Monte Carlo Methods using Matlab

Roberto Casarin
University Ca’ Foscari, Venice
Summer School of Bayesian Econometrics
Perugia 2013

September 9, 2013
2
Contents

1 A Matlab Primer 1
1.1 Programming Languages . . . . . . . . . . . . . . . . . . . . . 1
1.2 Fourth Generation Languages (4GPL) . . . . . . . . . . . . . 5
1.3 Matlab . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
1.3.1 Operators . . . . . . . . . . . . . . . . . . . . . . . . . 6
1.3.2 Logical Operators . . . . . . . . . . . . . . . . . . . . . 6
1.3.3 Creating Matrices . . . . . . . . . . . . . . . . . . . . . 7
1.3.4 Matrix Description . . . . . . . . . . . . . . . . . . . . 7
1.3.5 Other Functions . . . . . . . . . . . . . . . . . . . . . . 7
1.3.6 Loops and If Statements . . . . . . . . . . . . . . . . . 8
1.3.7 Procedures . . . . . . . . . . . . . . . . . . . . . . . . . 9
1.4 Examples . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
1.4.1 Input, Output and Graphics . . . . . . . . . . . . . . . 9
1.4.2 Ordinary Least Square . . . . . . . . . . . . . . . . . . 11
1.4.3 A Bayesian Linear Regression Model . . . . . . . . . . 12
1.5 From Matlab to Scilab and R . . . . . . . . . . . . . . . . . . 17

2 Monte Carlo Integration 21

2.1 Integration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
2.2 A Monte Carlo Estimator . . . . . . . . . . . . . . . . . . . . 22
2.3 Asymptotic Properties . . . . . . . . . . . . . . . . . . . . . . 24
2.4 Optimal Number of MC Samples . . . . . . . . . . . . . . . . 25
2.5 Appendix - Matlab Code . . . . . . . . . . . . . . . . . . . . . 27

3 Importance Sampling 31
3.1 Importance Sampling . . . . . . . . . . . . . . . . . . . . . . . 31
3.2 Properties of the IS Estimators . . . . . . . . . . . . . . . . . 32
3.3 Generating Student-t Variables . . . . . . . . . . . . . . . . . 34

i
ii CONTENTS
Chapter 1

A Matlab Primer

Aim

Learn some basic facts in Matlab programming

Contents

1. Programming Languages

2. Fourth Generation Languages (4GPL)

3. Matlab

4. Examples

5. From Matlab to Scilab

1.1 Programming Languages

If you need to carry out an econometric analysis, before starting to write a
code, may be you would like to have a look to the following link

http://www.feweb.vu.nl/econometriclinks/software.html

where many of the most used econometrics softwares and their contributed
libraries are linked.

1
2 CHAPTER 1. A MATLAB PRIMER

In the following we report a brief description of the softwares listed at the

econometriclinks webpage maintained by the Royal Economic Society:

• A+, ACML, ADMB, AIMMS, ALOGIT, Alyuda, AMOS, AMPL, APL,

Apophenia, Arc, AREMOS, AutoBox, Autometrics, AutoSignal

• B34S, BACC, BATS, BETA, BIOGEME, BMDP, Brodgar, BUGS,

BV4
BACC: Bayesian Analysis, Computation and Communication. Free high
quality generic software developed for different operating systems (Windows,
Unix) and different front-ends. Specific model procedures as well. Supported
by the US NSF. Developed by Bill McCausland under the supervision of John
Geweke.
BUGS: Bayesian inference Using Gibbs Sampling (MCMC: Markov Chain
Monte Carlo)

• C(++), CART, Census X12, Caterpillar-SSA, CPLEX, ConfortS,

CVar

• DataDesk, Dataplore, Dataplot, DATAVIEW, DEA-Solver, DEME-

TRA, Draco, DYALOG, DYNARE
DYNARE: A Program for the Resolution and Simulation of Dynamic Models
with Forward Variables Through the Use of a Relaxation Algorithm. Com-
putes k-th order approximations of dynamic stochastic general equilibrium
(DSGE) models. Also allows Bayesian Estimation of DSGEs

• EasyFit, EasyReg, EcoWin, ECTS, EQS, Eviews, Excel, EXPO

• FAME, ForecastPro, Fortran, FreeFore, FSQP

• GAMS, GARCH, GAUSS, GAUSSX, GiveWin, Gempack, GeoDa,

Genstat, GLIM, GLIMMIX, GQOPT, graphpad, Gnuplot, GSL, GRETL
GAMS: Generic Algebraic Modeling System for large scale optimization
problems.
1.1. PROGRAMMING LANGUAGES 3

GAUSS: is a programming language designed to operate with and on ma-

trices. It is a general purpose tool. As such, it is a long way from more
specialised econometric packages. On a spectrum which runs from the com-
puter language C at one end to, say, the menu-driven econometric program
EViews at the other, GAUSS is very much at the programming end.
GRETL: Is a cross-platform software package for econometric analysis, writ-
ten in the C programming language. It is free, open-source software.

• HLM

• ICRFS-Plus, ILOG, IDAMS, IMSL, INSTAT, ITSM

• J, JMP, JMulti, JStatCom, JWAVE

• KNITRO

• MacAnova, Maple, Mendeley, MARS, Mathcad, Mathematica, Math-

Player, MathML, MathType, MATLAB, Matrixer, M@ximize, MetrixND,
MHTS, Microfit, MiKTeX, Minitab, MINOS, MIXOR, MLE, MLwiN,
Modeleasy, ModelQED, Modler, MOSEK, Mplus, Modula, MuPAD,
Mx.
MATLAB: It is a high-level language and more specifically a 4GPL (such as
SAS, SPSS, Stata, GAUSS) which allows matrix manipulations for numeri-
cal computing.

• NAG Mark 22 Numerical Libraries (2009), Genstat, MLP (ML estima-

tion))

• Octave, O-Matrix, Omegahat, OpenDX, Ox, OxEdit, OxGauss, Ox-

Metrics
Octave: a high-level language, primarily intended for numerical computa-
tions. It provides a convenient command line interface for solving linear and
nonlinear problems numerically, and for performing other numerical experi-
ments using a language that is mostly compatible with Matlab. It may also
4 CHAPTER 1. A MATLAB PRIMER

be used as a batch-oriented language.

Ox: is an object-oriented matrix programming language for statistics and
econometrics developed by Jurgen Doornik

• PASS, PASW, PcFiml, PcGets, PcGive, PcNaive, Python

Python: Free Open Source Dynamic object-oriented programming language
that can be used for many kinds of software development. It offers strong
support for integration with other languages and tools, comes with extensive
standard libraries

• R, RATS, REG-X, ReSampling Stats, Rlab, Rlab+

R: is 4GPL, it is a free software environment for statistical computing and
graphics. It compiles and runs on a wide variety of UNIX platforms, Win-
dows and MacOS.
RATS: developed by Estima, RATS (Regression Analysis of Time Series) is
an econometrics and time-series analysis software package.

