Real-Time Signalextraction

An Application of Customized
Estimation Criteria

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 Real-Time Estimation:
KOF-economic barometer

11.01.24 2
 GDP and old KOF-economic barometer
(ex post)
Standardized growth rates

3 3

2 2
GDP
1 1

0 0

-1 -1

-2 -2
KOF-Barometer
-3 -3
84 86 88 90 92 94 96 98 00 02 04

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 `Old´ KOF-economic barometer (real
time)
1.5

-1.5
2001 2002 2003
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 Problems

• Real-time estimates lag

– Delay
• Real-time estimates are noisy
– Unreliability
• Purpose of TP-criterion
– Reduce delay and improve reliability,
SIMULTANEOUSLY!

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 Signal

Definition
Customization

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 Definition
• Signal: match intention of researcher/user
• KOF economic barometer:
– Eliminate short-term (periodicity < 1.5 years)
fluctuations from a leading indicator of GDP
• Transfer function of the filter
• Symmetric filter

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 Business-cycle frequencies,
cutoff: 1.5 years

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 Symmetric and asymmetric (real-time)
MA-filters
60
 TN 60   X N 60 k

k
Tt  k X t k k 60
k  60 1

 k   k TˆN    k X N  k   k Xˆ N  k
k 0 k 60

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 Customization
• Specify a smoothing process that fits your
intention
– Customized signal
• Estimate that signal properly in real-time
– Customized estimation criteria

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 Research Focus
• Business cycle analysis
• Detection of turning-points
– Local extrema of the (previous) trend
component
– Experience: these TP‘s are informative about
the future dynamics of the series
• Convey a strong prospective content about the
future dynamics of the economy

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 Real-time estimation problem

Traditional MBA (level)

Methodological issues

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 Traditional MBA

• X-12, X-11 ARIMA, TRAMO/SEATS

– Identify a time series model for the DGP
– Forecast the future
– Apply the symmetric filter to the extended
time series
• Optimization Criterion
– One-step ahead mean-square performance
– Multi-step ahead forecasts needed
– Mismatch because models are
misspecified
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 TRAMO: heavy misspecification
(120 Obs.)
•Business survey data: bounded time series
Series nmb. Models d Series nmb. Models d
1 (210)(011) 2 19 (100)(011) 1
2 (011)(011) 2 20 (011)(011) 2
3 (011)(011) 2 21 (011)(011) 2
4 (011)(000) 1 22 (011)(000) 1
5 (210)(100) 1 23 (100)(000) 0
6 (110)(000) 1 24 (010)(001) 1
7 (100)(011) 1 25 (011)(011) 2
8 (011)(011) 2 26 (013)(001) 1
9 (011)(011) 2 27 (011)(011) 2
10 (121)(011) 3 28 (110)(000) 1
11 (110)(011) 2 29 (011)(011) 2
12 (011)(000) 1 30 (012)(000) 1
13 (300)(011) 1 31 (011)(011) 2
14 (011)(001) 1 32 (011)(000) 1
15 (011)(011) 2 33 (010)(011) 2
16 (110)(000) 1 34 (010)(011) 2
17 (011)(011) 2 35 (011)(011) 2
18 (011)(011) 2 36 (112)(000) 1
01/11/24 14
 Conclusions

• Traditionally, statistics based on one-step

ahead forecasts
• Estimation, Identification (AIC/BIC, unit-roots tests,…),
Diagnostics (Box-Pierce, Ljung-Box)
– Cannot detect misspecification related to mid-or
long-term dynamics
– Conflict one vs. multi-step ahead forecasting
performances
• Consequences
– Inefficient real-time filters
– Unnecessarily large time delays
– TP cannot be accounted for explicitly
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 Customized criteria

Level
Turning Point (TP)

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 Material
• Paper
• Book
– Real-Time Signalextraction: Beyond
Maximum Likelihood Principles
– Marc.wildi@zhawin.ch
• Software
– R-package: signalextraction
– CRAN (ETHZ, Zurich)

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 Empirical results TP‘s
(Part 1)

Simple level criteria (Benchmarks)

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 Criteria (Level)

T
MBA: min  ( X t 1  Xˆ t 1 ) 2
t 1

DFA(TD): min E (Tt  Tˆt ) 2

T /2
DFA(FD): min  | T (k )  T (k ) | I NX (k )
 ˆ
2

k 1

•Direct Filter Approach (DFA)

•Customization: WYOIWYG
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 Simple designs

1. Optimal (mean-square) T /2
real-time level filter min  | (k )  
( ) |2 I ( )
k NX k
– L-L filter k 1

– TP: local extrema

2. Optimal (mean-square)
real-time level filter in first T /2

differences min  | (k )  

( ) |2 I ( )
k N X k
k 1
– L-D Filter
– TP: crossings of the zero-
level line

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 L-L and L-D filters

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 TP‘s: identification in real-time

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 Conclusions

• Level-Filter for original data (L-L-Filter)

– Faster
– Noisier
– Classical trade-off
• Next steps: improve
1. Speed
2. Speed AND reliability

