Monte Carlo Methods using Matlab

Roberto Casarin
University Ca Foscari, Venice
Summer School of Bayesian Econometrics
Perugia 2013
September 9, 2013

Contents
1 A Matlab Primer
1.1 Programming Languages . . . . . . . . . . .
1.2 Fourth Generation Languages (4GPL) . . .
1.3 Matlab . . . . . . . . . . . . . . . . . . . . .
1.3.1 Operators . . . . . . . . . . . . . . .
1.3.2 Logical Operators . . . . . . . . . . .
1.3.3 Creating Matrices . . . . . . . . . . .
1.3.4 Matrix Description . . . . . . . . . .
1.3.5 Other Functions . . . . . . . . . . . .
1.3.6 Loops and If Statements . . . . . . .
1.3.7 Procedures . . . . . . . . . . . . . . .
1.4 Examples . . . . . . . . . . . . . . . . . . .
1.4.1 Input, Output and Graphics . . . . .
1.4.2 Ordinary Least Square . . . . . . . .
1.4.3 A Bayesian Linear Regression Model
1.5 From Matlab to Scilab and R . . . . . . . .

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1
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. 17

2 Monte Carlo Integration

2.1 Integration . . . . . . . . . . . . .
2.2 A Monte Carlo Estimator . . . .
2.3 Asymptotic Properties . . . . . .
2.4 Optimal Number of MC Samples
2.5 Appendix - Matlab Code . . . . .

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21
21
22
24
25
27

3 Importance Sampling
31
3.1 Importance Sampling . . . . . . . . . . . . . . . . . . . . . . . 31
3.2 Properties of the IS Estimators . . . . . . . . . . . . . . . . . 32
3.3 Generating Student-t Variables . . . . . . . . . . . . . . . . . 34
i

ii

CONTENTS

Chapter 1
A Matlab Primer
Aim
Learn some basic facts in Matlab programming
Contents
1. Programming Languages
2. Fourth Generation Languages (4GPL)
3. Matlab
4. Examples
5. From Matlab to Scilab

1.1

Programming Languages

If you need to carry out an econometric analysis, before starting to write a

code, may be you would like to have a look to the following link
http://www.feweb.vu.nl/econometriclinks/software.html
where many of the most used econometrics softwares and their contributed
libraries are linked.
1

CHAPTER 1. A MATLAB PRIMER

In the following we report a brief description of the softwares listed at the

econometriclinks webpage maintained by the Royal Economic Society:

A+, ACML, ADMB, AIMMS, ALOGIT, Alyuda, AMOS, AMPL, APL,
Apophenia, Arc, AREMOS, AutoBox, Autometrics, AutoSignal

B34S, BACC, BATS, BETA, BIOGEME, BMDP, Brodgar, BUGS,

BV4
BACC: Bayesian Analysis, Computation and Communication. Free high
quality generic software developed for different operating systems (Windows,
Unix) and different front-ends. Specific model procedures as well. Supported
by the US NSF. Developed by Bill McCausland under the supervision of John
Geweke.
BUGS: Bayesian inference Using Gibbs Sampling (MCMC: Markov Chain
Monte Carlo)

C(++), CART, Census X12, Caterpillar-SSA, CPLEX, ConfortS,

CVar

DataDesk, Dataplore, Dataplot, DATAVIEW, DEA-Solver, DEMETRA, Draco, DYALOG, DYNARE

DYNARE: A Program for the Resolution and Simulation of Dynamic Models
with Forward Variables Through the Use of a Relaxation Algorithm. Computes k-th order approximations of dynamic stochastic general equilibrium
(DSGE) models. Also allows Bayesian Estimation of DSGEs

EasyFit, EasyReg, EcoWin, ECTS, EQS, Eviews, Excel, EXPO

FAME, ForecastPro, Fortran, FreeFore, FSQP
GAMS, GARCH, GAUSS, GAUSSX, GiveWin, Gempack, GeoDa,

Genstat, GLIM, GLIMMIX, GQOPT, graphpad, Gnuplot, GSL, GRETL

GAMS: Generic Algebraic Modeling System for large scale optimization
problems.

1.1. PROGRAMMING LANGUAGES

GAUSS: is a programming language designed to operate with and on matrices. It is a general purpose tool. As such, it is a long way from more
specialised econometric packages. On a spectrum which runs from the computer language C at one end to, say, the menu-driven econometric program
EViews at the other, GAUSS is very much at the programming end.
GRETL: Is a cross-platform software package for econometric analysis, written in the C programming language. It is free, open-source software.

HLM
ICRFS-Plus, ILOG, IDAMS, IMSL, INSTAT, ITSM
J, JMP, JMulti, JStatCom, JWAVE
KNITRO
MacAnova, Maple, Mendeley, MARS, Mathcad, Mathematica, MathPlayer, MathML, MathType, MATLAB, Matrixer, M@ximize, MetrixND,
MHTS, Microfit, MiKTeX, Minitab, MINOS, MIXOR, MLE, MLwiN,
Modeleasy, ModelQED, Modler, MOSEK, Mplus, Modula, MuPAD,
Mx.
MATLAB: It is a high-level language and more specifically a 4GPL (such as
SAS, SPSS, Stata, GAUSS) which allows matrix manipulations for numerical computing.

NAG Mark 22 Numerical Libraries (2009), Genstat, MLP (ML estimation))

Octave, O-Matrix, Omegahat, OpenDX, Ox, OxEdit, OxGauss, OxMetrics

Octave: a high-level language, primarily intended for numerical computations. It provides a convenient command line interface for solving linear and
nonlinear problems numerically, and for performing other numerical experiments using a language that is mostly compatible with Matlab. It may also

CHAPTER 1. A MATLAB PRIMER

be used as a batch-oriented language.
Ox: is an object-oriented matrix programming language for statistics and
econometrics developed by Jurgen Doornik

PASS, PASW, PcFiml, PcGets, PcGive, PcNaive, Python

Python: Free Open Source Dynamic object-oriented programming language

that can be used for many kinds of software development. It offers strong
support for integration with other languages and tools, comes with extensive
standard libraries

R, RATS, REG-X, ReSampling Stats, Rlab, Rlab+

R: is 4GPL, it is a free software environment for statistical computing and

graphics. It compiles and runs on a wide variety of UNIX platforms, Windows and MacOS.
RATS: developed by Estima, RATS (Regression Analysis of Time Series) is
an econometrics and time-series analysis software package.

