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123 PDF
Diebold,Chapter7
Recallthecomponentdecomposition
t = Tt + St + Ct
ThecyclecomponentCt shouldbefreeof
trendandseasonal
Wewillfocusonpurecyclemodels
t = Ct
MeanStationary
Definition:AtimeseriesYt hasaconstant
mean,orismeanstationary,if
E (Yt ) =
isconstant(stable)overtime.
Counterexample:
Atrendedtimeseriesisnotmeanstationary
WeassumethecyclicalcomponentCt is
meanstationary
VarianceStationarity
Definition:AtimeseriesYt hasaconstant
variance,orisvariancestationary,if
var(Yt ) = 2
isconstant(stable)overtime.
Counterexample:
Atimeserieswithtrended(increasing)varianceis
notvariancestationary
WeassumethecyclicalcomponentCt is
variancestationary
Covariance
ThecovarianceoftworandomvariablesX
andZ is
cov( X , Z ) = E (( X EX )(Z EZ ))
Thecovariancemeasuresthelinear
dependencebetweenX andZ .
Correlation
Thecorrelationnormalizesthecovariance
corr( X , Z ) =
cov( X , Z )
var( X ) var(Z )
Correlationsliebetween1and1
corr(X,Z)=0meansnolinearassociation
corr(X,Z)=1meansX=Z
corr(X,Z)=1meansX=Z
Lags
ThefirstlagofYt isitsvalueinthepreceding
timeperiod,Yt1
ThesecondlagofYt isitsvalueinthetwo
periodspreceding,Yt1
Thekth lagofYt isYtk
U.S.UnemploymentRate
Lags1through4
Yt
3.4
3.8
4
3.9
3.5
3.6
3.6
3.9
3.8
3.7
3.8
4
Yt1
Yt2
Yt3
Yt4
3.4
3.8
4
3.9
3.5
3.6
3.6
3.9
3.8
3.7
3.8
3.4
3.8
4
3.9
3.5
3.6
3.6
3.9
3.8
3.7
3.4
3.8
4
3.9
3.5
3.6
3.6
3.9
3.8
3.4
3.8
4
3.9
3.5
3.6
3.6
3.9
t
1948m1
1948m2
1948m3
1948m4
1948m5
1948m6
1948m7
1948m8
1948m9
1948m10
1948m11
1948m12
LagOperator
ThelagoperatorL isausefulwayto
manipulatelags
Itisdefinedbytherelation
Lyt = yt 1
Takingthelagoperatortoapowermeansthat
youapplyititeratively
L2 yt = LLyt = Lyt 1 = yt 2
Ingeneral
Lk yt = yt k
LagOperatorinSTATA
STATAusesthesamenotation
generateur1=L.ur
Thiscreatesavariableur1whichisthefirstlagof
ur
generateur5=L5.ur
Thiscreatesavariableur5whichisthefifthlag
scatterur L.ur
Thiscreatesascatterofuranditsfirstlag
regressur L.ur
Thisregressesuronitsfirstlag
Autocovariance
Thefirstautocovariance ofatimeseriesYt is
thecovarianceofYt withitsvalueinthe
precedingtimeperiodYt1
Wecall Yt1 thefirstlag ofYt
Wewritethefirstautocovariance as
(1) = cov(Yt , Yt 1 )
= E ((Yt )(Yt 1 ))
Autocorrelation
Thefirstautocorrelation ofatimeseriesYt is
thecorrelationofYt withYt1
Wewritethefirstautocorrelationas
(1) = corr(Yt , Yt 1 )
cov(Yt , Yt 1 )
=
var(Yt ) var(Yt 1 )
cov(Yt , Yt 1 )
=
var(Yt )
Thethirdequalityholdsbyvariancestationarity
Autocorrelation
Theautocorrelation(1)liesbetween1and1
(1)iscloseto1forhighlycorrelatedseries
(1)iscloseto1ifthecorrelationisnegative
iftherearemovementsbackandforth
(1)=0iftheseriesisuncorrelated
Yt andYt1
ScatterPlot
Yt andYt1
FirstAutocorrelation
UnemploymentRate
Autocovariances
Thekth autocovariance ofatimeseriesYt is
thecovarianceofYt withitslagYtk
Itiswrittenas
(k ) = cov(Yt , Yt k )
= E ((Yt )(Yt k ))
Autocorrelations
Thekth autocorrelation ofatimeseriesYt is
thecorrelationofYt withYtk
Itiswrittenas
corr(Yt , Yt k )
(k ) =
var(Yt ) var(Yt k )
corr(Yt , Yt k )
=
var(Yt )
Autocorrelationsliebetween1and1
CovarianceStationarity
Definition:AtimeseriesYt iscovariance
stationary ifitsmeanEYt ,variance,and
autocovariance function(k)areconstant
(stable)overtime
Counterexample:
Atimeserieswithchangingcorrelationsisnot
covariancestationary
WeassumethecyclicalcomponentCt is
covariancestationary
Autocorrelations1to4
AutocorrelationFunction
Theautocovariance (k)andautocorrelation
(k)arefunctionsofthelagk.
