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A property of the Hodrick-Prescott filter and its application

Sakarya, Neslihan and de Jong, Robert M (2020) 'A property of the Hodrick-Prescott filter and its application.' Econometric Theory. ISSN 0266-4666

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Abstract

This paper explores a simple property of the Hodrick-Prescott filter: when the HP filter is applied to a series, the cyclical component is equal to the HP filtered trend of the fourth difference of the series, except for the first and last two observations, for which different formulas are needed. We use this result to derive small sample results and asymptotic results for a fixed smoothing parameter. We first apply this property to analyze the consequences of a deterministic break. We find that the effect of a deterministic break on the cyclical component is asymptotically negligible for the points that are away from the break point, while for the points in the neighborhood of the break point, the effect is not negligible even asymptotically. Second, we apply this property to show that the cyclical component of the Hodrick-Prescott filter, when applied to series that are integrated up to order 2, is weakly dependent, while the situation for series that are integrated up to order 3 or 4 is more subtle. Third, we characterize the behavior of the Hodrick-Prescott filter when applied to deterministic polynomial trends and show that in the middle of the sample, the cyclical component reduces the order of the polynomial by 4, while the end point behavior is different. Finally, we give a characterization of the Hodrick-Prescott filter when applied to an exponential deterministic trend, and this characterization shows that the filter is effectively incapable of dealing with a trend that increases this fast. Our results are compared to those of Phillips and Jin (2015).

Item Type: Article
Uncontrolled Keywords: Hodrick-Prescott filter, polynomial trends, structural break, weak dependence, integrated series
Divisions: Faculty of Social Sciences > Economics, Department of
Depositing User: Elements
Date Deposited: 24 Oct 2019 14:46
Last Modified: 09 Jun 2020 22:15
URI: http://repository.essex.ac.uk/id/eprint/25659

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