Solution Hayashi Cap 9

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Solution Hayashi Cap 9

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1. From the hint, we have

T 2 2 T

1X 1 T 1 0 1 X

t t1 = (t )2 . ()

T t=1 2 T 2 T 2T t=1

Consider

the second term on the RHS of (). Since E(0 / T ) 0 and Var(0 / T ) 0,

0 / T converges in mean square (by Chevychevs LLN), and hence in probability, to 0. So the

second term vanishes (converges in probability to zero) (this can actually be shown directly

from the definition of convergence in probability). Next, consider the expression T / T in the

first term on the RHS of (). It can be written as

T

1 1X

T = (0 + 1 + + T ) = 0 + T t .

m

T T T T t=1

er as

co

As just seen, 0T vanishes. Since t is I(0) satisfying (9.2.1)-(9.2.3), the hypothesis of Proposi-

eH w

tion 6.9 is satisfied (in particular, the absolute summability in the hypothesis of the Proposition

is satisfied because it is implied by the one-summability (9.2.3a)). So

o.

rs e 1X

T

T

t X, X N (0, 1).

ou urc

T t=1 d

where 2 is the long-run variance of t . Regarding the third term on the RHS of (), since

1

PT 2 1

t is ergodic stationary, 2T t=1 (t ) converges in probability to 2 0 . Finally, by Lemma

o

2

2.4(a) we conclude that the RHS of () converges in distribution to 2 X 2 21 0 .

aC s

vi y re

(b) From (a),

1

PT

T t=1 yt yt1

T (b

1) = 1

PT

.

2

t=1 (yt1 )

ed d

T2

Apply Proposition 9.2(d) to the numerator and Proposition 9.2(c) to the denominator.

ar stu

(c) Since {yt } is random walk, 2 = 0 . Just set 2 = 0 in (4) of the question.

(d) First, a proof that b p 0. By the algebra of OLS,

T

1X

is

b =

(yt b yt1 )

T t=1

Th

T

1X

= 1)yt1 )

(yt (b

T t=1

T T

1X 1X

sh

= 1)

yt (b yt1

T t=1 T t=1

T T

!

1X 1 1 1X

= 1)

yt T (b yt1 .

T t=1 T T T t=1

https://www.coursehero.com/file/8818911/analqs-ch9/

PT

The first term after the last equality, T1 t=1 yt , vanishes (converges to zero in proba-

bility) because yt is ergodic stationary and E(yt ) = 0. To show that

the second term

1

after the last equality vanishes, we first note that T T (b 1) vanishes because

PT

1) converges to a random variable by (b). By (6) in the hint, 1T T1 t=1 yt1

T (b

converges to a random variable. Therefore, by Lemma 2.4(b), the whole second term

vanishes.

Now turn to s2 . From the hint,

T T

1 X 2 1X

s2 = b )2

(yt 1)]

[T (b b ) yt1

(yt

T 1 t=1 T 1 T t=1

T

1 2 1 X

+ [T (b

1)] 2 (yt1 )2 . ()

T 1 T t=1

b p 0, it should be easy to show that the first term on the RHS of () converges

Since

to 0 in probability. Regarding the second term, rewrite it as

m

er as

T T

2 1X 2 T 1 1X

co

[T (b

1)] yt yt1 [T (b b

1)] yt1 . ()

T 1 T t=1 T 1 T T t=1

eH w

o.

PT

By Proposition 9.2(b), T1 t=1 yt yt1 converges to a random variable. So does T

rs e

1). Hence the first term of () vanishes. Turning to the second term of (), (6)

(b

ou urc

PT

in the question means 1T T1 t=1 yt1 converges to a random variable. It should now

be routine to show that the whole second term of () vanishes. A similar argument,

this time utilizing Proposition 9.2(a), shows that the third term of () vanishes.

o

aC s

PT1

b 1 yt yt1

vi y re

t = 1 = q t=1

T

.

s qP

T 2

PT

s T12 t=1 (yt1 )2

t=1 (yt1 )

Use Proposition 9.2(c) and (d) with 2 = 0 = 2 and the fact that s is consistent for

ed d

ar stu

(b) From (a), we have

1

PT

t=1 yt yt1

1) =

T (b T

.

is

1

PT 2

T2 t=1 (yt1 )

Th

PT t

t=1 yt1 = 0. So

1

PT

t=1 t t1

1) = T1 P

T (b T

.