• S+, SAS, SCA, Scilab, SciPy, SciViews, Sciword, SCP, Shazam, Sigmaplot,
SIMSTAT, SOLAS, SOL, Soritec, SpaceStat, SQlite, SPAD, Speakeasy,
IBM SPSS, SsfPack, STAMP, Stata, StatCrunch, Statgraphics, Sta-
tistica, Stat/Transfer, StatsDirect, STL, Statview, SUDAAN, SVAR,
SYSTAT
SAS: is a 4GPL which allows to define a sequence of operations (statistical
analysis and data management) to be performed on data
Scilab: is 4GPL free and open source for numerical computation, similar to
Matlab

• TSM, TISEAN, TRAMO/SEATS, TSP, TVAR

TRAMO/SEATS:

• UNISTAT, VassarStats, ViSta

1.2. FOURTH GENERATION LANGUAGES (4GPL) 5

• Web Decomp, WebStat, WEKA, WinIDAMS, WINKS, Windows KWIK-

STAT, XploRe, Winsolve, X-12-ARIMA, XLisp-Stat, Xtremes, X(G)PL

1.2 Fourth Generation Languages (4GPL)

Each step in the development of Computer Languages has aimed to reduce
the amount of time required to write programs and reduce the amount of
skill required to write Programs.

In the 1GPL the programs are written in binary code and can access
binary digits. To write programs with 1GPL is a very skilled job and it is
very time consuming to test and debug programs.

In the 2GPL, the programs are written in symbolic assembly code, they
access bytes and are slightly less time demanding.

In the 3GPL, the programs are written in a High Level Language (e.g.
COBOL, Pascal, C, Fortran, etc), they can access records and programming
requires less time and skills.

In the 4GPL, the programs perform BOOLEAN operations on SETS

(Mathematical), they requires less time and skills. A well known example of
4GPL is SQL.

Scilab, Matlab, Gauss and R, see

http://www.scilab.org/
http://www.mathworks.it/
http://www.aptech.com/
http://www.r-project.org/
are 4GPL and have some common features. They are a long way from more
specialised econometric packages, are not menu-driven programs (such as E-
Views) and are very much at the programming end. Thus all of them require
a certain degree of familiarity with programming methods and structures.
6 CHAPTER 1. A MATLAB PRIMER

Another common feature is that they are extremely powerful for matrix
manipulation and in this sense they are more useful for economists than the
3GPL programming languages (such as C or Fortran), where the basic data
units are all scalars. At the same time they are very flexible and allows more
expert users to use interface to procedures written in other languages such
as C, C++, or Fortran.

An important feature of Scilab and R is that the source code of their

libraries are available, which is not generally the case for Matlab and Gauss.
Finally note that Matlab, Gauss and R have a lot of proprietary and con-
tributed libraries oriented to statistics and econometrics.

1.3 Matlab

1.3.1 Operators
• Select submatrix from matrix:
x( startrow : endrow, startcolumn : endcolumn )
• Transposition operator:
• Matrix Operators: + - * \ %
• Element-by-element operators: .+ .- .* .\
• Concatenating operators:
[leftmatrix, rightmatrix] [uppermatrix; bottommatrix]
• Relational operators: < > == /= >= <=
• Relational operators (element-by-element): .< .> .== ./= .>= .<=

1.3.2 Logical Operators

and, or, xor, eqv, not
• Logical Operators (element-by-element) with: .
1.3. MATLAB 7

1.3.3 Creating Matrices

• let x = [ 1 2 3, 4 5 6, 7 8 9 ];
• disp(x);
• x = eye( 3 );
• x = ones( 2, 5 );
• x = ( start : inc : n );
• x = rand( 4, 10 );
• x = randn( 4, 10 );
• y = x[ 2, : ];

1.3.4 Matrix Description

• y = size( x , 1 );
• y = size( x , 2 );
• y = max( x, [] , 1 );
• y = max( x, [] , 2 );
• y = [ma,maind]=max( x );
• y= mean( x );
• y= std( x ); divisor is 1/n − 1
• y= sum( x );
• y= prod( x );
• y= cumsum( x );
• y= cumprod( x );

1.3.5 Other Functions

• y= diag( x );
• y= inv( x );
• y= log( x );
• y= exp( x );
• y =round( x );
8 CHAPTER 1. A MATLAB PRIMER

• y= ceil( x );
• y= floor( x );
• y= reshape( x,r,c );
• Kronecker product: kron( x , y )
• y= trimr( x,t,b );

1.3.6 Loops and If Statements

for i=start:step:increment;
...
end;

while logical expression;

...
end;

if logical expression 1;
...
elseif logical expression 2;
...
else;
...
end;

Example of do loop with counter:

i=1;
while (i¡=100);
...
i=i+1;
end;
1.4. EXAMPLES 9

1.3.7 Procedures
Procedures may contain so called local variables. These variables are called
local, since you can access them only in the particular procedure.

Example: Computation of log-returns for financial assets:

function [lrt]=logret(data)
% Procedure Name: logret
% Input: T * K matrix of levels
% Output: (T-1) * K matrix of ln-returns
% Utilizing the Procedure:
% returns=_logret(prices);
% prices has to be an existing T*K matrix
% returns is the created (T-1)*K matrix
% containing the ln-returns
dat1=log(data(2:size(data,1),:));
dat2=log(data(1:size(data,1)-1,:));
lrt=dat1-dat2;
end

1.4 Examples
1.4.1 Input, Output and Graphics
%*************************************************
% basic in I/O, graphical, statistical procedures
%*************************************************
% Load UK/EU exchange rate data
clc;
clear all;
yy= load(’C:/Dottorato/Teaching/SummerSchoolBertinoro/...
TutorialAntonietta/TutorialRobAnt/AllLab/MatlabCode/ChapterMatlab/pound.txt’);

%*************************************************
n=size(yy,1); % evaluate the number of rows %
xx=(1:n);

%*************************************************
% for end if end
% (1) Evaluate sequentially the variance
% (2) Built a dummy variable, based on the value
% of the variance estimated recursively
%*************************************************
wn=10; % set the value of a variable%
s=zeros(n,1); % define a n-dim null vector %
d=zeros(n,1);
for j=(wn+1):n;
s(j,1)=var(yy((j-wn+1):j,1));
if (s(j,1)>0.45);
d(j,1)=1;
10 CHAPTER 1. A MATLAB PRIMER

end;
end;

