Wednesday, May 30, 2018

State Space Models with Fat-Tailed Errors and the sspacetdist add-in

Author and guest post by Eren Ocakverdi.

Linear State Space Models (LSSM) provide a very useful framework for the analysis of a wide range of time series problems. For instance; linear regression, trend-cycle decomposition, smoothing, ARIMA, can all be handled practically and dynamically within this flexible system.
One of the assumptions behind LSSM is that the errors of the measurement/signal equation are normally distributed. In practice, however, there are situations where this may not be the case and errors follow a fat-tailed distribution. Ignoring this fact may result in wider confidence intervals for the estimated parameters or may cause outliers to bias parameter estimates.