threshold

Create threshold transitions

Since R2021b

Description

threshold creates threshold transitions from the specified levels and transition type, either discrete or smooth. Use a threshold object to specify the switching mechanism of a threshold-switching dynamic regression model (tsVAR).

To study a threshold transitions model, pass a fully specified threshold object to an object function. You can specify transition levels and rates as unknown parameters (NaN values), which you can estimate when you fit a tsVAR model to data by using estimate.

Alternatively, to create a random switching mechanism, governed by a discrete-time Markov chain, for a Markov-switching dynamic regression model, see dtmc and msVAR.

Creation

Syntax

tt = threshold(levels)

tt = threshold(levels,Name,Value)

Description

tt = threshold(levels) creates the threshold transitions object tt for discrete state transitions specified by the transition mid-levels levels.

tt = threshold(levels,Name,Value) sets properties using name-value argument syntax. For example, threshold([0 1],Type="exponential",Rates=[0.5 1.5]) specifies smooth, exponential transitions at mid-levels 0 and 1 with rates 0.5 and 1.5, respectively.

Input Arguments

levels — Transition mid-levels t₁, t₂,… t_n

increasing numeric vector

Transition mid-levels t₁, t₂,… t_n, specified as an increasing numeric vector.

Levels t_j separate threshold variable data into n + 1 states represented by the intervals (−∞,t₁),[t₁,t₂),… [t_n,∞).

NaN entries indicate estimable transition levels. The estimate function of tsVAR treats the known elements of levels as equality constraints during optimization.

threshold stores levels in the Levels property

Data Types: double

Properties

You can set most properties when you create a model by using name-value argument syntax. You can modify only StateNames by using dot notation. For example, create a two-state, logistic transition at 0, and then label the first and second states Depression and Recession, respectively.

tt = threshold(0,Type="logistic");
tt.StateNames = ["Depression" "Recession"];

Type — Type of transitions

"discrete" (default) | "normal" | "logistic" | "exponential" | "custom"

This property is read-only.

Type of transitions, specified as a character vector or string scalar.

The transition function F(z_t,t_j,r_j) associates a transition type with each threshold level t_j, where z_t is a threshold variable and r_j is a level-specific transition rate. Each function F is bounded between 0 and 1. This table contains the supported types of transitions:

Value	Description
"discrete" (default)	Discrete transitions: $$F(z_t,t_j)=\{\begin{array}{ll}0\hfill & ,z_t<t_j\hfill \\ 1\hfill & ,z_t>=t_j\hfill \end{array}.$$ Discrete transitions do not have transition rates.
"normal"	Cumulative normal transitions: F(zt,tj,rj) = normcdf(zt,tj,1/rj).
"logistic"	Logistic transitions: $$F(z_t,t_j,r_j)=\frac{1}{1+e^{-r_j(z_t-t_j)}}.$$
"exponential"	Exponential transitions: $$F(z_t,t_j,r_j)=1-e^{-r_j{(z_t-t_j)}^2}.$$
"custom"	Custom transition function specified by the function handle of the TransitionFunction property.

Example: "normal"

Data Types: char | string

Levels — Transition mid-levels t₁, t₂,… t_n

increasing numeric vector

This property is read-only.

Transition mid-levels t₁, t₂,… t_n, specified as an increasing numeric vector. The levels input argument sets Levels.

Data Types: double

Rates — Transition rates r₁, r₂,… r_n

ones(n,1) (default) | positive numeric vector

This property is read-only.

Transition rates r₁, r₂,… r_n, specified as a positive numeric vector of length n, the number of levels. Each rate corresponds to a level in Levels.

NaN values indicate estimable rates. The estimate function of tsVAR treats the known elements of Rates as equality constraints during optimization.

threshold ignores rates for discrete transitions.

Example: [0.5 1.5]

Data Types: double

NumStates — Number of states

positive scalar

This property is read-only.

Number of states, specified as a positive scalar and derived from Levels.

Data Types: double

StateNames — Unique state labels

string(1:(n + 1)) (default) | string vector | cell vector of character vectors | numeric vector

Unique state labels, specified as a string vector, cell vector of character vectors, or numeric vector of length numStates.