%*************************************************
% Some Pictures...
%*************************************************
% figure(1) to have distinct graphs

figure(1);
title(’Time series data’);
ylabel(’Data’);
xlabel(’Time’);
plot(xx,yy);

figure(2);
title(’Time-varying log-volatility’);
a=plot(xx,s,’color’,[1 0 0]); %[red green blue] the rgb convention
axis([1 n min(s) max(s)]); % Set tics

figure(3);
title(’Dummy’);
plot(xx,d,’color’,[1 0 0]); %[red green blue] the rgb convention
axis([1 n -0.1 1.1]); % Set tics

%*************************************************
% All charts in one pictures...
%*************************************************
figure(4);
subplot(3,1,1);
title(’Time series data’);
ylabel(’Data’);
xlabel(’Time’);
plot(xx,yy);

subplot(3,1,2);
title(’Time-varying log-volatility’);
plot(xx,s,’color’,[1 0 0]); %[red green blue] the rgb convention
axis([1 n min(s) max(s)]); % Set tics

subplot(3,1,3);
title(’Dummy’);
plot(xx,d,’color’,[1 0 0]); %[red green blue] the rgb convention
axis([1 n -0.1 1.1]); % Set tics

%*************************************************
% histogram
%*************************************************
figure(5);
hist(yy,50);

%*************************************************
% Save the results in a ouput file
%*************************************************
fid = fopen(’C:/Dottorato/Teaching/SummerSchoolBertinoro/...
TutorialAntonietta/TutorialRobAnt/AllLab/MatlabCode/ChapterMatlab/OutPound.txt’, ’w’);
fprintf(fid, ’%5.2f\n’, yy);
fclose(fid);
1.4. EXAMPLES 11

%*************************************************

1.4.2 Ordinary Least Square

We learn how to use structures in Matlab
function results=ols(y,x)
% PURPOSE: least-squares regression
%---------------------------------------------------
% USAGE: results = ols(y,x)
% where: y = dependent variable vector (nobs x 1)
% x = independent variables matrix (nobs x nvar)
%---------------------------------------------------
% RETURNS: a structure
% results.meth = ’ols’
% results.beta = bhat
% results.tstat = t-stats
% results.yhat = yhat
% results.resid = residuals
% results.sige = e’*e/(n-k)
% results.rsqr = rsquared
% results.rbar = rbar-squared
% results.dw = Durbin-Watson Statistic
% results.nobs = nobs
% results.nvar = nvars
% results.y = y data vector

Check for the correct number of input argument and if the number of
rows of x is equal to the number of rows of y

if (nargin ~= 2); error(’Wrong # of arguments to ols’);

else
[nobs nvar] = size(x); [nobs2 ndep] = size(y);
if (nobs ~= nobs2); error(’x and y must have same # obs in ols’);
end;
end;
k=nvar;

Evaluate all the statistics that are usually involved in a OLS estimation
results.y = y;
results.nobs = nobs;
results.nvar = nvar;
%
xpxi = (x’*x)\eye(k);
results.beta = xpxi*(x’*y);
results.yhat = x*results.beta;
results.resid = y - results.yhat;
sigu = results.resid’*results.resid;
results.sige = sigu/(nobs-nvar);
tmp = (results.sige)*(diag(xpxi));
results.tstat = results.beta./(sqrt(tmp));
12 CHAPTER 1. A MATLAB PRIMER

ym = y - mean(y);
rsqr1 = sigu; rsqr2 = ym’*ym;
results.rsqr = 1.0 - rsqr1/rsqr2; % r-squared
rsqr1 = rsqr1/(nobs-nvar);
rsqr2 = rsqr2/(nobs-1.0);
results.rbar = 1 - (rsqr1/rsqr2); % rbar-squared
ediff = results.resid(2:nobs) - results.resid(1:nobs-1);
results.dw = (ediff’*ediff)/sigu; % durbin-watson
end;

We save as a function the ols.m code and run the following simulation
example
nob=100;
x1=ones(nob,1);
x2=randn(nob,1).*((1:nob)’/10);
x=[x1 x2];
sig=2;
y=x*[10; 0.9]+sig*randn(nob,1);
res=ols(y,x);
res.beta
%%
figure(1)
plot([res.yhat y]);
figure(2)
plot(res.resid);

1.4.3 A Bayesian Linear Regression Model

Let y ∈ Rn , X ∈ Rn × Rk and β ∈ Rk . Consider the simple regression model

(1.1) y = Xβ + ε
(1.2) ε ∼ Nn (0n , σ 2 In )

with the following prior specification

(1.3) Rβ ∼ N (r, T )

or equivalently

(1.4) Qβ ∼ N (q, Ik )

where Q′ Q = T −1 and q = Qr.

1.4. EXAMPLES 13

The joint posterior distribution of β and σ 2 is

  n+1
2 1 2
(1.5) π(β, σ |y) ∝ exp{(β − β̄)V̄ −1 (β − β̄)}
σ2

where V̄ = σ 2 ((X ′ X) + σ 2 Q′ Q)−1 and β̄ = V̄ /σ 2 (X ′ y + σ 2 Q′ q)

Theil and Goldberger (1961) observed that the conditional posterior dis-
tribution of β given σ 2 and y is

(1.6) π(β|σ 2 , y) ∝ N (β̄, V̄ )

and proposed to replace the unknown quantity σ 2 with an estimated value

σ̂ 2 = (y − X β̂)′ (y − X β̂)/(n − k).
In a Gibbs sampling framework it is possible to simulate from the poste-
rior by simulating iteratively (Gelfand and Smith (1990) gave a proof of the
convergence to the true posterior distribution) from the posterior conditional
distribution of β given σ 2 and y

(1.7) π(β|σ 2 , y) ∝ N (β̄, V̄ )

and from the posterior conditional distribution of σ 2 given β and y

 
2 n 1
(1.8) π(σ |β, y) ∝ IG , (y − Xβ)′ (y − Xβ)
2 2

or equivalently

(1.9) π((y − Xβ)′ (y − Xβ)/σ −2 |β, y) ∝ χ2n

% Simulate a dataset
n=100; k=3;
x = randn(n,k);
b = ones(k,1);
y = x*b + randn(n,1);

% Set prior
14 CHAPTER 1. A MATLAB PRIMER

r = [1.0 1.0 1.0]’;

R = eye(k);
T = eye(k);
Q = chol(inv(T));
q = Q*r;