S+, SAS, SCA, Scilab, SciPy, SciViews, Sciword, SCP, Shazam, Sigmaplot,
SIMSTAT, SOLAS, SOL, Soritec, SpaceStat, SQlite, SPAD, Speakeasy,
IBM SPSS, SsfPack, STAMP, Stata, StatCrunch, Statgraphics, Statistica, Stat/Transfer, StatsDirect, STL, Statview, SUDAAN, SVAR,
SYSTAT
SAS: is a 4GPL which allows to define a sequence of operations (statistical
analysis and data management) to be performed on data
Scilab: is 4GPL free and open source for numerical computation, similar to
Matlab

TSM, TISEAN, TRAMO/SEATS, TSP, TVAR

TRAMO/SEATS:

UNISTAT, VassarStats, ViSta

1.2. FOURTH GENERATION LANGUAGES (4GPL)

Web Decomp, WebStat, WEKA, WinIDAMS, WINKS, Windows KWIKSTAT, XploRe, Winsolve, X-12-ARIMA, XLisp-Stat, Xtremes, X(G)PL

1.2

Fourth Generation Languages (4GPL)

Each step in the development of Computer Languages has aimed to reduce

the amount of time required to write programs and reduce the amount of
skill required to write Programs.
In the 1GPL the programs are written in binary code and can access
binary digits. To write programs with 1GPL is a very skilled job and it is
very time consuming to test and debug programs.
In the 2GPL, the programs are written in symbolic assembly code, they
access bytes and are slightly less time demanding.
In the 3GPL, the programs are written in a High Level Language (e.g.
COBOL, Pascal, C, Fortran, etc), they can access records and programming
requires less time and skills.
In the 4GPL, the programs perform BOOLEAN operations on SETS
(Mathematical), they requires less time and skills. A well known example of
4GPL is SQL.
Scilab, Matlab, Gauss and R, see
http://www.scilab.org/
http://www.mathworks.it/
http://www.aptech.com/
http://www.r-project.org/
are 4GPL and have some common features. They are a long way from more
specialised econometric packages, are not menu-driven programs (such as EViews) and are very much at the programming end. Thus all of them require
a certain degree of familiarity with programming methods and structures.

CHAPTER 1. A MATLAB PRIMER

Another common feature is that they are extremely powerful for matrix

manipulation and in this sense they are more useful for economists than the
3GPL programming languages (such as C or Fortran), where the basic data
units are all scalars. At the same time they are very flexible and allows more
expert users to use interface to procedures written in other languages such
as C, C++, or Fortran.
An important feature of Scilab and R is that the source code of their
libraries are available, which is not generally the case for Matlab and Gauss.
Finally note that Matlab, Gauss and R have a lot of proprietary and contributed libraries oriented to statistics and econometrics.

1.3
1.3.1

Matlab
Operators

Select submatrix from matrix:

x( startrow : endrow, startcolumn : endcolumn )

Transposition operator:

Matrix Operators: + - * \ %

Element-by-element operators: .+ .- .* .\
Concatenating operators:

[leftmatrix, rightmatrix] [uppermatrix; bottommatrix]

Relational operators: < > == /= >= <=

Relational operators (element-by-element): .< .> .== ./= .>= .<=

1.3.2

Logical Operators

and, or, xor, eqv, not

Logical Operators (element-by-element) with: .

1.3. MATLAB

1.3.3

Creating Matrices

let x = [ 1 2 3, 4 5 6, 7 8 9 ];
disp(x);

x = eye( 3 );

x = ones( 2, 5 );

x = ( start : inc : n );
x = rand( 4, 10 );

x = randn( 4, 10 );
y = x[ 2, : ];

1.3.4

Matrix Description

y = size( x , 1 );
y = size( x , 2 );

y = max( x, [] , 1 );
y = max( x, [] , 2 );

y = [ma,maind]=max( x );
y= mean( x );

y= std( x ); divisor is 1/n 1

y= sum( x );

y= prod( x );

y= cumsum( x );

y= cumprod( x );

1.3.5

Other Functions

y= diag( x );
y= inv( x );
y= log( x );
y= exp( x );

y =round( x );

CHAPTER 1. A MATLAB PRIMER

y= ceil( x );

y= floor( x );
y= reshape( x,r,c );
Kronecker product: kron( x , y )

y= trimr( x,t,b );

1.3.6

Loops and If Statements

for i=start:step:increment;
...
end;

while logical expression;

...
end;

if logical expression 1;
...
elseif logical expression 2;
...
else;
...
end;
Example of do loop with counter:
i=1;
while (i=100);
...
i=i+1;
end;

1.4. EXAMPLES

1.3.7

Procedures

Procedures may contain so called local variables. These variables are called
local, since you can access them only in the particular procedure.
Example: Computation of log-returns for financial assets:
function [lrt]=logret(data)
% Procedure Name: logret
% Input: T * K matrix of levels
% Output: (T-1) * K matrix of ln-returns
% Utilizing the Procedure:
% returns=_logret(prices);
% prices has to be an existing T*K matrix
% returns is the created (T-1)*K matrix
% containing the ln-returns
dat1=log(data(2:size(data,1),:));
dat2=log(data(1:size(data,1)-1,:));
lrt=dat1-dat2;
end

1.4
1.4.1

Examples
Input, Output and Graphics

%*************************************************
% basic in I/O, graphical, statistical procedures
%*************************************************
%
Load UK/EU exchange rate data
clc;
clear all;
yy= load(C:/Dottorato/Teaching/SummerSchoolBertinoro/...
TutorialAntonietta/TutorialRobAnt/AllLab/MatlabCode/ChapterMatlab/pound.txt);
%*************************************************
n=size(yy,1);
% evaluate the number of rows %
xx=(1:n);
%*************************************************
%
for end
if end
% (1) Evaluate sequentially the variance
% (2) Built a dummy variable, based on the value
%
of the variance estimated recursively
%*************************************************
wn=10;
% set the value of a variable%
s=zeros(n,1);
% define a n-dim null vector %
d=zeros(n,1);
for j=(wn+1):n;
s(j,1)=var(yy((j-wn+1):j,1));
if (s(j,1)>0.45);
d(j,1)=1;