Wecall(k)theautocorrelationfunction.
Plottedasafunctionofkitshowsushowthe
dependencepatternalterswiththelag.
AutocorrelationPlot
acur
acur,title(UnemploymentRate)
WhiteNoiseAutocorrelation
Definition:Awhitenoise processhaszero
autocorrelations:(k)=0fork>0
Seriallyuncorrelated
Linearlyunforecastable
LevelofYt doesnothelppredictfuturevalues
Commonforassetreturns,andsomegrowth
rates
ExampleofWhiteNoise:StockReturns
ExampleofWhiteNoise:
NonDurable ConsumptionGrowthRate
PositiveAutocorrelation
(k)>0
Positivecorrelation
HighvaluesofYt predictfuturehighvaluesforYt+h
LowvaluesofYt predictfuturelowvaluesforYt+h
Commonlyfound
Mosteconomicvariablesmeasuredinlevels
Ergodicity
Thetimeseriesisergodic if(k)declinesto
zeroask goestoinfinity.
Ifatimeseriesyt isergodic,thenatlong
horizons(largeh)thebestforecastconverges
totheunconditionalmeane.g.T+h|T Eyt ,
Example:
Seasonalandtrendcomponentsarenotergodic
NSA(notseasonallyadjusteddata)maynotbe
ergodic
Example:UnemploymentClaims
Autocorrelation
withGeometricDecay
GeometricDecay
(k) k forsome<1
(k)decayssmoothlytozero
ergodic
Longrangeforecastsareclosetothe
unconditionalmean
Commonlyfoundineconomicvariables
measuredinlevels
ExampleofPositiveGeometricDecay
UnemploymentRate
NegativeAutocorrelation
(1)<0
Yt hasimmediatereversalsinadjacentperiods
Occursinsomeeconomicvariablesmeasuredas
changes(differences)
Tendstoalternate
(1)<0
(k)>0forsomek>1
Etc
Forecastscanhaveoppositesignfromcurrent
level
Ergodic if|(k)|goestozeroask goestoinfinity
ExampleofNegativeAutocorrelation
WeeklyChangeinNewUnemployment
InsuranceClaims
Autocorrelation
withSlowDecay
SlowDecay
(k)decaysslowlytozero
Powerlaw
(k) kd forsomed>0
ergodic
Originallyintroducedinhydrology(patternsof
theriverNile)
Suggestedforabsolutestockreturns
Notcommonforeconomicvariables
ExampleofSlowDecay:
AbsoluteStockReturns
EstimationofAutocorrelations
Theautocorrelationisafunctionofmoments
(k ) =
cov(Yt , Yt k )
var(Yt )
(k )
( 0)
cov(Yt , Yt k ) = (k )
=
= E ((Yt )(Yt k ))
= EYt
Weestimatebyreplacingthepopulation
momentsbysamplemoments
Estimation
Thepopulationmean
= EYt
isestimatedbythesamplemean
1 T
= Yt
T t =1
Thepopulationcovariance
(k ) = E ((Yt )(Yt k ))
isestimatedbythesamplecovariance
1 T
(k ) = (Yt )(Yt k )
T t = k +1
Estimation
Thepopulationautocorrelation
(k )
(k ) =
(0)
isestimatedbytheratioofsample
autocovariances
(k )
(k ) =
(0)
AutocorrelationPlot
acur
acur,title(UnemploymentRate)
SamplingUncertainty
Thesampleautocorrelationsareestimatesof
thepopulationautocorrelations,andarethus
random.
Justbecausetheestimatedautocorrelationis
positivedoesnotmeanthatthetrue
autocorrelationispositive.Theestimate
containssamplingerror
ConfidenceBands WhiteNoiseCase
IfYt isindependentwhitenoise,then
1
var ( ( k ) )
T
whichmeansthatthestandarderroris1/T1/2
Thusthesamplevalueswilllieintheregion
[2/T1/2 ,2/T1/2]with95%probability.
Consequently,acommonmeasureofuncertainty
forsampleautocorrelationsistoplot 2/T1/2
confidencebandsaboutzero(asdoneinthetext).
Theinterpretationisthatifthesample
autocorrelationiswithinthebands,itisnot
statisticallydifferentfromzero.
ConfidenceBands CorrelatedCase
The 2/T1/2 confidencebandsareonlyvalid
ifthetruthprocessiswhitenoise
Ingeneral,theconfidencebandsdependupon
theactualautocorrelation.
Bartlettworkedoutanapproximationbased
onamovingaveragemodel(discussedinnext
chapter)
BartlettConfidenceBands
Supposethattheautocorrelations
uptoorderk1aretheestimated
values,buttheremaining
autocorrelations
(orderkandabove)arezero.
TheBartlettconfidencebandisthe
95%samplingintervalforthe
estimatedkth autocorrelation
STATAdisplaystheBartlettbandsas
theshadedregion
Theinterpretationisthatifthe
estimatedautocorrelationfalls
outsidetheshadedregion,itis
statisticallydifferentthanzero.