% Initial values for the Gibbs

b0 = (x’*x)\(x’*y);
sige = (y-x*b0)’*(y-x*b0)/(n-k);
xpx = x’*x; xpy = x’*y;
qpq = Q’*Q; qpv = Q’*q;
ndraw = 1100; nomit = 100;
bsave = zeros(ndraw,k);
ssave = zeros(ndraw,1);
for i=1:ndraw;
xpxi = inv(xpx + sige*qpq);
% update b
b = xpxi*(xpy + sige*qpv);
b = chol((sige*xpxi))*randn(k,1) + b;
bsave(i,:) = b’;
% update sige
e = y - x*b; ssr = e’*e;
chi = random(’gamma’,n/2,2);
sige = ssr/chi;
ssave(i,1) = sige;
end;

% Evaluate statistics
bhat = mean(bsave(nomit+1:ndraw,:));
bstd = std(bsave(nomit+1:ndraw,:));
tstat = bhat./bstd;
sighat = mean(ssave(nomit+1:ndraw,1));
tout = 1-cdf(’t’,abs(tstat’),n);

% Display Gibbs results

disp(’Gibb sampling estimates’)
disp([’Coefficient ’,’t-statistic ’,’t-probability’]);
disp([bhat’ tstat’ tout]);

% Calculate and Display Theil-Goldberger results

tgsige=(y - x*b0)’*(y - x*b0)/(n-k);
tgbhat=inv(xpx + tgsige*qpq)*(xpy+tgsige*qpv); %Theil-Goldberger estimates
tgbstd = diag(chol(tgsige*(xpx + tgsige*qpq)));
tgtstat = tgbhat./tgbstd;
disp(’Theil-Goldberger estimates’)
disp(tgbhat);

A typical result from this code is

Gibb sampling estimates

Coefficient t-statistic t-probability
1.0045 10.2286 0
1.4. EXAMPLES 15

0.9610 11.2966 0
0.9200 11.2740 0

Theil-Goldberger estimates
1.0037
0.9569
0.9198

We apply now the inference procedure to a financial dataset. We consider

monthly data on the short-term interest rate (the three-month Treasury Bill
rate) and on the AAA corporate bond yield in the USA. As Treasury Bill
notes and AAA bonds are low-risk securities and one could expect that there
is a relationship between their interest rate. We consider data from January
1950 to December 1999.

Let yi be the monthly change in the Treasury Bill rate and zi the monthly
change in the AAA bond rate. We will fit on this set of data the heteroscedas-
tic model presented above with

yi = β1 + β2 zi + εi

that corresponds to set xi = (1, zi )′ and β = (β1 , β2 )′ in the multivariate

regression model given above. The results of the estimation procedure are

Gibb sampling estimates

Coefficient t-statistic t-probability
0.0053 0.7805 0.2177
0.2751 19.8628 0

Theil-Goldberger estimates
0.0057
0.2747
16 CHAPTER 1. A MATLAB PRIMER

1.5
Actual
1 Fitted

0.5

−0.5

−1

−1.5
100 200 300 400 500 600

1.5
Residuals
1

0.5

−0.5

−1
100 200 300 400 500 600

Figure 1.1: Actual and fitted data (top) and residuals (bottom) using the
Bayesian estimates of the linear regression model.

The estimates of the σ 2 are 0.0283 for the Gibbs sampler and 0.0282 for the
Theil-Goldberger procedure.
The actual and fitted data and the residuals are given in Fig. 1.1. The
plot of the residuals shows that in the second half of the sample (say after
the 1975) the variance is underestimated. More precisely one should account
in the model for the time variation in the variance of the data. This call
for heteroscedastic linear regression models (see Chapter ??) or for nonlinear
models such as stochastic volatility models (see Chapter ?? and ??).

References
• Gelfand, Alan E., and A.F.M Smith. 1990. Sampling-Based Approaches
to Calculating Marginal Densities, Journal of the American Statistical Asso-
ciation, Vol. 85, pp. 398-409.
1.5. FROM MATLAB TO SCILAB AND R 17

• Theil, Henri and Arthur S. Goldberger. 1961. On Pure and Mixed Sta-
tistical Estimation in Economics, International Economic Review, Vol. 2,
65-78.

1.5 From Matlab to Scilab and R

We present here an example of translation of a Matlab code into a Scilab
and a R code. This exercise shall demonstrate the similarity and between
the three programming languages. In particular we found that Scilab could
be in term of syntax the most similar to Matlab.
Scilab
//*************************************************
// basic in I/O, graphical, statistical procedures
//*************************************************
// Load UK/EU exchange rate data
clc;
clear all;
yy= fscanfMat(’C:/Dottorato/Teaching/SummerSchoolBertinoro/TutorialAntonietta/...
TutorialRobAnt/AllLab/MatlabCode/ChapterMatlab/OutPound.txt/pound.txt’);

//*************************************************
n=size(yy,1); // evaluate the number of rows //
xx=(1:2:n);

//*************************************************
// for endfor if end
// (1) Evaluate sequentially the variance
// (2) Built a dummy variable, based on the value
// of the variance estimated recursively
//*************************************************
wn=10; // set the value of a variable//
s=zeros(n,1); // define a n-dim null vector //
d=zeros(n,1);
for j=(wn+1):n;
s(j,1)=variance(yy((j-wn+1):j,1));
if (s(j,1)>0.45);
d(j,1)=1;
end;
end;
18 CHAPTER 1. A MATLAB PRIMER

//*************************************************
// Some Pictures...
//*************************************************
// figure(1) to have distinct graphs
figure(1);
title("Time series data");
ylabel("Data");
xlabel("Time");
plot(xx,yy);

figure(2);
title("Time-varying log-volatility");
plot(xx,s,’color’,[1 0 0]); //[red green blue] the rgb convention
a=gca();
a.data_bounds=[1,min(s);n,max(s)];// Set tics

figure(3);
title("Dummy");
plot(xx,d,’color’,[1 0 0]); //[red green blue] the rgb convention
a=gca();
a.data_bounds=[1,-0.1;n,1.1];// Set tics

//*************************************************
// All charts in one pictures...
//*************************************************
figure(4);
subplot(3,1,1);
title("Time series data");
ylabel("Data");
xlabel("Time");
plot(xx,yy);

subplot(3,1,2);
title("Time-varying log-volatility");
plot(xx,s,’color’,[1 0 0]); //[red green blue] the rgb convention
a=gca();
a.data_bounds=[1,min(s);n,max(s)];// Set tics

subplot(3,1,3);
title("Dummy");
plot(xx,d,’color’,[1 0 0]); //[red green blue] the rgb convention
a=gca();
a.data_bounds=[1,-0.1;n,1.1];// Set tics

//*************************************************
// histogram
1.5. FROM MATLAB TO SCILAB AND R 19

//*************************************************
figure(5);
histplot(100,yy);

