Talking On a Tangent

22 Jun

What is the trend over the last X months? One estimate of the ‘trend’ over the last k time periods is what I call the ‘hold up the ends’ method. Look at t_k and t_0, get the difference between the two, and divide by the number of time periods. If t_k > t_0, you say that things are going up. If t_k < t_0, you say things are going down. And if they are the same, then you say that things are flat. But this method can elide over important non-linearity. For instance, say unemployment went down in the first 9 months and then went up over the last 3 but ended with t_k < t_0. What is the trend? If by trend, we mean average slope over the last t time periods, and if there is no measurement error, then 'hold up the ends' method is reasonable. If there is measurement error, we would want to smooth the time series first before we hold up the ends. Often people care about 'consistency' in the trend. One estimate of consistency is the following: the proportion of times we get a number of the same sign when we do pairwise comparison of any two time consecutive time periods. Often people also care more about later time periods than earlier time periods. And one could build on that intuition by weighting later changes more.