The Kalman filter is a time series estimation algorithm that is applied extensively in the field of engineering and recently (relative to engineering) in the field of finance and economics. However, presentations of the technique are somewhat intimidating despite the relative ease of generating the algorithm. This article presents the Kalman filter in a simplified manner and produces an example of an application of the algorithm in Excel. This scaled-down version of the Kalman filter can be introduced in the (advanced) undergraduate classroom as well as the graduate classroom.
Copyright © 2008 Taylor & Francis. Article first published online: 02 JUNE 2008. DOI: 10.1080/00137910802058574
The definitive version is available at: http://www.tandfonline.com/doi/abs/10.1080/00137910802058574?queryID=%24%7BresultBean.queryID%7D#.VEVhRvnF-So
Arnold, Tom, Mark J. Bertus, and Jonathan Godbey. "A Simplified Approach to Understanding the Kalman Filter Technique." The Engineering Economist 53, no. 2 (2008): 140-55. doi:10.1080/00137910802058574.
Arnold, Tom; Bertus, Mark J.; and Godbey, Jonathan, "A Simplified Approach to Understanding the Kalman Filter Technique" (2008). Finance Faculty Publications. 8.
Click below to download supplemental content.A Simplified Approach to Understanding the Kalman Filter Technique - Excel Template.xls (88 kB)
A Simplified Approach to Understanding the Kalman Filter Technique - Excel Template