Estimation in a Hazard Regression Model with Smooth Transitions over Unknown Regimes

Abstract This paper introduces the smooth transition duration model, designed to model the dependence of duration on explanatory variables, allowing the duration time to vary with smooth transitions over different regimes. The proposed model is a generalisation of parametric survival regression models, and it makes it possible to detect nonlinear behaviour when the response of interest is the duration time until some event occurs. A Lagrange multiplier (LM) test is derived together with the maximum likelihood estimators of the smooth transition duration model. The practical use of the introduced model is exemplified by assessing the time between abnormal price increases in the electricity spot prices in Queensland, Australia. A deregulation process might have led to a change in the behaviour of the market participants, and the smooth transition duration model is used to detect and examine such possible transitions. The results show clear support for a gradual change in the appearance of abnormal price increases.