university of copenhagen department of economics

Econometrics II
What is the Stationarity Condition
in an AR(p) Model?
Morten Nyboe Tabor
university of copenhagen department of economics

Outline: What is the Stationarity Condition in an AR(p) Model?

1 What is the Stationarity Condition?

2 Stationarity in Terms of the Eigenvalues of the Companion Matrix

3 The Link Between the Roots of the Characteristic Polynomial and the
Eigenvalues of the Companion Matrix

4 ARMA Models and ARIMA Models

Econometrics II — Fall 2016 — Dynamic Models for Stationary Time Series — What is the Stationarity Condition in an AR(p) Model? — Slide 2/24
university of copenhagen department of economics

The Stationarity Condition

• MA(q):
yt = µ + εt + α1 εt−1 + α2 εt−2 + ... + αq εt−q .
The MA(q) process is stationary by construction (sum of stationary
terms).

• MA(∞):
yt = µ + εt + α1 εt−1 + α2 εt−2 + ...
P∞
The MA(∞) process is stationary if i=0
αi2 < ∞.

• AR(1):
yt = δ + θyt−1 + εt .
The AR(1) process is stationary if |θ| < 1.

Note, that the stationarity condition is a restriction on the models’ parameters!

Econometrics II — Fall 2016 — Dynamic Models for Stationary Time Series — What is the Stationarity Condition in an AR(p) Model? — Slide 3/24
university of copenhagen department of economics

The Stationarity Condition in an AR(p) Model

We consider the stationarity condition in two ways:

1 In terms of the eigenvalues of the companion matrix.

2 In terms of the roots of the characteristic polynomial.

We illustrate the results with an AR(2) model.

Econometrics II — Fall 2016 — Dynamic Models for Stationary Time Series — What is the Stationarity Condition in an AR(p) Model? — Slide 4/24
university of copenhagen department of economics

Outline: What is the Stationarity Condition in an AR(p) Model?

1 What is the Stationarity Condition?

2 Stationarity in Terms of the Eigenvalues of the Companion Matrix

3 The Link Between the Roots of the Characteristic Polynomial and the
Eigenvalues of the Companion Matrix

4 ARMA Models and ARIMA Models

Econometrics II — Fall 2016 — Dynamic Models for Stationary Time Series — What is the Stationarity Condition in an AR(p) Model? — Slide 5/24
university of copenhagen department of economics

Econometrics II — Fall 2016 — Dynamic Models for Stationary Time Series — What is the Stationarity Condition in an AR(p) Model? — Slide 6/24
university of copenhagen department of economics

Econometrics II — Fall 2016 — Dynamic Models for Stationary Time Series — What is the Stationarity Condition in an AR(p) Model? — Slide 7/24
university of copenhagen department of economics

Econometrics II — Fall 2016 — Dynamic Models for Stationary Time Series — What is the Stationarity Condition in an AR(p) Model? — Slide 8/24
university of copenhagen department of economics

Econometrics II — Fall 2016 — Dynamic Models for Stationary Time Series — What is the Stationarity Condition in an AR(p) Model? — Slide 9/24
university of copenhagen department of economics

Econometrics II — Fall 2016 — Dynamic Models for Stationary Time Series — What is the Stationarity Condition in an AR(p) Model? — Slide 10/24
university of copenhagen department of economics

Econometrics II — Fall 2016 — Dynamic Models for Stationary Time Series — What is the Stationarity Condition in an AR(p) Model? — Slide 11/24
university of copenhagen department of economics

Econometrics II — Fall 2016 — Dynamic Models for Stationary Time Series — What is the Stationarity Condition in an AR(p) Model? — Slide 12/24
university of copenhagen department of economics

Outline: What is the Stationarity Condition in an AR(p) Model?

1 What is the Stationarity Condition?

2 Stationarity in Terms of the Eigenvalues of the Companion Matrix

3 The Link Between the Roots of the Characteristic Polynomial and the
Eigenvalues of the Companion Matrix

4 ARMA Models and ARIMA Models

Econometrics II — Fall 2016 — Dynamic Models for Stationary Time Series — What is the Stationarity Condition in an AR(p) Model? — Slide 13/24
university of copenhagen department of economics

Econometrics II — Fall 2016 — Dynamic Models for Stationary Time Series — What is the Stationarity Condition in an AR(p) Model? — Slide 14/24
university of copenhagen department of economics

Econometrics II — Fall 2016 — Dynamic Models for Stationary Time Series — What is the Stationarity Condition in an AR(p) Model? — Slide 15/24
university of copenhagen department of economics

Econometrics II — Fall 2016 — Dynamic Models for Stationary Time Series — What is the Stationarity Condition in an AR(p) Model? — Slide 16/24
university of copenhagen department of economics

The Stationarity Condition in an AR(p) Model

The AR(p) process is stationary if:

• The roots of the characteristic polynomial, z1 , z2 , ..., zp , are outside the
unit circle.

• The inverse roots of the characteristic polynomial, φ1 , φ2 , ..., φp , are inside

the unit circle.

• The eigenvalues of the companion matrix, λ1 , λ2 , ..., λp , are inside the unit
circle.

Econometrics II — Fall 2016 — Dynamic Models for Stationary Time Series — What is the Stationarity Condition in an AR(p) Model? — Slide 17/24
university of copenhagen department of economics

Econometrics II — Fall 2016 — Dynamic Models for Stationary Time Series — What is the Stationarity Condition in an AR(p) Model? — Slide 18/24
university of copenhagen department of economics

The MA Representation of a Stationary AR(p) Process

Econometrics II — Fall 2016 — Dynamic Models for Stationary Time Series — What is the Stationarity Condition in an AR(p) Model? — Slide 19/24
university of copenhagen department of economics

Outline: What is the Stationarity Condition in an AR(p) Model?

1 What is the Stationarity Condition?

2 Stationarity in Terms of the Eigenvalues of the Companion Matrix

3 The Link Between the Roots of the Characteristic Polynomial and the
Eigenvalues of the Companion Matrix

4 ARMA Models and ARIMA Models

Econometrics II — Fall 2016 — Dynamic Models for Stationary Time Series — What is the Stationarity Condition in an AR(p) Model? — Slide 20/24
university of copenhagen department of economics

Econometrics II — Fall 2016 — Dynamic Models for Stationary Time Series — What is the Stationarity Condition in an AR(p) Model? — Slide 21/24
university of copenhagen department of economics

Example: Danish Real House Prices

[Data used: hprice.in7]

• Estimating an AR(2) model for 1975:3–2001:4 yields

pt = 0.012285 + 1.51607 · pt−1 − 0.53050 · pt−2 + residual.

The lag polynomial is given by

θ(L) = 1 − 1.51607 · L + 0.53050 · L2 ,

with inverse roots 0.968 and 0.548, such that

θ(L) = (1 − 0.968L)(1 − 0.548L)

• One inverse root is close to unity 0.968 ≈ 1 and we estimate an

ARIMA(1,1,0) for pt :

∆pt = 0.00115 + 0.5132 · ∆pt−1 + residual.

The second inverse root is basically unchanged.

Econometrics II — Fall 2016 — Dynamic Models for Stationary Time Series — What is the Stationarity Condition in an AR(p) Model? — Slide 22/24
university of copenhagen department of economics

Econometrics II — Fall 2016 — Dynamic Models for Stationary Time Series — What is the Stationarity Condition in an AR(p) Model? — Slide 23/24
university of copenhagen department of economics

Econometrics II — Fall 2016 — Dynamic Models for Stationary Time Series — What is the Stationarity Condition in an AR(p) Model? — Slide 24/24