10

CHAPTER 1. A MATLAB PRIMER

end;
end;
%*************************************************
%
Some Pictures...
%*************************************************
% figure(1) to have distinct graphs
figure(1);
title(Time series data);
ylabel(Data);
xlabel(Time);
plot(xx,yy);
figure(2);
title(Time-varying log-volatility);
a=plot(xx,s,color,[1 0 0]); %[red green blue] the rgb convention
axis([1 n min(s) max(s)]);
% Set tics
figure(3);
title(Dummy);
plot(xx,d,color,[1 0 0]); %[red green blue] the rgb convention
axis([1 n -0.1 1.1]); % Set tics
%*************************************************
%
All charts in one pictures...
%*************************************************
figure(4);
subplot(3,1,1);
title(Time series data);
ylabel(Data);
xlabel(Time);
plot(xx,yy);
subplot(3,1,2);
title(Time-varying log-volatility);
plot(xx,s,color,[1 0 0]); %[red green blue] the rgb convention
axis([1 n min(s) max(s)]);
% Set tics
subplot(3,1,3);
title(Dummy);
plot(xx,d,color,[1 0 0]); %[red green blue] the rgb convention
axis([1 n -0.1 1.1]); % Set tics
%*************************************************
%
histogram
%*************************************************
figure(5);
hist(yy,50);
%*************************************************
% Save the results in a ouput file
%*************************************************
fid = fopen(C:/Dottorato/Teaching/SummerSchoolBertinoro/...
TutorialAntonietta/TutorialRobAnt/AllLab/MatlabCode/ChapterMatlab/OutPound.txt, w);
fprintf(fid, %5.2f\n, yy);
fclose(fid);

1.4. EXAMPLES

11

%*************************************************

1.4.2

Ordinary Least Square

We learn how to use structures in Matlab

function results=ols(y,x)
% PURPOSE: least-squares regression
%--------------------------------------------------% USAGE: results = ols(y,x)
% where: y = dependent variable vector (nobs x 1)
% x = independent variables matrix (nobs x nvar)
%--------------------------------------------------% RETURNS: a structure
% results.meth = ols
% results.beta = bhat
% results.tstat = t-stats
% results.yhat = yhat
% results.resid = residuals
% results.sige = e*e/(n-k)
% results.rsqr = rsquared
% results.rbar = rbar-squared
% results.dw = Durbin-Watson Statistic
% results.nobs = nobs
% results.nvar = nvars
% results.y = y data vector

Check for the correct number of input argument and if the number of
rows of x is equal to the number of rows of y
if (nargin ~= 2); error(Wrong # of arguments to ols);
else
[nobs nvar] = size(x); [nobs2 ndep] = size(y);
if (nobs ~= nobs2); error(x and y must have same # obs in ols);
end;
end;
k=nvar;

Evaluate all the statistics that are usually involved in a OLS estimation
results.y = y;
results.nobs = nobs;
results.nvar = nvar;
%
xpxi = (x*x)\eye(k);
results.beta = xpxi*(x*y);
results.yhat = x*results.beta;
results.resid = y - results.yhat;
sigu = results.resid*results.resid;
results.sige = sigu/(nobs-nvar);
tmp = (results.sige)*(diag(xpxi));
results.tstat = results.beta./(sqrt(tmp));

12

CHAPTER 1. A MATLAB PRIMER

ym = y - mean(y);
rsqr1 = sigu; rsqr2 = ym*ym;
results.rsqr = 1.0 - rsqr1/rsqr2; % r-squared
rsqr1 = rsqr1/(nobs-nvar);
rsqr2 = rsqr2/(nobs-1.0);
results.rbar = 1 - (rsqr1/rsqr2); % rbar-squared
ediff = results.resid(2:nobs) - results.resid(1:nobs-1);
results.dw = (ediff*ediff)/sigu; % durbin-watson
end;

We save as a function the ols.m code and run the following simulation
example
nob=100;
x1=ones(nob,1);
x2=randn(nob,1).*((1:nob)/10);
x=[x1 x2];
sig=2;
y=x*[10; 0.9]+sig*randn(nob,1);
res=ols(y,x);
res.beta
%%
figure(1)
plot([res.yhat y]);
figure(2)
plot(res.resid);

1.4.3

A Bayesian Linear Regression Model

Let y Rn , X Rn Rk and Rk . Consider the simple regression model

(1.1)

y = X +

(1.2)

Nn (0n , 2 In )

with the following prior specification

(1.3)

R N (r, T )

or equivalently
(1.4)

Q N (q, Ik )

where Q Q = T 1 and q = Qr.

1.4. EXAMPLES

13

The joint posterior distribution of and 2 is

(1.5)

(, |y)

1
2

 n+1
2

V 1 ( )}

exp{( )

= V / 2 (X y + 2 Q q)
where V = 2 ((X X) + 2 Q Q)1 and
Theil and Goldberger (1961) observed that the conditional posterior distribution of given 2 and y is
V )
(| 2 , y) N (,

(1.6)

and proposed to replace the unknown quantity 2 with an estimated value

(y X )/(n

2 = (y X )
k).

In a Gibbs sampling framework it is possible to simulate from the posterior by simulating iteratively (Gelfand and Smith (1990) gave a proof of the
convergence to the true posterior distribution) from the posterior conditional
distribution of given 2 and y
V )
(| 2 , y) N (,

(1.7)

and from the posterior conditional distribution of 2 given and y

(1.8)

( |, y) IG

n 1
, (y X) (y X)
2 2

or equivalently
(1.9)

% Simulate a dataset
n=100; k=3;
x = randn(n,k);
b = ones(k,1);
y = x*b + randn(n,1);
% Set prior

((y X) (y X)/ 2 |, y) 2n

14
r
R
T
Q
q

=
=
=
=
=

CHAPTER 1. A MATLAB PRIMER

[1.0 1.0 1.0];
eye(k);
eye(k);
chol(inv(T));
Q*r;

