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A bootstrap test for threshold effects in a diffusion process

Author

Listed:
  • Heiko Rachinger

    (Universitat de les Illes Balears)

  • Edward M. H. Lin

    (Tunghai University)

  • Henghsiu Tsai

    (Institute of Statistical Science Academia Sinica)

Abstract

This paper proposes a bootstrap testing approach based on an approximate maximum likelihood method to discern whether a diffusion process is linear or whether there are threshold effects in the drift, the diffusion term or in both. It complements an alternative method based on the least-squares estimator which focuses on threshold effects in the drift. Monte Carlo simulations illustrate that the proposed testing approach is able to detect the source of the non-linearity. Two empirical applications show the importance of modeling threshold effects in the diffusion instead of the drift.

Suggested Citation

  • Heiko Rachinger & Edward M. H. Lin & Henghsiu Tsai, 2024. "A bootstrap test for threshold effects in a diffusion process," Computational Statistics, Springer, vol. 39(5), pages 2859-2872, July.
    • Handle: RePEc:spr:compst:v:39:y:2024:i:5:d:10.1007_s00180-023-01375-z
    DOI: 10.1007/s00180-023-01375-z
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    References listed on IDEAS

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