The Hodrick-Prescott (HP) lter is dened as minimizer m = (m 1 , . . .

, m T ) of (m; ) =
T t=1

(yt mt ) +
2

T t=3

(mt 2mt1 + mt2 )2

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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Because for any vector c = 0 we have: ( ) cT I + BT B c = cT c + (Bc)T (Bc)

>0 0

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()

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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 =

1 (yt2 + 4yt1 + 3yt + 4yt+1 yt+2 ) 9 3

j =0

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

So we will try to explain separate new components by using old ones.

a)

m t =

1 9

(mt2 + 4mt1 + 3mt + 4mt+1 mt+2 ) ( 3 3 j j j 3 j =0 j (t 2) + 4 j =0 j (t 1) + 3 j =0 j t + ) 3 j j +4 3 ( t + 1) ( t + 2) j j j =0 j =0

1 9

0 +40 +30 +40 0

1 (t 2) +41 (t 1) +31 (t) +41 (t + 1) 1 (t + 2)

2 (t 2)2 +42 (t 1)2 +32 (t)2 +42 (t + 1)2 2 (t + 2)2

3 (t 2)3 +43 (t 1)3 +33 (t)3 . 3 +43 (t + 1) 3 (t + 2)3

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

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b)

1 s t = 9 (st2 + 4st1 + 3st + 4st+1 st+2 )

=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.

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P., Strejc P.