All books

Professional

Apps About Coach Log in Start reading

Quantitative Finance · Glossary

What is Prediction-error decomposition?

Definition 19.6 Quantitative Methods · Chapter 19 — State-Space Models and the Kalman Filter

The prediction-error decomposition writes the likelihood of the observations as the product of the one-step predictive densities, ln⁡L=−12∑t(ln⁡(2πFt)+vt2/Ft)\ln L = -\frac12\sum_t\bigl(\ln(2\pi F_t) + v_t^2/F_t\bigr), with the innovations and their variances from the filter.

Read in context →