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 Empirical results TP‘s
(Part 2)

Improving speed
An explicit focus towards TP‘s

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 Characteristics of previous level filters

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 Controlling the time delay

 2
 T  k 0
[T / 2]
|  ( )  Aˆ ( ) |2 I ( )
 k k NX k
min ˆ 
  2  [T / 2] 2 A( ) Aˆ ( )(1  cos( ˆ ( )))I ( )

 T k 0 k k k NX k

•λ=1: best level filter

•λ>1: emphasize the time delay in the pass-band
•Issues are detailed in paper/book

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 Empirical results part 2

• Two competing designs

– Optimal real-time level filters in first
differences
• λ=1: mean-level performance
• λ=6: SELECTIVE mean-level performance

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 L-L (black) vs. L-D (λ=1: red and λ=6:
brown)

•Rate of false alarms: 9.1% (λ=6), 12.4% (λ=1), 15% (level)

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 Filter characteristics

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 Selectivity: improved performance in
TP‘s

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 Selectivity: improved performance in
TP‘s

•Mean-square filter errors

λ=6 λ=1
TP's only 0.0008** 0.0034
All time points 0.0074** 0.0055

•Selectivity-effect
•Obtained without knowledge of location of
TP‘s
•Due to stylized fact: second derivative large (in
absolute value) in TP‘s
01/11/24 31
 Empirical results TP‘s
(Part 3)

Improving speed and reliability

SIMULTANEOUSLY
Research Projects

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 Customization: Controlling time delay
and high-frequency damping
 2 [T / 2]
 T  k 0 W ( ) 2
|  ( )  ˆ ( ) |2 I ( )
A
k k k NX k
min ˆ 
 2  [T / 2] 2W ( ) 2 A( ) Aˆ ( )(1  cos( ˆ ( )))I ( )
 T k 0 k k k k NX k

• Stronger damping of high-frequency

noise in stop-band
W ( )
• Smaller time delays in pass-band
• W(ω) is monotonic (increasing) and λ>1


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 Competing Designs

• Fast real-time level filter in first differences

– λ=6
• Logit-model
• New TP-filter
– New customized criterion

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 Comparison: TP-filter vs fast (λ=6) level-
filter

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 TP-filter vs. logit-model

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 Performances

Logit TP L-D (λ=6)

Total rate of false alarms 11.60% 10.60% 9.10%
Delays 6.60% 4.10% 6.60%
Anticipations 2.50% 6.50% 0%
Random alarms (noise) 2.50% 0% 2.50%

•Rate of undesirable errors:

•TP: 4.1% (IN REAL-TIME)
•Logit: 9.1%
•λ=6: 9.1%

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 Amplitude DFA TP-filter vs. DFA level
filter (KOF-Economic Barometer)

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 Delay TP-filter vs. level filter
(KOF-Economic Barometer)

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 Conclusions

• TP-filter is both fast and reliable

– There is a trade-off!
– But optimal filter designs can significantly improve
upon
• Traditional level filters
• Logit models
• Traditional level- and TP-criteria are incongruent
– Generalization of level-criterion
– Improved level performance in TP‘s

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 Economic Sentiment Indicator
(ESI) for the euro area,
published monthly by DG ECFIN.

DFA vs Dainties

11.01.24 41
 In the past (DFA: fast and reliable)

115.000000000

110.000000000

105.000000000 DFA
Dainties

100.000000000

95.000000000

90.000000000
Jan 97

Jan 98

Jan 99

Jan 00

Jan 01
Jul 96

Jul 97

Jul 98

Jul 99

Jul 00

Jul 01
Okt 96

Okt 97

Okt 98

Okt 99

Okt 00
Apr 96

Apr 97

Apr 98

Apr 99

Apr 00

Apr 01
01/11/24 42
 Towards the current boundary

106.000000000

104.000000000

102.000000000

100.000000000
DFA
Dainties
98.000000000

96.000000000

94.000000000

92.000000000

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 Leading Indicator for
German GDP
Research Project with the
Bundesministerium für Wirtschaft
und Technologie

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 GDP and fastest (real-time) series

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 Comparison: symmetric trend and real-
time output

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 Conclusions

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 Optimization criteria
• Very often ML-principles do not fit the intention of
the researcher/user
– Model misspecification: functions of ML-estimates are
not ML-estimates of these functions
• Example: multi-step ahead forecasts

Xˆ T  k  aˆ k X T
• Customization-principle
– Define and implement criteria that match the intention
of the researcher
– Very often: generalization of ML
01/11/24 48
 Outcomes
• New estimation criteria
– Level/TP’s
– Estimate parameters of real-time filter directly
• New diagnostics
– Verify characteristics of real-time filter directly
• New filter constraint test
– Generalizes unit root tests to problems
involving linear combinations of one- and
multi-step ahead forecasts

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 New Results/Work in Progress
• Trading filters (major Swiss bank)
• Non-linear Filters (IDP)
– Asymmetric cycles
• Multivariate filters (ETHZ)

01/11/24 50