% Initial values for the Gibbs

b0 = (x*x)\(x*y);
sige = (y-x*b0)*(y-x*b0)/(n-k);
xpx = x*x; xpy = x*y;
qpq = Q*Q; qpv = Q*q;
ndraw = 1100; nomit = 100;
bsave = zeros(ndraw,k);
ssave = zeros(ndraw,1);
for i=1:ndraw;
xpxi = inv(xpx + sige*qpq);
% update b
b = xpxi*(xpy + sige*qpv);
b = chol((sige*xpxi))*randn(k,1) + b;
bsave(i,:) = b;
% update sige
e = y - x*b; ssr = e*e;
chi = random(gamma,n/2,2);
sige = ssr/chi;
ssave(i,1) = sige;
end;
% Evaluate statistics
bhat = mean(bsave(nomit+1:ndraw,:));
bstd = std(bsave(nomit+1:ndraw,:));
tstat = bhat./bstd;
sighat = mean(ssave(nomit+1:ndraw,1));
tout = 1-cdf(t,abs(tstat),n);
% Display Gibbs results
disp(Gibb sampling estimates)
disp([Coefficient ,t-statistic ,t-probability]);
disp([bhat tstat tout]);
% Calculate and Display Theil-Goldberger results
tgsige=(y - x*b0)*(y - x*b0)/(n-k);
tgbhat=inv(xpx + tgsige*qpq)*(xpy+tgsige*qpv); %Theil-Goldberger estimates
tgbstd = diag(chol(tgsige*(xpx + tgsige*qpq)));
tgtstat = tgbhat./tgbstd;
disp(Theil-Goldberger estimates)
disp(tgbhat);

A typical result from this code is

Gibb sampling estimates
Coefficient t-statistic t-probability
1.0045
10.2286
0

1.4. EXAMPLES

15

0.9610

11.2966

0.9200

11.2740

Theil-Goldberger estimates
1.0037
0.9569
0.9198
We apply now the inference procedure to a financial dataset. We consider
monthly data on the short-term interest rate (the three-month Treasury Bill
rate) and on the AAA corporate bond yield in the USA. As Treasury Bill
notes and AAA bonds are low-risk securities and one could expect that there
is a relationship between their interest rate. We consider data from January
1950 to December 1999.
Let yi be the monthly change in the Treasury Bill rate and zi the monthly
change in the AAA bond rate. We will fit on this set of data the heteroscedastic model presented above with
yi = 1 + 2 zi + i
that corresponds to set xi = (1, zi ) and = (1 , 2 ) in the multivariate
regression model given above. The results of the estimation procedure are
Gibb sampling estimates
Coefficient t-statistic t-probability
0.0053
0.7805
0.2177
0.2751

19.8628

Theil-Goldberger estimates
0.0057
0.2747

16

CHAPTER 1. A MATLAB PRIMER

1.5
Actual
Fitted

1
0.5
0
0.5
1
1.5

100

200

300

400

500

600

1.5
Residuals
1
0.5
0
0.5
1

100

200

300

400

500

600

Figure 1.1: Actual and fitted data (top) and residuals (bottom) using the
Bayesian estimates of the linear regression model.
The estimates of the 2 are 0.0283 for the Gibbs sampler and 0.0282 for the
Theil-Goldberger procedure.
The actual and fitted data and the residuals are given in Fig. 1.1. The
plot of the residuals shows that in the second half of the sample (say after
the 1975) the variance is underestimated. More precisely one should account
in the model for the time variation in the variance of the data. This call
for heteroscedastic linear regression models (see Chapter ??) or for nonlinear
models such as stochastic volatility models (see Chapter ?? and ??).
References
Gelfand, Alan E., and A.F.M Smith. 1990. Sampling-Based Approaches
to Calculating Marginal Densities, Journal of the American Statistical Association, Vol. 85, pp. 398-409.

1.5. FROM MATLAB TO SCILAB AND R

17

Theil, Henri and Arthur S. Goldberger. 1961. On Pure and Mixed Statistical Estimation in Economics, International Economic Review, Vol. 2,
65-78.

1.5

From Matlab to Scilab and R

We present here an example of translation of a Matlab code into a Scilab

and a R code. This exercise shall demonstrate the similarity and between
the three programming languages. In particular we found that Scilab could
be in term of syntax the most similar to Matlab.
Scilab
//*************************************************
// basic in I/O, graphical, statistical procedures
//*************************************************
//
Load UK/EU exchange rate data
clc;
clear all;
yy= fscanfMat(C:/Dottorato/Teaching/SummerSchoolBertinoro/TutorialAntonietta/...
TutorialRobAnt/AllLab/MatlabCode/ChapterMatlab/OutPound.txt/pound.txt);
//*************************************************
n=size(yy,1);
// evaluate the number of rows //
xx=(1:2:n);
//*************************************************
//
for endfor
if end
// (1) Evaluate sequentially the variance
// (2) Built a dummy variable, based on the value
//
of the variance estimated recursively
//*************************************************
wn=10;
// set the value of a variable//
s=zeros(n,1);
// define a n-dim null vector //
d=zeros(n,1);
for j=(wn+1):n;
s(j,1)=variance(yy((j-wn+1):j,1));
if (s(j,1)>0.45);
d(j,1)=1;
end;
end;

18

CHAPTER 1. A MATLAB PRIMER

//*************************************************
//
Some Pictures...
//*************************************************
// figure(1) to have distinct graphs
figure(1);
title("Time series data");
ylabel("Data");
xlabel("Time");
plot(xx,yy);
figure(2);
title("Time-varying log-volatility");
plot(xx,s,color,[1 0 0]); //[red green blue] the rgb convention
a=gca();
a.data_bounds=[1,min(s);n,max(s)];// Set tics
figure(3);
title("Dummy");
plot(xx,d,color,[1 0 0]); //[red green blue] the rgb convention
a=gca();
a.data_bounds=[1,-0.1;n,1.1];// Set tics
//*************************************************
//
All charts in one pictures...
//*************************************************
figure(4);
subplot(3,1,1);
title("Time series data");
ylabel("Data");
xlabel("Time");
plot(xx,yy);
subplot(3,1,2);
title("Time-varying log-volatility");
plot(xx,s,color,[1 0 0]); //[red green blue] the rgb convention
a=gca();
a.data_bounds=[1,min(s);n,max(s)];// Set tics
subplot(3,1,3);
title("Dummy");
plot(xx,d,color,[1 0 0]); //[red green blue] the rgb convention
a=gca();
a.data_bounds=[1,-0.1;n,1.1];// Set tics
//*************************************************
//
histogram

