Uneven two-sided power distributions with applications in econometric models

Abstract.

In this paper we propose and analyze a bounded density function with a jump discontinuity at a threshold. Its properties are presented and a maximum likelihood estimation (MLE) procedure for the threshold location and jump size is developed. The distribution seems be appropriate in the context of financial engineering, production analysis, standard auction models and the equilibrium job search problem. An example of the MLE procedure is given utilizing an i.i.d. sample of standardized log differences of bi-monthly US Certificate Deposit interest rates for the period from 1966-2002. The corresponding time series was constructed using an Auto-Regressive Conditional Heteroscedastic (ARCH) model.