StateNames(1) names the state corresponding to (−∞,t₁), StateName(2) names the state corresponding to [t₁,t₂),… and StateNames(n + 1) names the state corresponding to [t_n,∞).

Example: ["Depression" "Recession" "Stagnant" "Boom"]

Data Types: string

TransitionFunction — Custom transition function

[] (default) | function handle

This property is read-only.

Custom transition function F(z_t,t_j,r_j), specified as a function handle. The handle must specify a function with the following syntax:

function f = transitionfcn(z,tj,rj)

where:

• You can replace the name transitionfcn.

• z is a numeric vector of threshold variable data.

• tj is a numeric scalar threshold level.

• rj is a numeric scalar rate.

• f is a numeric vector of in the interval [0,1].

When Type is not "custom", threshold ignores TransitionFunction.

Example: @transitionfcn

Data Types: function_handle

Object Functions

ttplot	Plot threshold transitions
ttdata	Transition function data
ttstates	Threshold variable data state path

Examples

Create Discrete Threshold Transition

Create a threshold transition at mid-level ${\mathit{t}}_1=0$.

t1 = 0;
tt = threshold(t1)

tt = 
  threshold with properties:

          Type: 'discrete'
        Levels: 0
         Rates: []
    StateNames: ["1"    "2"]
     NumStates: 2

tt is a threshold object representing a discrete threshold transition at mid-level 0. tt is fully specified because its properties do not contain NaN values. Therefore, you can pass tt to any threshold object function.

Given a univariate threshold variable, tt divides the range of the variable into two distinct states, which tt labels "1" and "2". tt also specifies the switching mechanism of a threshold-switching autoregressive (TAR) model, represented by a tsVAR object. Given values of the observed univariate transition variable:

• The TAR model is in state "1" when the transition variable is in the interval $\left(-\infty ,0\right)$.

• The TAR model is in state "2" when the transition variable is in the interval $$[0,\infty )$$.

Plot Smooth Threshold Transitions

This example shows how to create two logistic threshold transitions with different transition rates, and then display a gradient plot of the transitions.

Load the yearly Canadian inflation and interest rates data set. Extract the inflation rate based on consumer price index (INF_C) from the table, and plot the series.

load Data_Canada
INF_C = DataTable.INF_C;

plot(dates,INF_C);
axis tight

Assume the following characteristics of the inflation rate series:

• Rates below 2% are low.

• Rates at least 2% and below 8% are medium.

• Rates at least 8% are high.

• A logistic transition function describes the transition between states well.

• Transition between low and medium rates are faster than transitions between medium and high.

Create threshold transitions to describe the Canadian inflation rates.

t = [2 8];      % Thresholds
r = [3.5 1.5];  % Transition rates
statenames = ["Low" "Med" "High"];
tt = threshold(t,Type="logistic",Rates=r,StateNames=statenames)

tt = 
  threshold with properties:

          Type: 'logistic'
        Levels: [2 8]
         Rates: [3.5000 1.5000]
    StateNames: ["Low"    "Med"    "High"]
     NumStates: 3

Plot the threshold transitions; show the gradient of the transition function between the states, and overlay the data.

figure
ttplot(tt,Data=INF_C)

Prepare Switching Mechanism of Threshold-Switching Model for Estimation

A threshold-switching dynamic regression (tsVAR) model has two main components:

• Threshold transitions, which represent the switching mechanism between states. Mid-levels and transition rates are estimable.

• A collection of autoregressive models describing the dynamic system among states. Submodel coefficients and covariances are estimable.

Before you create a threshold-switching model, you must specify its threshold transitions by using theshold. If you plan to fit a threshold-switching model to data, you can fully specify its threshold transitions if you know all mid-levels and transition rates. If you need to estimate some or all mid-levels and rates, you can enter NaN values as placeholders for unknown parameters. estimate treats all specified parameters as equality constraints during estimation. Regardless, to fit threshold transition parameters to data, you must specify a partially specified threshold object as the switching mechanism of a threshold-switching model.

