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Seasonal Dummy Model

Seasonal Dummy Model Deterministic seasonality Stcan be written as a function of Seasonal Dummy variables Let s be the Seasonal frequency s=4 for quarterly s=12 for monthly Let D1t, D2t, D3t,.., Dstbe Seasonal dummies D1t= 1 if s is the first period, otherwise D1t= 0 D2t= 1 if s is the second period, otherwise D2t= 0 At any time period t, one of the Seasonal dummies D1t, D2t, D3t,.., Dstwill equal 1, all the others will equal Dummy Model Deterministic seasonalitya linear function of the Dummy variablesitsiitDDecembertifFebruarytifJa nuarytifS == ====11221 MMEstimation Least squares regression You can either Regress yon all the Seasonal dummies, omitting the intercept, or Regress yon an intercept and the Seasonal dummies, omitting one Dummy (one season, December) You cannot regress on both the intercept plus all Seasonal dummies, for they would be collinear and ++=+= ==+111 Interpreting Coefficients In the modelthe intercept = sis the seasonality in the omitted season.

• Daily data – Day of the week – Handle by including dummy variables for each day • High‐frequency data – Include hourly or time‐of‐day indicators

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