//*************************************************
// Save the results in a ouput file
//*************************************************
fprintfMat(’C:/Dottorato/Teaching/SummerSchoolBertinoro/TutorialAntonietta/...
TutorialRobAnt/AllLab/MatlabCode/ChapterMatlab/OutPound.txt’,yy,’%5.2f’);
// attention this overwrites the existing file

R
#*************************************************
# basic in I/O, graphical, statistical procedures
#*************************************************
# Load UK/EU exchange rate data
yy=scan("C:/Dottorato/Teaching/SummerSchoolBertinoro/TutorialAntonietta/...
TutorialRobAnt/AllLab/MatlabCode/ChapterMatlab/pound.txt",sep="\t",skip=0,na.strings=".")
dim(yy)=c(1006,1);

#*************************************************
n=dim(yy); # evaluate the number of rows #
n=n[1];
xx=(1:n);

#*************************************************
# for endfor if end
# (1) Evaluate sequentially the variance
# (2) Built a dummy variable, based on the value
# of the variance estimated recursively
#*************************************************
wn=10; # set the value of a variable#
s=array(0,n); # define a n-dim null vector #
d=array(0,n);
for (j in ((wn+1):n)){
s[j]=var(yy[(j-wn+1):j]);
if (s[j]>0.45){
d[j]=1;
}
}

#*************************************************
# Some Pictures...
#*************************************************
# figure(1) to have distinct graphs
20 CHAPTER 1. A MATLAB PRIMER

dev.new();
plot(xx,yy,main="Time series data",xlab="Time",ylab="Data",type="l");

dev.new();
plot(xx,s,main="Time-varying log-volatility",xlab="Time",ylab="Data",type="l");
#[red green blue] the rgb convention

dev.new();
plot(xx,d,main="Dummy",xlab="Time",ylab="Data",type="l");
#[red green blue] the rgb convention
#*************************************************
# All charts in one pictures...
#*************************************************
par(mfrow=c(3,1),pin=c(5,1.5));
plot(xx,yy,main="Time series data",xlab="Time",ylab="Data",type="l");
plot(xx,s,main="Time-varying log-volatility",xlab="Time",ylab="Data",type="l");
#[red green blue] the rgb convention
plot(xx,d,main="Dummy",xlab="Time",ylab="Data",type="l");
#[red green blue] the rgb convention

#*************************************************
# histogram
#*************************************************
dev.new();
hist(yy,50);

#*************************************************
# Save the results in a ouput file
#*************************************************
save(yy, file = "C:/Dottorato/Teaching/SummerSchoolBertinoro/TutorialAntonietta/...
TutorialRobAnt/AllLab/MatlabCode/ChapterMatlab/OutPound.txt");
Chapter 2

Monte Carlo Integration

Aim

Apply basic Monte Carlo principles to solve some basic integration

problems. Discuss the choice of the number of samples in a Monte
Carlo estimation.

Contents

1. Integration

2. A Monte Carlo Estimator

3. Asymptotic Properties

4. Optimal Number of MC Samples

5. Appendix - Matlab Code

2.1 Integration
• Our aim is to approximate the integral
Z 1
(2.1) µ(f ) = f (x)dx
0

21
22 CHAPTER 2. MONTE CARLO INTEGRATION

for the following integrand functions f

1. f (x) = x

2. f (x) = x2

3. f (x) = cos(πx)

• We apply a Monte Carlo approach and re-write the integration problem in

statistical terms as follows
Z 1 Z +∞
(2.2) f (x)dx = f (x)I[0,1] (x)dx = E(f (X))
0 −∞

where IA (x) if the indicator function that holds 1 if x ∈ A and 0 otherwise

and X ∼ U[0,1] is a random variable with a standard uniform distribution.

2.2 A Monte Carlo Estimator

• Let X1 , . . . , Xn be a set of n i.i.d. samples from a uniform distribution.
The integral µ = E(f (X)) approximates as follows
n
1X
(2.3) µ̂n = f (Xi )
n i=1

that is called a Monte Carlo estimator of E(f (X)).

The results of the Monte Carlo estimates for different sample sizes n =
1, . . . , 50 and different integrand functions f are given in Fig. 2.1

• Find the mean and the variance of the estimator and give a Monte Carlo
approximation for the expression of the variance.
2.2. A MONTE CARLO ESTIMATOR 23

MC Means
f(x)=x
0.8
Empirical Average
0.6 Theoretical Mean

0.4

0.2

0
0 10 20 30 40 50
2
f(x)=x
0.4
Empirical Average
0.3 Theoretical Mean

0.2

0.1

0
0 10 20 30 40 50

f(x)=cos(π x)
1
Empirical Average
Theoretical Mean
0.5

−0.5
0 10 20 30 40 50

Figure 2.1: Monte Carlo estimates µ̂n (solid lines) for different sample sizes
n = 1, . . . , 50 and true values of µ (horizontal dotted lines).

Due to the i.i.d. assumption we have:

n
1X
(2.4) E(µ̂n ) = E(f (Xi )) = µ
n i=1

n
1 X 1
(2.5) V(µ̂n ) = 2 V(f (Xi )) = σ 2 (f )
n i=1 n
24 CHAPTER 2. MONTE CARLO INTEGRATION

where Z +∞
2
σ (f ) = V(f (X1 )) = (x − µ)2 f (x)I[0,1] (x)dx
−∞

For the different f we find the analytical solution of the integral µ(f ) (see
also horizontal dotted lines in Fig. 2.1)

1. For f (x) = x

1  1 2 0
Z  
(2.6) E(f (X1 )) = xdx =  x  = 1/2
0 2 1

2. For f (x) = x2

1
 0
1
Z
x2 dx =  x3  = 1/3
 
(2.7) E(f (X1 )) =
0 3 1

3. For f (x) = cos(πx)

1
 0
1
Z

(2.8) E(f (X1 )) = cos(πx)dx =  sin(πx) = 0

0 π 1

2.3 Asymptotic Properties

Under the i.i.d. and finite variance assumptions we have

a.s.
(2.9) µ̂n −→ µ
n→∞

√ D
(2.10) n (µ̂n − µ) −→ N (0, σ 2 (f ))
n→∞

For the different f we have

2.4. OPTIMAL NUMBER OF MC SAMPLES 25

1. For f (x) = x

V(f (X1 )) = E(f (X1 )2 ) − (E(f (X1 )))2

Z 1 Z 1 2
2
= x dx − xdx
0 0
= 1/3 − 1/4 = 1/12

2. For f (x) = x2
V(f (X1 )) = 1/5 − 1/9 = 4/45

3. For f (x) = cos(πx)

V(f (X1 )) = 1/2 − 0 = 1/2

When the variance V(f (X1 )) is unknown one can use the Monte Carlo
estimator
n
2 1 X
(2.11) σ̂ (f ) = (Xi − µ̂n )2
n − 1 i=1

The empirical approximations of the asymptotic variances are given in Fig.

