Markets: A Rigorous Course

M04 · Problem 2 ★★ Check

EMA and MACD weights

With an infinite history, let Et=α∑k≥0(1−α)kpt−kE_t=\alpha\sum_{k\ge0}(1-\alpha)^kp_{t-k} be the EMA of log prices. (a) Prove pt−Et=∑i≥0(1−α)i+1rt−ip_t-E_t=\sum_{i\ge0}(1-\alpha)^{i+1}r_{t-i}. (b) Hence write MACDt=Et(f)−Et(s)\mathrm{MACD}_t=E^{(f)}_t-E^{(s)}_t (fast αf\alpha_f > slow αs\alpha_s) as ∑ivirt−i\sum_i v_ir_{t-i}, show vi>0v_i>0, and find ∑ivi\sum_iv_i. (c) For the conventional 12/26 EMAs (α=2/(n+1)\alpha=2/(n+1)), find the lag at which viv_i peaks.

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