Adjustment of Monthly or Quarterly Series to Annual Totals: An Approach Based on Quadratic Minimization Frank T. Denton Journal of the American Statistical Association, Vol. 66, No. 333 (Mar., 1971), 99-102. Stable URL hitp:/Mlinks jstor-org/siisici=0162-1459% 28197 103% 2966%3A333%3C99%3A AOMOQS%3E2.0,CO%3B2-1 Journal of the American Statistical Association is currently published by American Statitieal Association, ‘Your use of the ISTOR archive indicates your acceptance of JSTOR’s Terms and Conditions of Use, available at hup:/www,jstororglabout/terms.hml. ISTOR’s Terms and Conditions of Use provides, in part, that unless you have obtained prior permission, you may not download an entire issue of a journal or multiple copies of articles, and you may use content in the JSTOR archive only for your personal, non-commercial use. Please contact the publisher regarding any further use of this work. Publisher contact information may be obtained at hutp:/www jstor.orgyjoumals/astata html. Each copy of any part of @ JSTOR transmission must contain the same copyright notice that appears on the sereen or printed page of such transmission. For more information on JSTOR contact jstor-info@umich.edu, ©2003 JSTOR bupslwww jstor.org/ Mon Nov 17 04:51:16 2003Adjustment of Mi Annual FRANK T. DENTON* © volo he Amato ttt Anodaon onthly or Quarterly Series to | Totals: An Approach Based on Quadratic Minimization This ete comers the problem of editing monthly or avr tne serie to make then occord wth independent aml fotos or overages without nor ling erifil dzone A general epercch nd tome wae procduee Invling centrcned minimization of qd form in the ferences between ‘revi end unreied sre re propo. Some computational odvontoge ot ‘ced Areton i given fo the ectiontps between he einen problem ond ere work by other cuthos onthe creation of monly o verter mie hon Chl cna! gues or oelbe. An example s provided 1 trate the opel {of fhe ropened ten procedure. 1. INTRODUCTION ‘A problem often encountered in the preparation of economic time series is that of adjusting monthly or quarterly values obtained from one source to make them accord with annual totals or averages obtained from another. For example, a frequently conducted survey restricted to larger business establishments might be the source of information on short-term (intra-annul) flue- ‘tuations of employment, output, profits, ete., while a survey covering all business establishments might provide annual figures. Typically, one would wish to make the adjustment in such a way as to distort as the original month-to-month or quarters ments of the series. A. si the discrepancy for a given year among the periods within that year, either in equal amounts or pro rata, However, if the discrepancies are not uniform from year to year, this procedure will introduce an artificial step or discon- tinuity between the last period of one year and the first period of the next. The purpose of the present article is to pose the adjustment problem as one of constrained quadratie minimization and to suggest some specific pro- cedures which avoid the difficulty just noted. ‘The problem of adjusting a given monthly or quarterly series to accord with a set of annual figures is related to another problem, that of creating a monthly or quarterly series, given only a set of annual figures. The latter prob- "Frank T: Denton i profenor of ecsumian Medfanter University, Harton, ontario "The probe widely recognized fn goverment satin! ages, and spay tint a vvty of sped preclare ave been devo by goverment ‘atlas end oer for coping wih is One approach of lng stan wae po. ‘ened by Huns [Prods (s)he del rtm witha lated at forest ‘oblen, Unt of trplating tice sre by empaping ter sre wi reo Felted wit Ua Hida does act del in any etl with the pote ofa Tan anal alo aerogesanong meat or qartery which the pablo pret arloearomn Jem has been explored by Lisman and Sandee [6], Glejser [5], and Boot, Feibes and Lisman [2]. In particular, Boot, Feibes and Lisman have suggested an approach which, in essence, may be viewed as special application of the general approach to the adjustment problem that is proposed here. This matter is taken up in Seetion 4. 2. FORMULATION OF THE PROBLEM AND A (GENERAL APPROACH TO ITS SOLUTION Assume that we are concerned with intra-annual time periods of which there are k per year, k being an integer Let the time series of interest cover m years and consist of n=mk values. The original values are represented in column-veetor form by z= [a1 z+ + za’. Assume also that we have, from a different souree, a set of m annual totals? represented by y= [vs ye +++ Yul’. The problem is to adjust the original vector z to obtain a new vector a= [nm- ++ aal/ by a method which (a) minimizes the istortion of the original series, in some sense, and (b) satisfies the condition that the k values of the new series (in each year sum to the given annual total for that year. More formally, we specify a penalty function, (, 