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Lecture 2
Moving Average and Exponential Smoothing
Read:
(WK Ch 3; handouts)
EC 413/513
Economic Forecast and Analysis
(Professor Lee)
1
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View Full Document This lecture is about:
Simple
shortrun forecasting tools based on
some underlying pattern to the data
•
Smoothed
curve (eliminate upanddown
movement)
•
Trend
•
Seasonality
1.
(Simple) Moving Averages
(Ex 1)
3 periods moving averages
t
=
(
y
t1
+ y
t2 +
y
t3
)
Also, 5 periods MA can be considered.
Period
Actual
3 Quarter MA
Forecast
5 Quarter MA
forecast
Mar83
239.3
Missing
Missing
Jun83
239.8
Missing
Missing
Sep83
236.1
Missing
Missing
Dec83
232
238.40
Missing
Mar84
224.75
235.97
Missing
Jun84
237.45
230.95
234.39
Sep84
245.4
231.40
234.02
Dec84
251.58
235.87
235.14
…
So on.
.
(Ex 2) Disney Stock Prices
2
Notes:
(i)
One can impose
weights
and use
weighted moving averages (WMA).
eg)
t
=
0.6y
t1
+ 0.3y
t1
+ 0.1y
t2
(ii)
How many periods to use is a question;
more significant smoothingout effect
with longer lags.
(iii)
Peaks and troughs (bottoms) are not
predicted.
3
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View Full Document (iv) Events are being averaged out.
(v) Since any moving average is serially
correlated, any sequence of random
numbers could appear to exhibit cyclical
fluctuation.
Example: Table 3.1
(Table3.1.xls)
Exchange Rates: Forecasts using
the SMA(3) model
Date
Rate
ThreeQuarter
Moving Average
ThreeQuarter
Forecast
Mar85
257.53
missing
missing
Jun85
250.81
missing
missing
Sep85
238.38
248.90
missing
Dec85
207.18
232.12
248.90
Mar86
187.81
211.12
232.12
4
Case Study
:
EMA and MACD for Stock Prices
Useful Reference:
http://www.stockcharts.com/
(1) EMA (Exponential Moving Average)
Read:
http://www.stockcharts.com/education/IndicatorAnalysis/indic_movingAvg.html
Model: similar to SEM (simple exponential smoothing)
t
=
t1
+
α
(y
t1

t1
)
with
α
= 2 / (n+1)
for nday EMA
For example: A 10period exponential moving average
weighs the most recent price 18.18%, which is 2/(10+1),
while a 20period EMA weighs the most recent price
9.52%.
Q1:
Which is better, SMA or EMA?
(2)
Moving Average Convergence/Divergence
(MACD)
Read:
http://www.stockcharts.com/education/IndicatorAnalysis/indic_MACD1.html
MACD = (12day EMA) 
(26day EMA)
5
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View Full Document
A positive MACD indicates that the 12day EMA is trading above
the 26day EMA.
If MACD is positive and rising, then the gap between the 12day
EMA and the 26day EMA is widening.
A bullish
crossover occurs when MACD moves above its 9day
EMA and a bearish
crossover occurs when MACD moves below
its 9day EMA.
o
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This note was uploaded on 02/29/2012 for the course EC 513 taught by Professor Staff during the Fall '08 term at Alabama.
 Fall '08
 Staff

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