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Trading Day Effects in Time Series

Trading Day Effects in Time Series. Example: single family construction. Home construction activity at the state and local level is measured by permits issued Over the year, construction rose 37% in Nashville Or did it?. Trading Day Effects.

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Trading Day Effects in Time Series

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  1. Trading Day Effects in Time Series

  2. Example: single family construction • Home construction activity at the state and local level is measured by permits issued • Over the year, construction rose 37% in Nashville • Or did it?

  3. Trading Day Effects • A trading day is a day in which an activity (sales, construction, air travel) takes place. • Recurring day-of-the-week effects are called trading day effects. • When these effects are significant and not taken into account, forecasting and analysis are hindered.

  4. Days of the week • Every month has at least 28 days • Thus, every day of the week occurs at least 4 times a month • Frequently, a day of the week occurs 5 times in a month • Some days of the week generate more activity than other days • Example: more permits are issued Wednesday than other days

  5. Days of the week • Thus, a month with 5 Wednesdays will show more permits than other months • This suggests that construction activity has increased, but in reality the effect is simply due to the trading day effect

  6. Example: single family permits • Gretl estimated these trading day effects for Nashville MSA single family permits • A month with 5 Wednesdays will have 26.3 more permits than other months • A month with 5 Saturdays with have 19.5 fewer permits than other months

  7. Example: single family permits • In our Nashville example, • Sun, Mon, and Tue occur 5 times in May 2011 • Tue, Wed, and Thu occur 5 times in May 2012 • 2011 is low because it has an extra Sunday • 2012 is high because it has an extra Wednesday

  8. Trading day adjustment • The trading day effect makes 2011 too low and 2012 too high

  9. Trading day adjustment • Solution: subtract the sum of the trading day effects from the original values

  10. Trading day adjustment • Conclusion: adjusting for trading day effects has a large impact on calculated permit growth • Adjusted growth rate is 26.6% (instead of 36.9%) • Adjusted growth is 94 units instead of 128 units.

  11. Trading day effects • The trading day effect may be significant for any time series that is measured as a flow (per unit of time): • Retail sales • Housing construction • Stock trades • Airline passengers • The trading day effect is not an issue for stock variables (measured at a point in time): • Employment • Personal income

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