Prepare All Estimable Parameters for Estimation

Consider a smooth transition autoregressive (STAR) model that switches between three states (two thresholds) with an exponential transition function.

Create the switching mechanism. Specify that all estimable parameters are unknown.

t1 = [NaN NaN]; % Two unknown mid-levels
r1 = [NaN NaN]; % Two unknown transition rates
tt1 = threshold(t1,Type="exponential",Rates=r1)

tt1 = 
  threshold with properties:

          Type: 'exponential'
        Levels: [NaN NaN]
         Rates: [NaN NaN]
    StateNames: ["1"    "2"    "3"]
     NumStates: 3

tt is a partially specified threshold object to pass to tsVAR as the switching mechanism. The estimate function of tsVAR fits the two mid-levels and transition rates to the data with any unknown submodel parameters in the threshold-switching model.

Specify Equality Constraints

Consider a STAR model, which has a switching mechanism with the following qualities:

• The thresholds are at -1 and 1.

• The transition function is exponential.

• The transition rate between the first and second state is 0.5, but the rate between the second and third states is unknown.

Create the switching mechanism.

t2 = [-1 1];
r2 = [0.5 NaN];
tt2 = threshold(t2,Type="exponential",Rates=r2)

tt2 = 
  threshold with properties:

          Type: 'exponential'
        Levels: [-1 1]
         Rates: [0.5000 NaN]
    StateNames: ["1"    "2"    "3"]
     NumStates: 3

tt is a partially specified threshold object to pass to tsVAR as the switching mechanism. The estimate function of tsVAR does the following:

• Treat the mid-levels tt.Levels and the first transition rate tt.Rates(1) as equality constraints

• Fit the second transition rate tt.Rates(2) to the data with any unknown submodel parameters in the threshold-switching model

Specify Custom Transition Functions

Create smooth threshold transitions with the following qualities:

• Mid-levels are at -1, 1, and 2.

• The transition function is the Student's $\mathit{t}$ cdf, which allows for a more gradual mixing than the normal cdf.

• The transition rates, which are the degrees of freedom of the distribution, are 3, 10, and 100.

t = [-1 1 2];
r = [3 10 100];
ttransfcn = @(z,ti,ri)tcdf(z,ri);
tt = threshold(t,Type="custom",TransitionFunction=ttransfcn,Rates=r)

tt = 
  threshold with properties:

          Type: 'custom'
        Levels: [-1 1 2]
         Rates: [3 10 100]
    StateNames: ["1"    "2"    "3"    "4"]
     NumStates: 4

Plot graphs of each transition function.

figure
ttplot(tt,Type="graph")
legend(string(tt.Levels))

More About

State Transition

In threshold-switching dynamic regression models (tsVAR), a state transition occurs when a threshold variable z_t crosses a transition mid-level.

Discrete transitions result in an abrupt change in the submodel computing the response. Smooth transitions create weighted combinations of submodel responses that change continuously with the value of z_t, and state changes indicate a shift in the dominant submodel.

The smooth transition weights are determined by a transition function F(z_t,t_j,r_j), where t_j is threshold j and r_j is transition rate j (see Type). Discrete, normal, and logistic transition functions separate states at small and large values of z_t. Exponential transitions separate states at small and large values of |z_t|. Exponential transitions model economic variables with "inner" and "outer" states, such as deviations from purchasing power parity.

Tips

• To widen a smooth transition band to show a more gradual mixing of states, decrease the transition rate by specifying the Rates name-value argument when you create threshold transitions.

References

[1] Enders, Walter. Applied Econometric Time Series. New York: John Wiley & Sons, Inc., 2009.

[2] Teräsvirta, Tima. "Modelling Economic Relationships with Smooth Transition Regressions." In A. Ullahand and D.E.A. Giles (eds.), Handbook of Applied Economic Statistics, 507–552. New York: Marcel Dekker, 1998.

[3] van Dijk, Dick. Smooth Transition Models: Extensions and Outlier Robust Inference. Rotterdam, Netherlands: Tinbergen Institute Research Series, 1999.

Version History

Introduced in R2021b