Assessing the GDP-growth-

cycle in real-time
An application of customized
optimization criteria

09.07.2007 1
 Revisions
• Data revisions
– Raw data (unadjusted)
– Adjustment methods
• Seasonal adjustment
• Noise elimination (smoothing)
• Concurrent signal estimates
• Focus on better algorithms for `noise elimination
´
– Smaller revisions
– Customized criteria

09.07.2007 2
 Real-Time Estimation:
KOF-economic barometer

09.07.2007 3
 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

09.07.2007 4
 `Old´ KOF-economic barometer (real
time)
1.5

-1.5
2001 2002 2003
09.07.2007 5
 Problems

• Real-time estimates lag

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

09.07.2007 6
 New criterion: real-time stable
24
TP-filter
16

-8

-16

-24
Nov Mai Nov Mai Nov Mai Nov
00 01 01 02 02 03 03
09.07.2007 7
 Signal

09.07.2007 8
 Business-cycle frequencies,
cutoff: 1.5 years

09.07.2007 9
 Symmetric MA-filter

09.07.2007 10
 Customization
• Specify a smoothing process that fits your
intention
– Signal
• Estimate that signal properly
– Customized estimation criteria

09.07.2007 11
 Real-time estimation problem
(Level)

Traditional MBA
Methodological issues

09.07.2007 12
 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
• Criterion
– One-step ahead mean-square performance
– Multi-step ahead forecasts needed
– Misspecification because models are
misspecified
09.07.2007 13
 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
09.07.2007 14
 Series 31: Model, series and
simulation (300 Obs.)
(1  B )(1  B12 ) X t  (1  0.6622 B )(1  0.8238 B12 ) t

09.07.2007 15
 How useful are model
diagnostics?

09.07.2007 16
 Misspecification
• Business survey data
– bounded : in [-100(%),100(%)]
• Forecasts from I(2) processes for bounded
data
– One-step ahead: often `not bad´
– Multi-step ahead: poor performance
– Inefficient real-time estimates (filters)

09.07.2007 17
 Customized criteria

Level
Turning Point (TP)

09.07.2007 18
 Empirical results TP‘s
(Part 1)

Simple level criteria (Benchmarks)

09.07.2007 19
 Criteria (Level)

MBA: min  ( X t 1  X t 1 )
ˆ 2

DFA(TD): min E (Yt 1  Yˆt 1 ) 2

DFA(FD): min  | (k )  (k ) | I NX (k )

 2

09.07.2007 20
 Simple designs

• Optimal (mean-square) real-time level filter

(L-L)
– TP: local extrema
• Optimal (mean-square) real-time level filter
in first differences (L-D)
– TP: crossings of the zero-level line

09.07.2007 21
 L-L and L-D filters

09.07.2007 22
 TP‘s: identification in real-time

09.07.2007 23
 Conclusions

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

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

09.07.2007 24
 Filter characteristics

09.07.2007 25
 Empirical results TP‘s
(Part 2)

Improving speed
An explicit focus towards TP‘s

09.07.2007 26
 Controlling the Time Delay
(Customization)

 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: emphasize the time delay in the pass-band

•λ=1: best level filter

09.07.2007 27
 Empirical results part 2

• Two competing designs

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

09.07.2007 28
 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)

09.07.2007 29
 Filter characteristics

09.07.2007 30
 Selectivity: improved performance in
TP‘s

09.07.2007 31
 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
09.07.2007 32
 Conclusion

• Traditional mean-level- and TP-criteria are

incongruent
– TP-criterion: improved level performance in
TP‘s

09.07.2007 33
 Empirical results TP‘s
(Part 3)

Improving speed and reliability

SIMULTANEOUSLY

09.07.2007 34
 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


09.07.2007 35
 Competing Designs

• Fast real-time level filter in first differences

– λ=6
• Logit-model
• New TP-filter

09.07.2007 36
 Comparison: TP-filter vs fast (λ=6) level-
filter

09.07.2007 37
 TP-filter vs. logit-model

09.07.2007 38
 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%

09.07.2007 39
 Amplitude DFA TP-filter vs. DFA level
filter (KOF-Barometer)

09.07.2007 40
 Delay TP-filter vs. level filter
(KOF-Barometer)

09.07.2007 41
 Conclusion

• 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

09.07.2007 42
 Economic Sentiment Indicator (ESI) for
the euro area, published monthly by
DG ECFIN.
DFA vs Dainties
Research Project with
EUROSTAT

09.07.2007 43
 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
09.07.2007 44
 Towards the current boundary

106.000000000

104.000000000

102.000000000

100.000000000
DFA
Dainties
98.000000000

96.000000000

94.000000000

92.000000000

09.07.2007 45
 Leading Indicator for
German GDP
Research Project with
Bundesministerium für Wirtschaft
und Technologie

09.07.2007 46
 GDP and fastest (real-time) series

09.07.2007 47
 Comparison: symmetric trend and real-
time output

09.07.2007 48
 Current and Future
Developments

09.07.2007 49
 Directions of Research
• Non-linear filters (in process)
– Olaf Hoenecke (idp)
• Multivariate filters (in process)
– Simone (KOF)
• Finance/Trading (future)
– Antonio Oro (CS)
– Customized criterion

09.07.2007 50
 Varia
• Book (~1 month, end of summer)
• Package `signalextraction´ on CRAN,
tutorial in `Vignettes´
• Old: marc.wildi@zhwin.ch
• New: marc.wildi@zhawin.ch

09.07.2007 51
 THE END

09.07.2007 52