( )2

2 t=1 t1

sh

Since {t } is driftless I(1), Proposition 9.2(e) and (f) can be used here.

(c) Just observe that 2 = 0 if {yt } is a random walk with or without drift.

https://www.coursehero.com/file/8818911/analqs-ch9/

4. From the hint,

T T T T

1X 1X 1X 1X

yt1 t = (1) wt1 t + t1 t + (y0 0 ) t . ()

T t=1 T t=1 T t=1 T t=1

Consider first the second term on the RHS of (). Since t1 , which is a function of (t1 , t2 , . . . ),

is independent of t , we have: E(t1 t ) = E(t1 ) E(t ) = 0. Then by the ergodic theorem

PT

this second term vanishes. Regarding the third term of (), T1 t=1 t p 0. So the whole third

term vanishes. Lastly, consider the first term on the RHS of (). Since {wt } is random

walk and

2

1

PT

t = wt , Proposition 9.2(b) with = 0 = implies T t=1 wt1 t d 2 [W (1)2 1].

2 2

5. Comparing Proposition 9.6 and 9.7, the null is the same (that {yt } is zero-mean stationary

AR(p), (L)yt = t , whose MA representation is yt = (L)t with (L) (L)1 ) but

the augmented autoregression in Proposition 9.7 has an intercept. The proof of Proposition

9.7 (for p = 1) makes appropriate changes on the argument developed on pp. 587-590. Let b

and be as defined in the hint. The AT and cT for the present case is

m

" 1

PT PT

#

2 1 1 ()

er as

T2 t=1 (yt1 ) T T t=1 yt1 (yt1 )

AT = 1 1 PT () 1

PT () 2

,

t=1 (yt1 ) yt1 t=1 [(yt1 ) ]

co

T T T

eH w

PT PT

t

" 1

# " 1

#

T t=1 yt1 T t=1 yt1 t

o.

cT = PT ()

= PT ,

1 1 ()

t=1 (yt1 ) t t=1 (yt1 ) t

rs e T T

ou urc

where t is the residual from the regression of t on a constant for t = 1, 2, ..., T .

(1,1) element of AT : Since {yt } is driftless I(1) under the null, Proposition 9.2(c) can

PT

be used to claim that T12 t=1 (yt1 )2 d 2 (W )2 , where 2 = 2 [(1)]2 with 2

R

o

Var(t ).

aC s

PT

(2,2) element of AT : Since (yt1 )() = yt1 T1 t=1 yt1 , this element can be

vi y re

written as !2

T T T

1X () 2 1X 2 1X

[(yt1 ) ] = (yt1 ) yt1 .

T t=1 T t=1 T t=1

ed d

ar stu

in probability to 0 .

Off diagonal elements of AT : it equals

T

" T

# T

! T

!

1 1X () 1 1X 1 1X 1X

(yt1 ) yt1 = (yt1 ) yt1 yt1 yt1 .

is

Th

The term in the square bracket is (9.4.14), which is shown to converge to a random variable

PT

(Review Question 3 of Section 9.4). The next term, 1T T1 t=1 yt1 , converges to a ran-

PT

dom variable by (6) assumed in Analytical Exercise 2(d). The last term, T1 t=1 yt1 ,

sh

Taken together, we have shown that AT is asymptotically diagonal:

R1

2 0 [W (r)]2 dr 0

AT ,

d 0 0

https://www.coursehero.com/file/8818911/analqs-ch9/

so R1 1

2 [W (r)]2 dr 0

(AT )1 0 .

d 0 01

Now turn to cT .