2.2.

• Exercise: use the asymptotic distribution and the approximation of the

asymptotic variance to find the 5% confidence intervals of the MC estimator
of µ.

2.4 Optimal Number of MC Samples

• It is possible to use the asymptotic properties of a MC estimator to find
the optimal number n of samples that are necessary to reach an accuracy
26 CHAPTER 2. MONTE CARLO INTEGRATION

MC Variances
f(x)=x
0.25
Empirical Variance
0.2 Theoretical Variance

0.15

0.1

0.05
0 10 20 30 40 50

f(x)=x2
0.2
Empirical Variance
0.15 Theoretical Variance

0.1

0.05

0
0 10 20 30 40 50

f(x)=cos(π x)
1.5
Empirical Variance
Theoretical Variance
1

0.5

0
0 10 20 30 40 50

Figure 2.2: Monte Carlo variance estimates σ̂n2 (solid lines) for different sam-
ple sizes n = 1, . . . , 50 and the true value σ 2 (horizontal dotted lines).

level ε, for a given confidence level α, in the Monte Carlo estimation of µ.

The asymptotic results allow us to find n such that
 p 
(2.12) 2
P r |µ̂n − µ| ≤ ε σ (f )/n = 1 − α

that is
 2
n Xα
r
(2.13) Xα = ε ⇔n= σ 2 (f )
σ 2 (f ) ε
2.5. APPENDIX - MATLAB CODE 27

where Xα = Φ−1 (1 − α/2), with Φ−1 the inverse cumulative distribution

function of a standard normal.
When the variance σ 2 (f ) is unknown one can use the Monte Carlo esti-
mator σ̂n2 (f ) and then apply a similar asymptotic argument. In this case the
optimal number of simulations should satisfy the following relationship

nε2
(2.14) σ̂n2 (f ) ≤
Xα2

One can check iteratively the condition.

1. Start with n1 MC samples X1 , . . . , Xn1

nε2
2. If σ̂n2 (f ) ≤ Xα2 then stop otherwise
2
3. evaluate k1 = ⌊ nε
Xα2 −n⌋ and generate k1 samples Xn1 +1 , . . . , Xn1 +k1 (⌊x⌋

indicates the integer part of x)

Exercise: write a Matlab’s code for computing the optimal number of sam-
ples that are needed to estimate µ(f ) for the different integrand functions f
given in Section 1 and for the accuracy level ε = 0.001.

2.5 Appendix - Matlab Code

% Uniform Random Number
% Monte Carlo method as an approximated integration technique
% integrate f(x) on the [0,1] interval
% solution: 1/2, 1/3, and 0
clc;
n=50;
x=rand(n,1);
gav=zeros(n,3);
gavvar=NaN(n,3);
gav(1,1)=x(1,1);
gav(1,2)=x(1,1)^2;
gav(1,3)=cos(pi*x(1,1));

for i=2:n
gav(i,1)=sum(x(1:i))/i;
gav(i,2)=sum(x(1:i).^2)/i;
gav(i,3)=sum(cos(pi*x(1:i)))/i;
gavvar(i,1)=var(x(1:i));
28 CHAPTER 2. MONTE CARLO INTEGRATION

gavvar(i,2)=var(x(1:i).^2);
gavvar(i,3)=var(cos(pi*x(1:i)));
end
%
%
%%%%%%%%% Graphics (mean) %%%%%%%%%%
figure(1);
subplot(3,1,1);
plot(gav(:,1));
line((1:n),ones(n,1)/2,’color’,’red’);
legend(’Empirical Average’,’Theoretical Mean’,...
’Location’,’NorthEastOutside’);
title(’f(x)=x’);
%
subplot(3,1,2);
plot(gav(:,2));
line((1:n),ones(n,1)/3,’color’,’red’);
legend(’Empirical Average’,’Theoretical Mean’,...
’Location’,’NorthEastOutside’);
title(’f(x)=x^2’);
%
subplot(3,1,3);
plot(gav(:,3));
line((1:n),ones(n,1)*0,’color’,’red’);
legend(’Empirical Average’,’Theoretical Mean’,...
’Location’,’NorthEastOutside’);
title(’f(x)=cos(\pi x)’);

To export picture to a .eps file one can use

%%%%%%%%% Export a picture %%%%%%%%%%%%%
dire=’C:\Dottorato\Teaching\SummerSchoolBertinoro’;
figu=’\TutorialAntonietta\TutorialRobAnt\Figure\’;
figname=strvcat([strcat(dire,figu,’MC1.eps’)]);
print (gcf,’-depsc2’, figname);

%
%%%%%%%%% Graphics (variance) %%%%%%%%%%
figure(2);
subplot(3,1,1);
plot(gavvar(:,1));
line((1:n),ones(n,1)/12,’color’,’red’);
legend(’Empirical Variance’,’Theoretical Variance’,...
’Location’,’NorthEastOutside’);
title(’f(x)=x’);
%
subplot(3,1,2);
plot(gavvar(:,2));
line((1:n),ones(n,1)*4/45,’color’,’red’);
legend(’Empirical Variance’,’Theoretical Variance’,...
’Location’,’NorthEastOutside’);
title(’f(x)=x^2’);
%
subplot(3,1,3);
plot(gavvar(:,3));
line((1:n),ones(n,1)*1/2,’color’,’red’);
legend(’Empirical Variance’,’Theoretical Variance’,...
2.5. APPENDIX - MATLAB CODE 29

’Location’,’NorthEastOutside’);
title(’f(x)=cos(\pi x)’);
30 CHAPTER 2. MONTE CARLO INTEGRATION
Chapter 3

Importance Sampling

Aim

Define and apply the importance sampling method and study its
properties.

Contents

1. Importance Sampling (IS)

2. Properties of the IS Estimators

3. Generating Student-t Variables

3.1 Importance Sampling

Let π be a probability density function, f a measurable function and

Z
(3.1) µ = Eπ (f (X)) = f (x)π(x)dx

the integral of interest.

In importance sampling (see Section 3.3 in Robert and Casella (2004)) a
distribution g (called importance distribution or instrumental distribution)

31
32 CHAPTER 3. IMPORTANCE SAMPLING

is used to apply a change of measure

π(x)
Z
(3.2) µ= f (x)g(x)dx
g(x)

The resulting integral is then evaluated numerically by using a i.i.d. sample

X1 , . . . , Xn from g
n
1X
(3.3) µ̂IS
n = w(Xi )f (Xi )
n i=1

where
π(Xi )
w(Xi ) = , i = 1, . . . , n
g(Xi )
are called importance weights.

