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Given the data $y_t$, $t=1, \cdots ,N$; I would like to estimate the decay parameter $\lambda$ in Exponentially Weighted Moving Average (EWMA) model, such that

$y_{t+1} = \sum_{k=0}^K \lambda^k y_{t - k} + e_t $, where $K<N$.

I am wondering, is there any common way and solver for this nonlinear least squares problem? Is it possible to make this problem more "friendly" by changing of the variables?

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  • $\begingroup$ Please do not cross post at Quantitative Finance SE. $\endgroup$ Jul 11, 2023 at 14:10

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Hi: The non geometric series version of the ES model is

$\tilde y_t = \lambda \tilde{y}_{t-1} + (1-\lambda) y_{t-1}$. ( you left out the multiplicative factor $(1-\lambda)$ on the outside of your sum ).

The equivalent time series model ( in the sense that they give the same predictions ) is an arima(0,1,1). So, if you fit the arima(0,1,1)

$y_t - y_{t-1} = \theta \epsilon_{t-1} + \epsilon_t$

and get back the value of the estimated MA coefficient $\theta$, then you can use the mapping : $\hat{\lambda} = ( 1 - \hat{\theta})$. That will give you the estimated value of $\lambda$.

Note that there's a proof somewhere that they are equivalent but it's been so long that I can't remember where you can find it. It might be in the Box-Jenkins-Reinsel text or in Harvey's structural time series text. Check Box-Jenkins-Reinsel first.

Note: The arima(0,1,1) is also equivalent to a random walk plus noise model so, if you're more familiar with the state space framework, you can fit that instead. See Harvey's text for details on that equivalence.

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  • $\begingroup$ Your equation for ARIMA(0,1,1) is incorrect, and you do not explain how to estimate it. $\endgroup$ Jul 11, 2023 at 19:22
  • $\begingroup$ Thanks Richard. I fixed the arima(0,1,1). As far as estimating it, I would use R and the arima function ( which does have some pitfalls ) but estimation really depends on the software one is using so I didn't feel the need to go into that discussion. If the OP needs help with estimation, I assumed that he could just ask another question. $\endgroup$
    – mlofton
    Jul 11, 2023 at 21:26
  • $\begingroup$ The OP's question seems to be specifically about estimation. Anyway, the ARIMA equation still seems to be incorrect. You wrote ARIMA(1,1,0) instead of ARIMA(0,1,1), did you not? $\endgroup$ Jul 12, 2023 at 4:51
  • $\begingroup$ Oops. I'll fix it again. It's been so long since I looked at ARIMA model but that's no excuse. Thanks. As far as your second point, I took his question to be about how to re-write the exponential smoothing model so that it could be estimated. Hopefully, the OP will tell us whether I was correct ? $\endgroup$
    – mlofton
    Jul 12, 2023 at 7:15

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