PT

1st element of cT : Recall that yt1 yt1 T1 t=1 yt1 . Combine this with the BN

decomposition yt1 = (1)wt1 + t1 + (y0 0 ) with wt1 1 + + t1 to obtain

T T T

1X 1X 1X

yt1 t = (1) wt1 t + t ,

T t=1 T t=1 T t=1 t1

PT

where wt1 wt1 T1 t=1 wt1 . t1 is defined similarly. Since t1 is independent of

t , the second term on the RHS vanishes. Noting that wt = t and applying Proposition

9.2(d) to the random walk {wt }, we obtain

T 2

1X

[W (1) ]2 [W (0) ]2 1 .

wt1 t

m

T t=1 d 2

er as

Therefore, the 1st element of cT converges in distribution to

co

eH w

1

c1 2 (1)

[W (1) ]2 [W (0) ]2 1 .

2

o.

rs e PT

2nd element of cT : Using the definition (yt1 )() yt1 T1 t=1 yt1 , it should be

ou urc

easy to show that it converges in distribution to

c2 N (0, 0 2 ).

o

Using the results derived so far, the modification to be made on (9.4.20) and (9.4.21) on p.

590 for the present case where the augmented autoregression has an intercept is

aC s

vi y re

2

T (b

1) 1 or 1) DF ,

T (b

2 2 (1)

R

d [W (r)]2 dr d

0

2

T (b1 1 ) N 0, .

ed d

d 0

ar stu

Repeating exactly the same argument that is given in the subsection entitled Deriving Test

2

Statistics on p. 590, we can claim that 2(1) is consistently estimated by 1/(1 ).

b This

completes the proof of claim (9.4.34) of Proposition 9.7.

is

(b) The proof should be straightforward.

Th

7. The one-line proof displayed in the hint is (with i replaced by k to avoid confusion)

X X X

X X X

|j | = k

| k | = k|k | < , ()

sh

j=0 j=0 k=j+1 j=0 k=j+1 k=0

the equalities and inequalities. For this purpose, we reproduce here the facts from calculus

shown on pp. 429-430:

https://www.coursehero.com/file/8818911/analqs-ch9/

P

(i) If {ak } is absolutely summable, then {ak } is summable (i.e., < k=0 ak < ) and

X X

ak |ak |.

k=0 k=0

P

(ii) Consider a sequence with two subscripts, {ajk } (j, k = 0, 1, 2, . . .). Suppose j=0 |ajk | <

P

for each k and let sk j=0 |ajk |. Suppose {sk } is summable. Then

X

X

X X X X

ajk < and ajk = ajk < .

j=0 k=0 j=0 k=0 k=0 j=0

(

k if k j + 1,

ak =

0 otherwise.

m

er as

Then {ak } is absolutely summable because {k } is absolutely summable. So by (i) above, we

have

co

eH w

X X X X X

k = k = ak |ak | = |k |.

k=j+1 k=j+1 k=0 k=0 k=j+1

o.

rs e

Summing over j = 0, 1, 2, ..., n, we obtain

ou urc

X n X n

X X

k |k |.

j=0 k=j+1 j=0 k=j+1

o

If the limit as n of the RHS exists and is finite, then the limit of the LHS exists and

aC s

P in n and if xn A < ,

n

vi y re

then the limit of xn exists and is finite; set xn j=0 | k=j+1 k |). Thus, provided that

P P

j=0 k=j+1 |k | is well-defined, we have

X

X X

X

k |k |.

ed d

j=0 k=j+1 j=0 k=j+1

ar stu

P P

We now show that j=0 k=j+1 |k | is well-defined. In (ii), set ajk as

(

|k | if k j + 1,

is

ajk =

0 otherwise.

Th

P

Then j=0 |ajk | = k |k | < for each k and sk = k |k |. By one-summability of {k }, {sk }

is summable. So the conditions in (ii) are satisfied for this choice of ajk . We therefore conclude

that

X

X X

X X X X

sh

j=0 k=j+1 j=0 k=0 k=0 j=0 k=0

https://www.coursehero.com/file/8818911/analqs-ch9/

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