Publication Date: October 2021
Functional coeﬀicient (FC) regressions allow for systematic flexibility in the responsiveness of a dependent variable to movements in the regressors, making them attractive in applications where marginal eﬀects may depend on covariates. Such models are commonly estimated by local kernel regression methods. This paper explores situations where responsiveness to covariates is locally flat or ﬁxed. In such cases, the limit theory of FC kernel regression is shown to depend intimately on functional shape in ways that aﬀect rates of convergence, optimal bandwidth selection, estimation, and inference. The paper develops new asymptotics that take account of shape characteristics of the function in the locality of the point of estimation. Both stationary and integrated regressor cases are examined. Locally flat behavior in the coeﬀicient function has, as expected, a major eﬀect on bias and thereby on the trade-oﬀ between bias and variance, and on optimal bandwidth choice. In FC cointegrating regression, flat behavior materially changes the limit distribution by introducing the shape characteristics of the function into the limiting distribution through variance as well as centering. Both bias and variance depend on the number of zero derivatives in the coeﬀicient function. In the boundary case where the number of zero derivatives tends to inﬁnity, near parametric rates of convergence apply for both stationary and nonstationary cases. Implications for inference are discussed and simulations characterizing ﬁnite sample behavior are reported.
Keywords: Boundary asymptotics, Functional coefficient regression, Limit theory, Locally flat regression coefficient, Near-parametric rate
JEL Classification Codes: C14, C22
See CFP: CFP 1795