Abstract: Threshold models have been popular for modelling nonlinear phenomena in diverse areas, in part due to their simple fitting and often clear model interpretation. A commonly used approach to fit a threshold model is the (conditional) least squares method, for which the standard grid search typically requires O(n) operations for a sample of size n; this is substantial for large n, especially in the context of panel time series. This paper proposes a novel method, the nested sub-sample search algorithm, which reduces the number of least squares operations drastically to O(log n) for large sample size. We demonstrate its speed and reliability via Monte Carlo simulation studies with finite samples. Possible extension to maximum likelihood estimation is indicated.

Key words and phrases: Least squares estimation, maximum likelihood estimation, nested sub-sample search algorithm, standard grid search algorithm, threshold model.