3.2 Properties of the IS Estimators

The Monte Carlo estimator µ̂IS

n of µ is unbiased

n
! n
1X
Z Z Y
Eg (µ̂IS
n ) = ··· w(xi )f (xi ) g(xi )dxi
n i=1 i=1
π(x1 )
Z
= f (x1 )g(x1 )dx1
g(x1 )
Z
= f (x1 )π(x1 )dx1

and converges almost surely to µ, under the assumption supp g ⊃ supp π.

Nevertheless the existence of the variance and of a limiting distribution is

not guaranteed. We shall notice that Vg (µ̂IS IS 2
n ) ≥ Eg ((µ̂n ) ) thus the condition
we need to check is the existence of an upper bound for the second order
3.2. PROPERTIES OF THE IS ESTIMATORS 33

moment of the IS estimator, that is

π(x1 )2
Z
Eg ((µ̂IS 2
n ) ) = f (x1 )2 g(x1 )dx1 =
g(x1 )2
π(x1 )
Z
= f (x1 )2 π(x1 )dx1 < ∞
g(x1 )

Note that if the tails of the importance density are lighter than those of the
π the importance weight π(x)/g(x) is not a.e. bounded and the variance of
the estimator will be infinite for many functions f .

The following is an example of a set of sufficient conditions for the IS

estimators to have finite variance

• π(x)/g(x) < M ∀x ∈ X and Vg (f ) < ∞

• X is compact, g(x) < F and g(x) > ε ∀x ∈ X

The condition π(x)/g(x) < M, ∀x ∈ X implies that the distribution f has

thicker tails than π.

An alternative way to address the issue of the finite variance is to consider

the self-normalized importance sampling (SNIS) estimator
Pn
w(Xi )f (Xi )
(3.4) µ̂SN
n
IS
= i=1
Pn
i=1 w(Xi )

It is biased on a finite sample, but it converges to µ by the strong law of

large number. It has been proved both theoretically and numerically that
this estimator may perform better, in terms of mean square error, than the
simple importance sampling estimator.
34 CHAPTER 3. IMPORTANCE SAMPLING

3.3 Generating Student-t Variables

Consider a Student-t distribution T (ν, θ, σ 2 ) with density
−(ν+1)/2
(x − θ)2

Γ((ν + 1)/2)
(3.5) π(x) = √ 1+ IR (x)
σ νπΓ(ν/2) νσ 2

w.l.o.g. take θ = 0, σ = 1 and ν = 12. We choose the quantities of interest

to be

1.  5
sin(x)
f (x) = I(x)(2.1,+∞)
x

2. s 
 x 
f (x) =  
1 − x

3.
x5
f (x) = I[0,+∞) (x)
1 + (x − 3)2

We study the performance of the importance sampling estimator µ̂IS

n
when the following instrumental distributions are used

1. T (ν ∗ , 0, 1) with ν ∗ < ν (e.g. ν ∗ = 7)

2. N (0, ν/(ν − 2))

3. C(0, 1)

We shall note that the Cauchy distribution C(α, β) has density function

1
π(x) = IR (x)
πβ(1 + ((x − α)/β)2 )
3.3. GENERATING STUDENT-T VARIABLES 35

2
Student−t
1
0
0 1 2 3 4 5
4
x 10
10
Normal
5
0
0 1 2 3 4 5
4
x 10
2
Cauchy
1
0
0 1 2 3 4 5
4
x 10

Figure 3.1: Importance sampling weights for the proposal distributions

T (ν ∗ , 0, 1), N (0, ν/(ν − 2)) and C(0, 1)

where −∞ < α < +∞ and β > 0 and cumulative distribution function

1 x 1
Z
F (x) = du
π −∞ πβ(1 + ((u − α)/β)2)
1 1 x−α
= + arc tan IR (x)
2 π β

The inverse c.d.f. method can be applied in order to generate from the
Cauchy. If X = F −1 (U), where U ∼ U[0,1] , then X ∼ C(α, β).

From the results in Fig. 3.1 one can see that the importance weights for
Student-t and Cauchy are not unstable while the importance weights asso-
ciated to the normal exhibit some large jumps. For all the functions the
results in Fig. 3.2 show that the normal proposal produces jumps in the
progressive averages (green lines) that are due to the unbounded variance of
the estimator. However for the first function the normal proposal behaves
quite well when compared with the Cauchy and Student-t proposals. For the
36 CHAPTER 3. IMPORTANCE SAMPLING

second and third function the Cauchy proposal seems to converge faster than
the Student-t. In all the pictures we plotted (black lines) the approximation
obtained with an exact simulation from a Student-t with ν = 12.

Exercise - Use repeated Monte Carlo experiments to find the distribution

of the estimator µ̂n (f ). Plot the 95% and 5% quantiles and the mean of the
estimator for n = 1, . . . , 50000.

The Matlab code is

%%%%%%% Importance weight for T(nustar,0,1)

function w=w1(x,nu,nustar)
w=pdf(’t’,x,nu)/pdf(’t’,x,nustar);
end
%
%%%%%%% Importance weight for N(0,nu/(nu-2))
function w=w2(x,nu)
w=pdf(’t’,x,nu)/pdf(’normal’,x,0,sqrt(nu/(nu-2)));
end
%
%%%%%%% Importance weight for C(0,1)
function w=w3(x,nu)
w=pdf(’t’,x,nu)/pdfcauchy(x,0,1);
end
%
clc;
%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%
% Importance sampling
%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%
nu=12;
nustar=7;
nIS=50000;
mu1IS=zeros(nIS,4);
mu2IS=zeros(nIS,4);
mu3IS=zeros(nIS,4);
%
mu1IScum=zeros(nIS,4);
mu2IScum=zeros(nIS,4);
mu3IScum=zeros(nIS,4);
%
wIS=zeros(nIS,3);

for i=1:nIS
% Proposal 1
x1=random(’t’,nustar);
% Proposal 2
x2=random(’normal’,0,sqrt(nu/(nu-2)));
% Proposal 3
x3=tan((rand(1,1)-0.5)*pi);
%x3=random(’normal’,0,1)/random(’normal’,0,1);
% Exact
3.3. GENERATING STUDENT-T VARIABLES 37

