Modelling thresholds and volatility in US ecological patents Felix Chan a , Dora Marinova b , Michael McAleer a, * a School of Economics and Commerce, University of Western Australia, Australia b Institute for Sustainability and Technology Policy, Murdoch University, Australia Received 31 October 2003; received in revised form 10 July 2004; accepted 24 September 2004 Abstract Ecological patents have been increasing steadily over time. This paper analyses trends and volatility in ecological patents in the USA from 1975 to 1997. Germany contributed more than 10% of the total US ecological patents, and is by far the strongest foreign performer. This paper estimates a set of novel regime-switching models to investigate the time-varying nature of the conditional mean, as well as the conditional variance of the patent ratio, namely the ratio of US ecological patents to total US patents, using monthly data from January 1975 to December 1997. The regime-switching LSTAR-GARCH model is found to be optimal for modelling the ecological patent ratio. Ó 2004 Elsevier Ltd. All rights reserved. Keywords: Ecological patents; Trends; Volatility; Regime-switching; Asymmetry; GARCH; GJR; STAR-GARCH; STAR-GJR 1. Introduction Ecological problems such as global warming, ozone layer depletion, land erosion, depletion of natural resources and acid rain have drawn the attention of politicians and researchers globally to the challenge of ecologically sustainable development. Since the United Nations Conference on Environment and Development in Rio de Janeiro in 1992, the business community has established the International Business Council for Sustainable Development to promote technologies that are less harmful to the environment. They have also developed the voluntary environmental standards ISO 14000 to establish continually improving processes for ecologically responsible behaviour. There has also been a higher level of research and development (R&D) expenditure channelled into research that is related to the ecological environment. The patents system is a firmly entrenched component of the economic and industrial environment in which technologies and trade links are developed. Since the mid-1970s, patenting has become a powerful tool for protecting intellectual property. Patents are also condu- cive to economic growth. If patents are essential to protect intellectual property, the efforts of the interna- tional business community to deal with ecological problems should result in more ecological innovations being patented. A number of studies have confirmed that patenting activities cause immediate and sub- sequent market changes (see, for example, Soete, 1987; Griliches et al., 1991; Ernst, 1995, 1997). International patenting has also been found to be a significant deter- minant in productivity performance (Fagerberg, 1987). Thus, the greater the number of ecological patents, the more likely will market economies adopt a course of sustainability. With its large and technologically advanced markets, the US economy has always been highly favourable to companies and individuals interested in protecting their intellectual rights. The USA has also been very attrac- tive to foreign residents who have been willing to * Corresponding author. School of Economics and Commerce, University of Western Australia, 35 Stirling Highway, Crawley, WA 6009, Australia. Tel.: C61 8 6488 3400; fax: C61 8 6488 1016. E-mail address: michael.mcaleer@uwa.edu.au (M. McAleer). 1364-8152/$ - see front matter Ó 2004 Elsevier Ltd. All rights reserved. doi:10.1016/j.envsoft.2004.09.017 www.elsevier.com/locate/envsoft Environmental Modelling & Software 20 (2005) 1369–1378