2), and express the problem as that of choosing 2 80 8 to minimize p(z, 2) subject to Demat Consider the class of penalty functions represented by (c=2)'A(2—2), a quadratic form in the differences be- tween the original and adjusted time-series values, A being a symmetrie nXn nonsingular matrix to be specified later, We set up @ Lagrangian expression and wi us @ 2 A(e — 2) — My — Br) for T = Bye ym Ue en where joo o d= bane ceed, eee 18 wilt amu Hanlrt Sat ee anal Bree ‘This meane spy tat i tha esol sna are nr on covered tata by malping by 9100 J being a k-dimensional column vector in which each ‘clement is unity and o being a k-dimensional null column vector. B is nXm. The penalty-minimizing solution is obtained by taking partial derivatives of u with respect to the elements of z and A, equating them to zero, and solving. For convenience, we write r=y—B’e for the vector of discrepancies between the two sets of annual totals and express the solution in the form CG ste a0) rt Leo Bir) where J is the mX rm identity matrix and 0 is the mxXm_ null matrix. (It is assumed, of course, that the second- order conditions necessary for the solution to be a mini- the inverse of a partitioned matrix, the solution for z is then found to be +Cr, where C= A~B(B'A*B)-". ‘Thus the adjusted values are equal to the original values plus linear combinations of the discrepancies between the two sets of annual totals. 2) 3. SOME SPECIFIC SOLUTIONS Suppose, first, that A is the identity matrix, which ‘means that we are minimizing the sum of squares of the simple differences between the original and revised values. In this case, C =1/k B, implying that the penalty funetion, is minimized by distributing the diserepaney for each year in equal amounts among the & periods within the ‘year. As noted before, this results, in general, in a spurious step or discontinuity between the last period of one year and the first period of the next. Clearly, A = is likely to be a bad specification, ‘A more appealing possibility is to employ penalty funetion based on the differences between the first differ- ences of the original and adjusted series: P(e, 2) = Dhar (Ber — de) = Liar [AG — 2d}. G1) If A is defined as a backward difference operator (e., Ar= 2/21), the penalty function will include the term A(z.—2) = (ax) — (Gz), the subscript 0 referring to the last period of the year preceding year 1. Period o is ‘outside the range over whieh the series is to be adjusted and we may take 2, and as equal and write A(z1—a) na. (It is assumed that no adjustments are to be made to the original series for years outside the range from year 1 to year m, inclusive.) The vector of (back- ‘ward) first differences may then be expressed as D(e—z), where D isan Xn matrix given by 10 0--- 0 0 -1 1 0-0 0 D=| 0-1 1:-- 0 0 2) a) i ‘The quadratic form to be mi ized, subject to the Joumal of the American Statistical Association, March 1971 ‘annual constraints, is now (¢—2)'D'D(2—2). In short, A=DD. It is also possible to specify the penalty funetion in terms of the differences between the second or higher order differences of the original and adjusted series. Specifying the function in general form, Ce, 2) = Dia (Aker — Ate)? = Dia [ave 2d) where A* is the fith-difference operator. Eliminating from the penalty funetion all values outside the adjust ‘ment range by setting 2)=2,for!=0, —1, «-- ,1—, the ‘veotor of hth differences is found by h successive applica tions of the D matrix: DD +++ D(r—2), so that A =D'D!---D'D-+- DD. One of the attractive features of the foregoing approach. is that the matrices have some convenient properties which make them easy to work with. Let & be an upper triangular matrix in which every element on or above the prineipal diagonal is 1 and every element below the prin- cipal diagonal is zero. Using the result D-!=R', whieh may be verified by inspection, it is easily shown that =R'R, (D'D'DD)"'=R'(D’D)“R, ete., each in- ‘obtained from the previous one by premultiplying by and post-multiplying by R. This makes it unnecessary to invert A, whieh is an n Xn matrix, and may be very large. For example, if A=D’D, we can write the inverse immediately: 3) bie 12 2-..2 12 B.-8 Bs) i 2 n Of course, the calculations still require the inversion of the mXm matrix B'A~B. However, this is a much less formidable task than inverting an nXn matrix, as one would have to do if the A matrix were less well behaved. For example, if one were working with 25 years of monthly data, the A matrix would be 300X300 whereas BAB would be only 25X25.