Regime switching diffusion processes with one or two thresholds and regime switching occurring by a change in the diffusion drift and/or volatility functions parameters of a stochastic differential equation, whose solution defines a continuous time diffusion process, were defined in previous works; the change in regime occurring whenever the trajectory of the process crosses a threshold, possibly with some delay. In this paper we generalise the previous results by allowing the underlying diffusion process to change from one family of diffusions in one regime to an entirely different one in the other regime; these families of diffusions are characterised by specific functional forms for drift and volatility coefficients depending on parameters. We propose an estimation procedure for all the parameters, namely the thresholds, the delay and, for both regimes, diffusion’s parameters and we apply the introduced estimation procedure to both simulated and real data.
|Journal||Global and Stochastic Analysis|
|Publication status||Published - 2021|