Detecting and modeling nonlinearity in the gas furnace data.

Using a modification of the Hinich, J Time Ser Anal 3(3):169-176, (1982) bispectrum test for nonlinearity and Gaussianity, the residuals of the Tiao and Box, J Am Stat Assoc 76:802-816, (1981) constrained and unconstrained VAR models for the gas furnace data reject the assumption of Gaussianity and linearity over a grid of bandwidths for estimating the bispectrum. These findings call into question the specification of the linear VAR and VARMA models assumed by Tiao and Box, J Am Stat Assoc 76:802-816, (1981). Utilizing the alternative Hinich J Nonparametr Stat 6:205-221, (1996) nonlinearity test, the residuals of the VAR model were shown to exhibit episodic nonlinearity. The sensitivity of the findings to outliers is investigated by estimating and testing the residuals of L1 and MINIMAX models from 1-6 lags. Building on the linear dynamic specification, a multivariate adaptive regression splines (MARS) model is estimated, using two software implementations, and shown to remove the nonlinearity in the residuals. Leverage plots were used to illustrate the 'cost' of imposing a linearity assumption. Out-of-sample forecasting tests from 1-6 periods ahead found that using the sum-of-squared errors criteria, the MARS model out performed ACE, GAM and projection pursuit models. [ABSTRACT FROM AUTHOR]