WSEAS Transactions on Business and Economics
Print ISSN: 1109-9526, E-ISSN: 2224-2899
Volume 22, 2025
Parameter Estimation of Threshold OU Process
Authors: , , , , , ,
Search Articles
Abstract: This study focuses on analyzing interest rate dynamics trends in different economies. First, we derive
the marginal distribution of the threshold Ornstein-Uhlenbeck (OU) process. Then, we explicitly construct its
probability density function (PDF). Additionally, we use the maximum likelihood estimation (MLE) method to
estimate the model parameters, as it is statistically robust and ensures reliable results. Afterwards, we utilize
historical interest rate data from four countries: China, the United States, the United Kingdom and Switzerland to
validate the model parameter estimates. We've figured out that the threshold OU model is better at capturing the
nonlinear dynamics in interest rates. Consequently, the model can furnish a reference basis for monetary policy
formulation and financial decision-making in a variable macroeconomic environment.
Keywords:
Ornstein-Uhlenbeck Process, Marginal distribution, Maximum Likelihood Estimation, Empirical
analysis
Pages: 1680-1686
DOI: 10.37394/23207.2025.22.134