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In this paper, we study the estimation of the threshold predictive regression
model with hybrid stochastic local unit root predictors. We demonstrate the
estimation procedure and derive the asymptotic distribution of the least square
estimator and the IV based estimator proposed by Magdalinos and Phillips
(2009), under the null hypothesis of a diminishing threshold effect. Simulation
experiments focus on the finite sample performance of our proposed estimators
and the corresponding predictability tests as in Gonzalo and Pitarakis (2012),
under the presence of threshold effects with stochastic local unit roots. An
empirical application to stock return equity indices, illustrate the usefulness
of our framework in uncovering regimes of predictability during certain
periods. In particular, we focus on an aspect not previously examined in the
predictability literature, that is, the effect of economic policy uncertainty.
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