1.5. FROM MATLAB TO SCILAB AND R

//*************************************************
figure(5);
histplot(100,yy);
//*************************************************
// Save the results in a ouput file
//*************************************************
fprintfMat(C:/Dottorato/Teaching/SummerSchoolBertinoro/TutorialAntonietta/...
TutorialRobAnt/AllLab/MatlabCode/ChapterMatlab/OutPound.txt,yy,%5.2f);
// attention this overwrites the existing file

R
#*************************************************
# basic in I/O, graphical, statistical procedures
#*************************************************
#
Load UK/EU exchange rate data
yy=scan("C:/Dottorato/Teaching/SummerSchoolBertinoro/TutorialAntonietta/...
TutorialRobAnt/AllLab/MatlabCode/ChapterMatlab/pound.txt",sep="\t",skip=0,na.strings=".")
dim(yy)=c(1006,1);
#*************************************************
n=dim(yy);
# evaluate the number of rows #
n=n[1];
xx=(1:n);
#*************************************************
#
for endfor
if end
# (1) Evaluate sequentially the variance
# (2) Built a dummy variable, based on the value
#
of the variance estimated recursively
#*************************************************
wn=10;
# set the value of a variable#
s=array(0,n);
# define a n-dim null vector #
d=array(0,n);
for (j in ((wn+1):n)){
s[j]=var(yy[(j-wn+1):j]);
if (s[j]>0.45){
d[j]=1;
}
}
#*************************************************
#
Some Pictures...
#*************************************************
# figure(1) to have distinct graphs

19

20

CHAPTER 1. A MATLAB PRIMER

dev.new();
plot(xx,yy,main="Time series data",xlab="Time",ylab="Data",type="l");
dev.new();
plot(xx,s,main="Time-varying log-volatility",xlab="Time",ylab="Data",type="l");
#[red green blue] the rgb convention
dev.new();
plot(xx,d,main="Dummy",xlab="Time",ylab="Data",type="l");
#[red green blue] the rgb convention
#*************************************************
#
All charts in one pictures...
#*************************************************
par(mfrow=c(3,1),pin=c(5,1.5));
plot(xx,yy,main="Time series data",xlab="Time",ylab="Data",type="l");
plot(xx,s,main="Time-varying log-volatility",xlab="Time",ylab="Data",type="l");
#[red green blue] the rgb convention
plot(xx,d,main="Dummy",xlab="Time",ylab="Data",type="l");
#[red green blue] the rgb convention
#*************************************************
#
histogram
#*************************************************
dev.new();
hist(yy,50);
#*************************************************
# Save the results in a ouput file
#*************************************************
save(yy, file = "C:/Dottorato/Teaching/SummerSchoolBertinoro/TutorialAntonietta/...
TutorialRobAnt/AllLab/MatlabCode/ChapterMatlab/OutPound.txt");

Chapter 2
Monte Carlo Integration
Aim
Apply basic Monte Carlo principles to solve some basic integration
problems. Discuss the choice of the number of samples in a Monte
Carlo estimation.
Contents
1. Integration
2. A Monte Carlo Estimator
3. Asymptotic Properties
4. Optimal Number of MC Samples
5. Appendix - Matlab Code

2.1

Integration

Our aim is to approximate the integral

(2.1)

(f ) =

f (x)dx
0

21

22

CHAPTER 2. MONTE CARLO INTEGRATION

for the following integrand functions f
1. f (x) = x
2. f (x) = x2
3. f (x) = cos(x)

We apply a Monte Carlo approach and re-write the integration problem in

statistical terms as follows
Z 1
Z +
(2.2)
f (x)dx =
f (x)I[0,1] (x)dx = E(f (X))
0

where IA (x) if the indicator function that holds 1 if x A and 0 otherwise

and X U[0,1] is a random variable with a standard uniform distribution.

2.2

A Monte Carlo Estimator

Let X1 , . . . , Xn be a set of n i.i.d. samples from a uniform distribution.

The integral = E(f (X)) approximates as follows
n

(2.3)

1X
f (Xi )

n =
n i=1

that is called a Monte Carlo estimator of E(f (X)).

The results of the Monte Carlo estimates for different sample sizes n =
1, . . . , 50 and different integrand functions f are given in Fig. 2.1
Find the mean and the variance of the estimator and give a Monte Carlo
approximation for the expression of the variance.

2.2. A MONTE CARLO ESTIMATOR

23

MC Means
f(x)=x
0.8

Empirical Average
Theoretical Mean

0.6
0.4
0.2
0

10

20

30

40

50

f(x)=x
0.4

Empirical Average
Theoretical Mean

0.3
0.2
0.1
0

10

20

30

40

50

f(x)=cos( x)
1

Empirical Average
Theoretical Mean

0.5
0
0.5

10

20

30

40

50

Figure 2.1: Monte Carlo estimates

n (solid lines) for different sample sizes
n = 1, . . . , 50 and true values of (horizontal dotted lines).

Due to the i.i.d. assumption we have:

n

(2.4)

(2.5)

E(
n ) =

1X
E(f (Xi )) =
n i=1

n
1 X
1
V(
n ) = 2
V(f (Xi )) = 2 (f )
n i=1
n

24

CHAPTER 2. MONTE CARLO INTEGRATION

where

(f ) = V(f (X1 )) =

(x )2 f (x)I[0,1] (x)dx

For the different f we find the analytical solution of the integral (f ) (see
also horizontal dotted lines in Fig. 2.1)
1. For f (x) = x
(2.6)

E(f (X1 )) =



 1 2 0
xdx =  x  = 1/2
2 1

2. For f (x) = x2
(2.7)

E(f (X1 )) =

3. For f (x) = cos(x)

(2.8)

2.3

E(f (X1 )) =

1
0

1
0

0



1
x2 dx =  x3  = 1/3
3 1


0
1


cos(x)dx =  sin(x) = 0

Asymptotic Properties

Under the i.i.d. and finite variance assumptions we have

a.s.

