Lecture_2_MA_Smoothing

Lecture_2_MA_Smoothing - 1 Lecture 2 Moving Average and...

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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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This lecture is about: Simple short-run forecasting tools based on some underlying pattern to the data Smoothed curve (eliminate up-and-down movement) Trend Seasonality 1. (Simple) Moving Averages (Ex 1) 3 periods moving averages t = ( y t-1 + y t-2 + y t-3 ) Also, 5 periods MA can be considered. Period Actual 3 Quarter MA Forecast 5 Quarter MA forecast Mar-83 239.3 Missing Missing Jun-83 239.8 Missing Missing Sep-83 236.1 Missing Missing Dec-83 232 238.40 Missing Mar-84 224.75 235.97 Missing Jun-84 237.45 230.95 234.39 Sep-84 245.4 231.40 234.02 Dec-84 251.58 235.87 235.14 So on. . (Ex 2) Disney Stock Prices 2
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Notes: (i) One can impose weights and use weighted moving averages (WMA). eg) t = 0.6y t-1 + 0.3y t-1 + 0.1y t-2 (ii) How many periods to use is a question; more significant smoothing-out effect with longer lags. (iii) Peaks and troughs (bottoms) are not predicted. 3
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(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 Three-Quarter Moving Average Three-Quarter Forecast Mar-85 257.53 missing missing Jun-85 250.81 missing missing Sep-85 238.38 248.90 missing Dec-85 207.18 232.12 248.90 Mar-86 187.81 211.12 232.12 4
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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 = t-1 + α (y t-1 - t-1 ) with α = 2 / (n+1) for n-day EMA For example: A 10-period exponential moving average weighs the most recent price 18.18%, which is 2/(10+1), while a 20-period 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 = (12-day EMA) - (26-day EMA) 5
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A positive MACD indicates that the 12-day EMA is trading above the 26-day EMA. If MACD is positive and rising, then the gap between the 12-day EMA and the 26-day EMA is widening. A bullish crossover occurs when MACD moves above its 9-day EMA and a bearish crossover occurs when MACD moves below its 9-day EMA. o
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Lecture_2_MA_Smoothing - 1 Lecture 2 Moving Average and...

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