A1416
Title: A doubly-threshold diffusion model: One threshold in drift, one in diffusion
Authors: Henghsiu Tsai - Academia Sinica (Taiwan) [presenting]
Edward Meng-Hua Lin - Tunghai University (Taiwan)
Abstract: A novel threshold diffusion model is proposed in which the drift and diffusion components undergo regime shifts at distinct threshold values. Specifically, the drift term switches regimes at one threshold, while the diffusion term transitions at a potentially different level. This doubly threshold specification offers greater flexibility for capturing asymmetric dynamics in both the conditional mean and volatility. To estimate the model, an approximate maximum likelihood estimation (AMLE) procedure is developed that remains computationally tractable despite the model's structural complexity. Monte Carlo simulations demonstrate that the proposed estimator is both consistent and efficient, and that standard information criteria (AIC, BIC, HQIC) can effectively distinguish between models with shared versus separate thresholds. Empirical applications to U.S. Treasury interest rate data-including the 3-Month Treasury Bill and the 10-Year/3-Month yield spread-further support the proposed framework. The results reveal structural asymmetries that are better captured by allowing distinct threshold mechanisms in the drift and diffusion terms.