(2.9)

(2.10)

n (
n ) N (0, 2 (f ))

For the different f we have

2.4. OPTIMAL NUMBER OF MC SAMPLES

25

1. For f (x) = x
V(f (X1 )) = E(f (X1 )2 ) (E(f (X1 )))2
Z 1
2
Z 1
2
=
x dx
xdx
0

= 1/3 1/4 = 1/12

2. For f (x) = x2
V(f (X1 )) = 1/5 1/9 = 4/45
3. For f (x) = cos(x)
V(f (X1 )) = 1/2 0 = 1/2
When the variance V(f (X1 )) is unknown one can use the Monte Carlo
estimator
n

(2.11)

1 X
(Xi
n )2
(f ) =
n 1 i=1
2

The empirical approximations of the asymptotic variances are given in Fig.

2.2.
Exercise: use the asymptotic distribution and the approximation of the

asymptotic variance to find the 5% confidence intervals of the MC estimator

of .

2.4

Optimal Number of MC Samples

It is possible to use the asymptotic properties of a MC estimator to find

the optimal number n of samples that are necessary to reach an accuracy

26

CHAPTER 2. MONTE CARLO INTEGRATION

MC Variances
f(x)=x

0.25

Empirical Variance
Theoretical Variance

0.2
0.15
0.1
0.05

10

20

30

40

50

f(x)=x2
0.2

Empirical Variance
Theoretical Variance

0.15
0.1
0.05
0

10

20

30

40

50

f(x)=cos( x)
1.5

Empirical Variance
Theoretical Variance

1
0.5
0

10

20

30

40

50

Figure 2.2: Monte Carlo variance estimates

n2 (solid lines) for different sam2
ple sizes n = 1, . . . , 50 and the true value (horizontal dotted lines).

level , for a given confidence level , in the Monte Carlo estimation of .

The asymptotic results allow us to find n such that
(2.12)
that is
(2.13)



p
2
P r |
n | (f )/n = 1

X =

n
n=
2 (f )

2

2 (f )

2.5. APPENDIX - MATLAB CODE

27

where X = 1 (1 /2), with 1 the inverse cumulative distribution

function of a standard normal.

When the variance 2 (f ) is unknown one can use the Monte Carlo estimator
n2 (f ) and then apply a similar asymptotic argument. In this case the
optimal number of simulations should satisfy the following relationship

n2 (f )

(2.14)

n2
X2

One can check iteratively the condition.

1. Start with n1 MC samples X1 , . . . , Xn1
2. If
n2 (f )

n2
2
X

then stop otherwise

2

3. evaluate k1 = n
2 n and generate k1 samples Xn1 +1 , . . . , Xn1 +k1 (x
X
indicates the integer part of x)
Exercise: write a Matlabs code for computing the optimal number of samples that are needed to estimate (f ) for the different integrand functions f
given in Section 1 and for the accuracy level = 0.001.

2.5

Appendix - Matlab Code

% Uniform Random Number

% Monte Carlo method as an approximated integration technique
% integrate f(x) on the [0,1] interval
% solution: 1/2, 1/3, and 0
clc;
n=50;
x=rand(n,1);
gav=zeros(n,3);
gavvar=NaN(n,3);
gav(1,1)=x(1,1);
gav(1,2)=x(1,1)^2;
gav(1,3)=cos(pi*x(1,1));
for i=2:n
gav(i,1)=sum(x(1:i))/i;
gav(i,2)=sum(x(1:i).^2)/i;
gav(i,3)=sum(cos(pi*x(1:i)))/i;
gavvar(i,1)=var(x(1:i));

28

CHAPTER 2. MONTE CARLO INTEGRATION

gavvar(i,2)=var(x(1:i).^2);
gavvar(i,3)=var(cos(pi*x(1:i)));

end
%
%
%%%%%%%%% Graphics (mean) %%%%%%%%%%
figure(1);
subplot(3,1,1);
plot(gav(:,1));
line((1:n),ones(n,1)/2,color,red);
legend(Empirical Average,Theoretical Mean,...
Location,NorthEastOutside);
title(f(x)=x);
%
subplot(3,1,2);
plot(gav(:,2));
line((1:n),ones(n,1)/3,color,red);
legend(Empirical Average,Theoretical Mean,...
Location,NorthEastOutside);
title(f(x)=x^2);
%
subplot(3,1,3);
plot(gav(:,3));
line((1:n),ones(n,1)*0,color,red);
legend(Empirical Average,Theoretical Mean,...
Location,NorthEastOutside);
title(f(x)=cos(\pi x));

To export picture to a .eps file one can use

%%%%%%%%% Export a picture %%%%%%%%%%%%%
dire=C:\Dottorato\Teaching\SummerSchoolBertinoro;
figu=\TutorialAntonietta\TutorialRobAnt\Figure\;
figname=strvcat([strcat(dire,figu,MC1.eps)]);
print (gcf,-depsc2, figname);
%
%%%%%%%%% Graphics (variance) %%%%%%%%%%
figure(2);
subplot(3,1,1);
plot(gavvar(:,1));
line((1:n),ones(n,1)/12,color,red);
legend(Empirical Variance,Theoretical Variance,...
Location,NorthEastOutside);
title(f(x)=x);
%
subplot(3,1,2);
plot(gavvar(:,2));
line((1:n),ones(n,1)*4/45,color,red);
legend(Empirical Variance,Theoretical Variance,...
Location,NorthEastOutside);
title(f(x)=x^2);
%
subplot(3,1,3);
plot(gavvar(:,3));
line((1:n),ones(n,1)*1/2,color,red);
legend(Empirical Variance,Theoretical Variance,...

2.5. APPENDIX - MATLAB CODE

Location,NorthEastOutside);
title(f(x)=cos(\pi x));

29

30

CHAPTER 2. MONTE CARLO INTEGRATION

Chapter 3
Importance Sampling
Aim
Define and apply the importance sampling method and study its
properties.
Contents
1. Importance Sampling (IS)
2. Properties of the IS Estimators
3. Generating Student-t Variables

3.1

Importance Sampling

Let be a probability density function, f a measurable function and

(3.1)

= E (f (X)) =

f (x)(x)dx

the integral of interest.

