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Time Series Book

Time Series Book

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Published by: Laotzu Chris Waggoner on Aug 24, 2010
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05/12/2014

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Time Series for Macroeconomics and Finance

John H. Cochrane1
Graduate School of Business
University of Chicago
5807 S. Woodlawn.
Chicago IL 60637
(773) 702-3059

john.cochrane@gsb.uchicago.edu
Spring 1997; Pictures added Jan 2005
1I thank Giorgio DeSantis for many useful comments on this manuscript. Copy-
rightc
°John H. Cochrane 1997, 2005
Contents
1 Preface
7
2 What is a time series?
8
3 ARMA models
10
3.1 Whitenoise. . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

3.2 Basic ARMA models. . . . . . . . . . . . . . . . . . . . . . . 11
3.3 Lag operators and polynomials. . . . . . . . . . . . . . . . . 11
3.3.1 Manipulating ARMAs with lag operators. ....... 12
3.3.2 AR(1) to MA() by recursive substitution. . . . . . . 13
3.3.3 AR(1) to MA() with lag operators. . . . . . . . . . . 13

3.3.4 AR(p) to MA(), MA(q) to AR(), factoring lag

polynomials, and partial fractions. . . . . . . . . . . . 14
3.3.5 Summary of allowed lag polynomial manipulations . . 16
3.4 Multivariate ARMA models. . . . . . . . . . . . . . . . . . . . 17
3.5 Problems and Tricks. . . . . . . . . . . . . . . . . . . . . . . 19

4 The autocorrelation and autocovariance functions.
21
4.1 Denitions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
4.2 Autocovariance and autocorrelation of ARMA processes. ... 22
4.2.1 Summary. . . . . . . . . . . . . . . . . . . . . . . . . 25
1

4.3 A fundamental representation. . . . . . . . . . . . . . . . . . 26 4.4 Admissible autocorrelation functions. . . . . . . . . . . . . . 27 4.5 Multivariate auto- and cross correlations. . . . . . . . . . . . . 30

5 Prediction and Impulse-Response Functions
31

5.1 Predicting ARMA models. . . . . . . . . . . . . . . . . . . . 32
5.2 State space representation. . . . . . . . . . . . . . . . . . . . 34
5.2.1 ARMAs in vector AR(1) representation. . . . . . . . 35
5.2.2 Forecasts from vector AR(1) representation. . . . . . . 35
5.2.3 VARs in vector AR(1) representation.. . . . . . . . . . 36

5.3 Impulse-responsefunction. . . . . . . . . . . . . . . . . . . . 37
5.3.1 Facts about impulse-responses. . . . . . . . . . . . . . 38
6 Stationarity and Wold representation
40
6.1 Denitions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40

6.2 Conditions for stationary ARMA’s. . . . . . . . . . . . . . . 41
6.3 Wold Decomposition theorem. . . . . . . . . . . . . . . . . . 43
6.3.1 What the Wold theorem does not say. . . . . . . . . . 45
6.4 The Wold MA() as another fundamental representation . . . 46

7 VARs: orthogonalization, variance decomposition, Granger
causality
48

7.1 OrthogonalizingVARs. . . . . . . . . . . . . . . . . . . . . . 48 7.1.1 Ambiguity of impulse-response functions. . . . . . . . 48 7.1.2 Orthogonalshocks. . . . . . . . . . . . . . . . . . . . 49 7.1.3 Simsorthogonalization–SpecifyingC(0). . . . . . . . 50 7.1.4 Blanchard-Quah orthogonalization—restrictions onC(1). 52

7.2 Variancedecompositions. . . . . . . . . . . . . . . . . . . . . 53
7.3 VAR’s in state space notation. . . . . . . . . . . . . . . . . . 54
2

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