Markets: A Rigorous Course

M13A · Problem 12 ★ Check

One Kalman step by hand

bt−1∣t−1=1.0b_{t-1|t-1} = 1.0, Pt−1∣t−1=0.01P_{t-1|t-1} = 0.01, Q=0.0001Q = 0.0001, R=0.04R = 0.04, xt=2x_t = 2, yt=2.3y_t = 2.3. (a) Compute Pt∣t−1P_{t|t-1}, ete_t, FtF_t, KtK_t, bt∣tb_{t|t} and Pt∣tP_{t|t}. (b) Compute the standardised innovation zt=et/Ftz_t = e_t/\sqrt{F_t}. Would a ±2\pm2 entry rule trade?

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Commas, ₹, % and 1e-3 notation are accepted.

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