autoregressive model using different techniques. In the study of Peel and Speight (1996), the empirical quality of nonlinear SETAR model is evaluated against a linear AR model for five developed countries and the SETAR model is found more appropriate. Koop, Pesaran and Potter (1996) develop a method of impulse response analysis for nonlinear multivariate models and they apply this approach to a multivariate model of US output and unemployment rate. Balke (2000) demonstrates that the impact of contractionary monetary shocks is larger than that of the expansionary monetary shocks on output using threshold vector autoregression model with an evidence of nonlinearity.