x4=random(’t’,nu);
%%%%%%%%%%%%%
% IS
%%%%%%%%%%%%%
% Importance weights
wIS(i,1)=w1(x1,nu,nustar);
wIS(i,2)=w2(x2,nu);
wIS(i,3)=w3(x3,nu);
% f_1
mu1IS(i,1)=((sin(x1)/x1)^5)*(x1>2.1);
mu1IS(i,2)=((sin(x2)/x2)^5)*(x2>2.1);
mu1IS(i,3)=((sin(x3)/x3)^5)*(x3>2.1);
mu1IS(i,3)=((sin(x4)/x4)^5)*(x4>2.1);
% f_2
mu2IS(i,1)=sqrt(abs(x1/(1-x1)));
mu2IS(i,2)=sqrt(abs(x2/(1-x2)));
mu2IS(i,3)=sqrt(abs(x3/(1-x3)));
mu2IS(i,4)=sqrt(abs(x4/(1-x4)));
% f_3
mu3IS(i,1)=(x1^5/(1+(x1-3)^2))*(x1>0);
mu3IS(i,2)=(x2^5/(1+(x2-3)^2))*(x2>0);
mu3IS(i,3)=(x3^5/(1+(x3-3)^2))*(x3>0);
mu3IS(i,4)=(x4^5/(1+(x4-3)^2))*(x4>0);
%
if ((1000*floor(i/1000))==i)
disp(i);
end
end

mu1IScum(:,1)=cumsum(mu1IS(:,1).*wIS(:,1))./(1:nIS)’;
mu1IScum(:,2)=cumsum(mu1IS(:,2).*wIS(:,2))./(1:nIS)’;
mu1IScum(:,3)=cumsum(mu1IS(:,3).*wIS(:,3))./(1:nIS)’;
mu1IScum(:,4)=cumsum(mu1IS(:,4))./(1:nIS)’;
%
mu2IScum(:,1)=cumsum(mu2IS(:,1).*wIS(:,1))./(1:nIS)’;
mu2IScum(:,2)=cumsum(mu2IS(:,2).*wIS(:,2))./(1:nIS)’;
mu2IScum(:,3)=cumsum(mu2IS(:,3).*wIS(:,3))./(1:nIS)’;
mu2IScum(:,4)=cumsum(mu2IS(:,4))./(1:nIS)’;
%
mu3IScum(:,1)=cumsum(mu3IS(:,1).*wIS(:,1))./(1:nIS)’;
mu3IScum(:,2)=cumsum(mu3IS(:,2).*wIS(:,2))./(1:nIS)’;
mu3IScum(:,3)=cumsum(mu3IS(:,3).*wIS(:,3))./(1:nIS)’;
mu3IScum(:,4)=cumsum(mu3IS(:,4))./(1:nIS)’;
%%
fs=14;
%%%%%%%%%%%%%%%
figure(1)
subplot(3,1,1);
plot((1:nIS)’,wIS(:,1));
legend(’Student-t’,’Location’,’NorthEast’);
set(gca,’FontSize’,fs);
subplot(3,1,2);
plot((1:nIS)’,wIS(:,2));
legend(’Normal’,’Location’,’NorthEast’);
set(gca,’FontSize’,fs);
subplot(3,1,3);
38 CHAPTER 3. IMPORTANCE SAMPLING

plot((1:nIS)’,wIS(:,3));
legend(’Cauchy’,’Location’,’NorthEast’);
set(gca,’FontSize’,fs);

figure(2)
plot((1:nIS)’,mu1IScum(:,1:3));
hold on;
plot((1:nIS)’,mu1IScum(:,4),’-k’);
hold off;
legend(’Student-t’,’Normal’,’Cauchy’,’Exact’,’Location’,’NorthEast’);
ylim([0.00001 0.00015]);
set(gca,’FontSize’,fs);

figure(3)
plot((1:nIS)’,mu2IScum(:,1:3));
hold on;
plot((1:nIS)’,mu2IScum(:,4),’-k’);
hold off;
legend(’Student-t’,’Normal’,’Cauchy’,’Exact’,’Location’,’NorthEast’);
ylim([1 1.4]);
set(gca,’FontSize’,fs);

figure(4)
plot((1:nIS)’,mu3IScum(:,1:3));
hold on;
plot((1:nIS)’,mu3IScum(:,4),’-k’);
hold off;
legend(’Student-t’,’Normal’,’Cauchy’,’Exact’,’Location’,’NorthEast’);
ylim([3 9]);
set(gca,’FontSize’,fs);

This code calls the following function defined by the user

%%%%%%% Cauchy probability density function
function f=pdfcauchy(x,a,b)
f=1/(pi*b*(1+((x-a)/b)^2));
end
%
3.3. GENERATING STUDENT-T VARIABLES 39

−5
x 10

14 Student−t
Normal
Cauchy
12 Exact

10

0 1 2 3 4 5
4
x 10
1.4
Student−t
1.35 Normal
Cauchy
1.3 Exact

1.25

1.2

1.15

1.1

1.05

1
0 1 2 3 4 5
4
x 10
9
Student−t
Normal
8 Cauchy
Exact
7

3
0 1 2 3 4 5
4
x 10

Figure 3.2: Charts from one to three: µ̂IS for the different functions f .
In each chart the IS estimators for different proposals (colored lines) and
the Monte Carlo estimator with exact simulation from the T (12, 0, 1) (black
lines).
40 CHAPTER 3. IMPORTANCE SAMPLING
Exercise

Importance Sampling
Consider a Student-t distribution T (ν, θ, σ 2 ) with density
−(ν+1)/2
(x − θ)2

Γ((ν + 1)/2)
(3.6) π(x) = √ 1+ IR (x)
σ νπΓ(ν/2) νσ 2

w.l.o.g. take θ = 0, σ = 1 and ν = 12.

Study the performance of the importance sampling estimator µ̂IS

n of

π(x)
Z Z
(3.7) µ = Eπ (f (X)) = f (x)π(x)dx = f (x)g(x)dx
g(x)

when the following instrumental distributions, g(x), are used

1. T (ν ∗ , 0, 1) with ν ∗ < ν (e.g. ν ∗ = 7)

2. N (0, ν/(ν − 2))

3. C(0, 1)

for the following test functions

1.  5
sin(x)
f (x) = I(x)(2.1,+∞)
x

41
42 CHAPTER 3. IMPORTANCE SAMPLING

2. s 
 x 
f (x) =  
1 − x

3.
x5
f (x) = I[0,+∞) (x)
1 + (x − 3)2

Metropolis-Hastings
Write a M.-H. algorithm to generate n = 500 i.i.d. random samples from
a zero-mean and independent bivariate normal distribution, N2 (0, I2 ), with
covariance matrix, I2 and mean 0 = (0, 0)′ . Use alternatively independent
and random walk proposals with variance covariance matrix σ 2 I2 . (Try with
different values of σ 2 ).