Nonlinear behaviour of the Chinese SSEC index with a unit root: Evidence from threshold unit root tests

We have investigated the behaviour of the Shanghai Stock Exchange Composite (SSEC) index for the period from 1990:12 to 2007:06 using an unconstrained two-regime threshold autoregressive (TAR) model with a unit root developed by Caner and Hansen. The method allows us to simultaneously consider nonstationarity and nonlinearity in time series that has regime switching. Our finding indicates that the Shanghai stock market exhibits nonlinear behaviour with two regimes and has unit roots in both regimes. The important implications of the threshold effect in stock markets are also discussed.