In importance sampling (see Section 3.3 in Robert and Casella (2004)) a
distribution g (called importance distribution or instrumental distribution)
31

32

CHAPTER 3. IMPORTANCE SAMPLING

is used to apply a change of measure

(3.2)

(x)
f (x)g(x)dx
g(x)

The resulting integral is then evaluated numerically by using a i.i.d. sample

X1 , . . . , Xn from g
n

IS
n

(3.3)

1X
w(Xi )f (Xi )
=
n i=1

where
w(Xi ) =

(Xi )
,
g(Xi )

i = 1, . . . , n

are called importance weights.

3.2

Properties of the IS Estimators

The Monte Carlo estimator

IS
n of is unbiased
Eg (
IS
n ) =
=
=

! n
n
Y
1X
w(xi )f (xi )
g(xi )dxi
n i=1
i=1

(x1 )
f (x1 )g(x1 )dx1
g(x1 )
f (x1 )(x1 )dx1

and converges almost surely to , under the assumption supp g supp .

Nevertheless the existence of the variance and of a limiting distribution is
2
not guaranteed. We shall notice that Vg (
IS
IS
n ) Eg ((
n ) ) thus the condition
we need to check is the existence of an upper bound for the second order

3.2. PROPERTIES OF THE IS ESTIMATORS

33

moment of the IS estimator, that is

2
Eg ((
IS
n ) )

(x1 )2
f (x1 )2 g(x1 )dx1 =
g(x1 )2

(x1 )
f (x1 )2 (x1 )dx1 <
g(x1 )

Note that if the tails of the importance density are lighter than those of the
the importance weight (x)/g(x) is not a.e. bounded and the variance of
the estimator will be infinite for many functions f .

The following is an example of a set of sufficient conditions for the IS

estimators to have finite variance

(x)/g(x) < M x X and Vg (f ) <

X is compact, g(x) < F and g(x) > x X
The condition (x)/g(x) < M, x X implies that the distribution f has
thicker tails than .

An alternative way to address the issue of the finite variance is to consider

the self-normalized importance sampling (SNIS) estimator
(3.4)

IS

SN
n

Pn
w(Xi )f (Xi )
Pn
= i=1
i=1 w(Xi )

It is biased on a finite sample, but it converges to by the strong law of

large number. It has been proved both theoretically and numerically that
this estimator may perform better, in terms of mean square error, than the
simple importance sampling estimator.

34

CHAPTER 3. IMPORTANCE SAMPLING

3.3

Generating Student-t Variables

Consider a Student-t distribution T (, , 2 ) with density

(3.5)

(( + 1)/2)
(x) =
(/2)

(x )2
1+
2

(+1)/2

IR (x)

w.l.o.g. take = 0, = 1 and = 12. We choose the quantities of interest

to be
1.
f (x) =
2.

sin(x)
x

5

I(x)(2.1,+)

s

 x 

f (x) = 
1 x

3.

x5
f (x) =
I[0,+) (x)
1 + (x 3)2

We study the performance of the importance sampling estimator

IS
n
when the following instrumental distributions are used
1. T ( , 0, 1) with < (e.g. = 7)
2. N (0, /( 2))
3. C(0, 1)
We shall note that the Cauchy distribution C(, ) has density function
(x) =

1
IR (x)
(1 + ((x )/)2 )

3.3. GENERATING STUDENT-T VARIABLES

35

2
Studentt
1
0
0

5
4

x 10
10
Normal
5
0
0

5
4

x 10
2
Cauchy
1
0
0

5
4

x 10

Figure 3.1: Importance sampling weights for the proposal distributions

T ( , 0, 1), N (0, /( 2)) and C(0, 1)
where < < + and > 0 and cumulative distribution function
Z
1
1 x
du
F (x) =
(1 + ((u )/)2)
1 1
x
=
+ arc tan
IR (x)
2

The inverse c.d.f. method can be applied in order to generate from the
Cauchy. If X = F 1 (U), where U U[0,1] , then X C(, ).
From the results in Fig. 3.1 one can see that the importance weights for
Student-t and Cauchy are not unstable while the importance weights associated to the normal exhibit some large jumps. For all the functions the
results in Fig. 3.2 show that the normal proposal produces jumps in the
progressive averages (green lines) that are due to the unbounded variance of
the estimator. However for the first function the normal proposal behaves
quite well when compared with the Cauchy and Student-t proposals. For the

36

CHAPTER 3. IMPORTANCE SAMPLING

second and third function the Cauchy proposal seems to converge faster than
the Student-t. In all the pictures we plotted (black lines) the approximation
obtained with an exact simulation from a Student-t with = 12.
Exercise - Use repeated Monte Carlo experiments to find the distribution
of the estimator
n (f ). Plot the 95% and 5% quantiles and the mean of the
estimator for n = 1, . . . , 50000.
The Matlab code is
%%%%%%% Importance weight for T(nustar,0,1)
function w=w1(x,nu,nustar)
w=pdf(t,x,nu)/pdf(t,x,nustar);
end
%
%%%%%%% Importance weight for N(0,nu/(nu-2))
function w=w2(x,nu)
w=pdf(t,x,nu)/pdf(normal,x,0,sqrt(nu/(nu-2)));
end
%
%%%%%%% Importance weight for C(0,1)
function w=w3(x,nu)
w=pdf(t,x,nu)/pdfcauchy(x,0,1);
end
%
clc;
%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%
% Importance sampling
%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%
nu=12;
nustar=7;
nIS=50000;
mu1IS=zeros(nIS,4);
mu2IS=zeros(nIS,4);
mu3IS=zeros(nIS,4);
%
mu1IScum=zeros(nIS,4);
mu2IScum=zeros(nIS,4);
mu3IScum=zeros(nIS,4);
%
wIS=zeros(nIS,3);
for i=1:nIS
% Proposal 1
x1=random(t,nustar);
% Proposal 2
x2=random(normal,0,sqrt(nu/(nu-2)));
% Proposal 3
x3=tan((rand(1,1)-0.5)*pi);
%x3=random(normal,0,1)/random(normal,0,1);
% Exact

