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st: re: seasonal dummies


From   Kit Baum <kitbaum@mac.com>
To   statalist@hsphsun2.harvard.edu
Subject   st: re: seasonal dummies
Date   Sat, 2 Apr 2005 20:36:41 -0500

Kelly wrote

thank you for your reply. can you please elaborate a bit more on the
additive method to use for actual retruns. i've generated the required dummy
variables. and i've regressed my return series on the 11 dummy variables.
how do i proceed from here? where do i add teh original mean (because as it
is i'm using the original series in the regression). any help would be
appreciated. also, is there any test for significance that can be done to
test the seasonality? a chi square test of some sort?

thanks

>From: Kit Baum <baum@bc.edu>
>Reply-To: statalist@hsphsun2.harvard.edu
>To: statalist@hsphsun2.harvard.edu
>Subject: st: Re: seasonality
>Date: Sat, 2 Apr 2005 09:14:14 -0500
>
>The textbook treatment of seasonality in economic and financial time series
>involves creating a set of seasonal dummies (you need 3 for Q, 11 for M)
>and then regressing your series on that set of dummies. Add the original
>mean back into the series and you have a deseasonalized series of stock
>returns.
>


I suggest you consult any econometrics textbook that discusses seasonal dummies. The residuals from the regression of y on a set of dummies and a constant term are deseasonalized y. You could also extract a trend at the same time by including a trend in the original regression. The residuals in either case will have mean zero, so if you want them to be in the same ball park as the seasonal series, add the mean of the original series back to them.

The regression has an ANOVA F statistic with the usual connotation. If you also include a trend, then consult the t-stat on the trend, and the F-stat for excluding the set of dummies.


Kit Baum, Boston College Economics
http://ideas.repec.org/e/pba1.html

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