Mean reversion of RMB exchange rate based on LSTAR with two thresholds

The paper puts forward a LSTAR model with two thresholds in order to analyze the mean reversion of the RMB exchange rate. When testing the linearity against this kind of LSTAR models, we find out that it is necessary to replace the transition function with its first-order Taylor approximation, which can help us to save many degrees of freedom. And the LSTAR model with two thresholds is used to the empirical study of RMB exchange rate. The conclusion is that if RMB exchange rate relative to PPP three months earlier is undervalued more than 2.44% or is overvalued more than 1.09%, RMB exchange rate now has the tendency to PPP, otherwise has no tendency to PPP, but is highly persistent.