3.3. GENERATING STUDENT-T VARIABLES

x4=random(t,nu);
%%%%%%%%%%%%%
% IS
%%%%%%%%%%%%%
% Importance weights
wIS(i,1)=w1(x1,nu,nustar);
wIS(i,2)=w2(x2,nu);
wIS(i,3)=w3(x3,nu);
% f_1
mu1IS(i,1)=((sin(x1)/x1)^5)*(x1>2.1);
mu1IS(i,2)=((sin(x2)/x2)^5)*(x2>2.1);
mu1IS(i,3)=((sin(x3)/x3)^5)*(x3>2.1);
mu1IS(i,3)=((sin(x4)/x4)^5)*(x4>2.1);
% f_2
mu2IS(i,1)=sqrt(abs(x1/(1-x1)));
mu2IS(i,2)=sqrt(abs(x2/(1-x2)));
mu2IS(i,3)=sqrt(abs(x3/(1-x3)));
mu2IS(i,4)=sqrt(abs(x4/(1-x4)));
% f_3
mu3IS(i,1)=(x1^5/(1+(x1-3)^2))*(x1>0);
mu3IS(i,2)=(x2^5/(1+(x2-3)^2))*(x2>0);
mu3IS(i,3)=(x3^5/(1+(x3-3)^2))*(x3>0);
mu3IS(i,4)=(x4^5/(1+(x4-3)^2))*(x4>0);
%
if ((1000*floor(i/1000))==i)
disp(i);
end
end

mu1IScum(:,1)=cumsum(mu1IS(:,1).*wIS(:,1))./(1:nIS);
mu1IScum(:,2)=cumsum(mu1IS(:,2).*wIS(:,2))./(1:nIS);
mu1IScum(:,3)=cumsum(mu1IS(:,3).*wIS(:,3))./(1:nIS);
mu1IScum(:,4)=cumsum(mu1IS(:,4))./(1:nIS);
%
mu2IScum(:,1)=cumsum(mu2IS(:,1).*wIS(:,1))./(1:nIS);
mu2IScum(:,2)=cumsum(mu2IS(:,2).*wIS(:,2))./(1:nIS);
mu2IScum(:,3)=cumsum(mu2IS(:,3).*wIS(:,3))./(1:nIS);
mu2IScum(:,4)=cumsum(mu2IS(:,4))./(1:nIS);
%
mu3IScum(:,1)=cumsum(mu3IS(:,1).*wIS(:,1))./(1:nIS);
mu3IScum(:,2)=cumsum(mu3IS(:,2).*wIS(:,2))./(1:nIS);
mu3IScum(:,3)=cumsum(mu3IS(:,3).*wIS(:,3))./(1:nIS);
mu3IScum(:,4)=cumsum(mu3IS(:,4))./(1:nIS);
%%
fs=14;
%%%%%%%%%%%%%%%
figure(1)
subplot(3,1,1);
plot((1:nIS),wIS(:,1));
legend(Student-t,Location,NorthEast);
set(gca,FontSize,fs);
subplot(3,1,2);
plot((1:nIS),wIS(:,2));
legend(Normal,Location,NorthEast);
set(gca,FontSize,fs);
subplot(3,1,3);

37

38

CHAPTER 3. IMPORTANCE SAMPLING

plot((1:nIS),wIS(:,3));
legend(Cauchy,Location,NorthEast);
set(gca,FontSize,fs);
figure(2)
plot((1:nIS),mu1IScum(:,1:3));
hold on;
plot((1:nIS),mu1IScum(:,4),-k);
hold off;
legend(Student-t,Normal,Cauchy,Exact,Location,NorthEast);
ylim([0.00001 0.00015]);
set(gca,FontSize,fs);
figure(3)
plot((1:nIS),mu2IScum(:,1:3));
hold on;
plot((1:nIS),mu2IScum(:,4),-k);
hold off;
legend(Student-t,Normal,Cauchy,Exact,Location,NorthEast);
ylim([1 1.4]);
set(gca,FontSize,fs);
figure(4)
plot((1:nIS),mu3IScum(:,1:3));
hold on;
plot((1:nIS),mu3IScum(:,4),-k);
hold off;
legend(Student-t,Normal,Cauchy,Exact,Location,NorthEast);
ylim([3 9]);
set(gca,FontSize,fs);

This code calls the following function defined by the user

%%%%%%% Cauchy probability density function
function f=pdfcauchy(x,a,b)
f=1/(pi*b*(1+((x-a)/b)^2));
end
%

3.3. GENERATING STUDENT-T VARIABLES

39

x 10

Studentt
Normal
Cauchy
Exact

14
12
10
8
6
4
2
0

5
4

x 10

1.4
Studentt
Normal
Cauchy
Exact

1.35
1.3
1.25
1.2
1.15
1.1
1.05
1
0

5
4

x 10
9
Studentt
Normal
Cauchy
Exact

8
7
6
5
4
3
0

5
4

x 10

Figure 3.2: Charts from one to three:

IS for the different functions f .
In each chart the IS estimators for different proposals (colored lines) and
the Monte Carlo estimator with exact simulation from the T (12, 0, 1) (black
lines).

40

CHAPTER 3. IMPORTANCE SAMPLING

Exercise
Importance Sampling
Consider a Student-t distribution T (, , 2 ) with density
(( + 1)/2)
(x) =
(/2)

(3.6)


(+1)/2
(x )2
1+
IR (x)
2

w.l.o.g. take = 0, = 1 and = 12.

Study the performance of the importance sampling estimator
IS
n of
(3.7)

= E (f (X)) =

f (x)(x)dx =

(x)
f (x)g(x)dx
g(x)

when the following instrumental distributions, g(x), are used

1. T ( , 0, 1) with < (e.g. = 7)
2. N (0, /( 2))
3. C(0, 1)
for the following test functions
1.
f (x) =

sin(x)
x
41

5

I(x)(2.1,+)

42

CHAPTER 3. IMPORTANCE SAMPLING

2.

3.

s

 x 

f (x) = 
1 x
f (x) =

x5
I[0,+) (x)
1 + (x 3)2

Metropolis-Hastings
Write a M.-H. algorithm to generate n = 500 i.i.d. random samples from
a zero-mean and independent bivariate normal distribution, N2 (0, I2 ), with
covariance matrix, I2 and mean 0 = (0, 0) . Use alternatively independent
and random walk proposals with variance covariance matrix 2 I2 . (Try with
different values of 2 ).