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, m T ) of (m; ) =
T t=1
(yt mt ) +
2
T t=3
with respect to m = (m1 , . . . , mT ) . Rewrite this penalized least squares criterion in matrix notation and show that the HP lter is a linear lter, i.e. that it may be represented as m = A()y for some non-stochastic matrix A() depending on the smoothing parameter > 0.
Solution When
we mark y1 . y= . . , yT m1 . m= . . mT 1 2 1 0 0 1 2 1 0 ... ... ... B= . .. .. .. . . . . . 0 1 2 0 0 . . . 0 1
and
we can rewrite Hodric-Precsott lter as: min (m; ) = (y m)T (y m) + (Bm)T (Bm) .
m
of equation when we derive that and set this derivative equal We can nd minimum m to zero: (m; ) = 2m 2y + .2.BT Bm= 0 m for When we prove that the second derivative is positive denite, we know that m which + BT Bm = y m is really minimimum for which we search.
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we know that the second derivative is positive denite i.e: ( ) 2 (m; ) = 2 I + BT B > 0. m m is Therefore we can say that our m ( ) 1 = I + BT B m y = A()y.
A()
Suppose that a time series {yt } can be decomposed into deterministic trend mt , a seasonal component st and irregular (random) uctuations ut such that yt = mt + st + ut for t = 1, . . . , T . Show that the weighted moving average lter
yt =
t = 3, . . . , T 2
has the following properties: a) A cubic time trend, mt = i.e. m t = mt . j tj , passes the lter without distortion, (3 points)
b) A seasonal component st with period 3 (i.e. st = st+3 for all t) is eliminated by the (3 points) lter, that is s t = const.
Solution
We are only interested in what happens when we pass our series through lter considering separate somponents. y t = m t + s t + ut
weighted moving average lter
; ; ; ; ;
yt = m t + st + ut
a)
m t =
1 9
We sum all coecients which belong to t1 , . . . , t3 respectively. (Its easier to look at that column by column.) And we get: m t = 1 (9mt2 + 36mt1 + 27mt + 36mt+1 9mt+2 ) = mt . 9
b)
=1 (st+1 + 4st+2 + 3st + 4st+1 st+2 ) 9 =1 (st + st+1 + st+2 ) . 3 But also
1 s t+1 = 3 (st+1 + st+2 + st+3 )
=1 (st+1 + st+2 + st ) 3 and identical for next ones too. So it is obvious that s t is the same for all t {3, . . . T 2}, thus constant.
P., Strejc P.