* 4A, THE PROBLEM OF CREATING A SERIES AS A ‘SPECIAL CASE OF THE ADJUSTMENT PROBLEM As noted already, several authors have dealt with the problem of generating a monthly or quarterly series, given only a set of annual totals. In particular, Boot, Feibes, and Lisman [2] have suggested that a reasonable proce- dure is to choose values for the series such that the sum of squares of either the first or second differences is minimum, subject to the annual constraints. ‘To see the relationship of this procedure to the adjustment proce- dure described earlier, first let the original series to be adjusted have constant values: 21211 for all relevant "Yor farther damon of computational mpitostiony, oe (3Adjustment of Monthly or Quarterly Series 101 ILLUSTRATIVE EXAMPLES INVOLVING ADJUSTMENT OF ARTIFICIAL SERIES OF 5 YEARS’ DURATION BASED (ON ALTERNATIVE SPECIFICATIONS OF QUADRATIC PENALTY FUNCTION AND USING BACKWARD DIFFERENCES Year and Original Adjusted series based on penalty function involving - quarter series (x2) ACez) AP (x2) A (xe) Year 1 - 1Q 50 75 67 62 59 56 57 55 34 29 100 125 127 125 123 122 124 122 120 3Q 150 175 180 182, 184 200 194 194 195 4Q 100 125 126 130 134 122 125 129 132 Year 2 - 1Q 50 50 65 70 "4 50 58 61 62 29 100 100 105 106 107 100 107 109 ul 3Q 150 150 14s 142 141 150 146 145 144 4 100 100 85 81 78 100 89 85 83 Year 3 - 1Q 50 25 27 24 22 44 40 39. 38 29 100 5B 73 2 n 8 ™ 73 n 3 150 125, 123 124 125 100 109 110 m1 4Q 100 75 78 80 81 78 7 78 79 Year 4 - 19 50 50 37 38 39 50 43, 43 43 29 100 100 96 96 96 100 94 94 94 3Q 150 150 154 155 154 150 153 1s4 153 4Q 100 100 12 12 a 100 no no 0 Year 5 - 19 50 75 69 68 67 56 58 58 58 2Q 100 125 124 123 123 122 123 121 122 3Q 150 175 178 178 178 200 190 189 190 4Q 100 125 129 132 132 122 129 131 130 values of f. Then 2[A(c,—z)]*=2(A2,)*. Again, if the w= (EAT — 2) — Ny Bs) 6.1) original series has constant first differences (Az,= Az), then 2[%(,—2,)]*=2(A%r)*. Thus the first-differenee and second-difference versions of the penalty function already proposed for adjusting a series reduce to the penalty funetions proposed by Boot, Feibes, and Lisman for creating a series in eases where there exist no initial estimates of monthly or quarterly movements other than possible estimate of linear trend. 5, ALTERNATIVE SPECIFICATIONS OF THE PENALTY FUNCTION ‘The penalty funetion for the adjustment problem ean bbe specified in terms of proportionate differences between ‘the original and revised series instead of arithmetie differ- ences. (This might be preferred sometimes on the grounds that larger values in the original series should bear a com- mensurately larger share of the adjustment burden.) We define the proportionate difference in period tas (21—2,)/2. Letting Z be the nXn diagonal matrix with diagonal ele- ments 2, 2, "++, a the new penalty function ean be written in the form (2=2’Z4AZ-@—2), We now minimize with respeet to the elements of 2 and \ and, following the same route as in Seetion 2, obtain the result x =2+ZA-ZB(B'ZA“ZB)-'r. Tt may be noted that whereas before the adjustment coofficients were indepen- dent of the values of the particular series being adjusted, ‘his is no longer the ease Another type of respecification involves defining the difference operator A (more generally, 4) as a forward operator (¢.g., Azy=2141—x1,). The foregoing development has been based on the use of a backward difference oper- ator, but can easily be adapted to the ease of a forward operator. 6. AN ILLUSTRATIVE EXAMPLE By way of illustration, the table displays the results of adjusting a five-year artificial quarterly series to a set of artificial annual totals, using backward differences and various specifications of the penalty function. The artifi- 4A cue can so be made for averaging th adjiontcoticnts bad on bkward ud forward difereee in some seasstanten: ison ow xe bokward, forward, or average codstts in eontalnal (3102 cial series chosen for this purpose has a regular and pro- nouneed seasonal pattern but otherwise is invariant from Year to year. It as values 50, 100,150, and 100i the four calendar quarters, so that the series sums to 400 in each year. The annual totals to which the series is to be ad- justed are assumed to be 500, 400, 300, 400, and 500 in the five suecessive years. Additional illustrative material is provided in (3). REFERENCES {1} Bano, V_ Lowi, “Interpolation Formule for the Adjustment of Tudex Number" Paper presented atthe Annual Mectings ofthe Amecan Sica Ascaton, Deve 199. (2 Boot, °C. Gy, Feibes, Wand Lisman, J. H.C, *Purther Journal of the American Statistical Association, March 1971 Methods of Derivation of Quarterly Figures from Annual Data,” Applied Statistics, 16, No. 1 (1967), 65-15. {3} Denton, Frank T., "Quadratic Minimization Procedures for ‘Adjusting Monthly or Quarterly Time Series to Independent ‘Annual Totals,” MeMaster University Department of Eeo- ‘nomics Working Paper 70-01, January 1970 (unpublished), [A] Friedman, Milton, “The Interpolation of Time Series by Related Series,” Journal of the American Statistical Associa tion, 87 December 1962), 720-87. 18] Glejser, H., “Une Méthode d’fivalustion de Données Men- suolles & Partir d'Indices Trimestriels ou Annuels,” Cahiore Beonomiques de Bruzeltes, No. 19 (1960), 1 Trimestro, 45-54. (6) Lisman, J. H, C, and Sandee, J,, “Derivation of Quarterly Figures from Annual Data,"” Applied Statiatie, 13, No. 2 (1964), 87-90.