Econmetrics - EC4061

Revision Question -Set 3_Times Series

Question 1
Assume that Yt is an ARM A (1, 1) time series;
Yt − φYt−1 = φ0 + εt − θεt−1
where εt is an i.i.d. (0, σε2 ) sequence.
1. State the conditions when;
(a) Yt is a stationary time series
(b) Yt is an invertible time series
2. Suppose that ARM A equations have a stationary solution Yt .
(a) Find E(Yt ) and V ar(Yt ). Note: For V ar(Yt ), assume for simplicity that

φ0 = 0
(b) Find auto covariance and autocorrelation function ρk , k ≥ 1. Assume
φ0 = 0

Question 2
Assume that Yt is a Moving Average M A(q) time series process given by:
Yt = εt − θ1 εt−1 − ... − θq εt−q
where εt is i.i.d. (0, σε2 ) sequence.
1. Show that E(Yt ) = 0
2. Show that V ar(Yt ) = σε2 (1 + θ12 + ... + θq2 )

Question 3
Consider the following rst-order vector autoregression (VAR) model in struc-
tural form.

yt = b10 − b12 zt + γ11 yt−1 + γ12 zt−1 + εyt (1)

zt = b20 − b21 yt + γ21 yt−1 + γ22 zt−1 + εzt (2)
a) Discuss the assumptions necessary for the structural VAR (primitive form)
to be transformed to a standard VAR model?
b) Using matrix algebra, derive the VAR in standard form. Show that the
error terms of the VAR in standard form are white noise processes.

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 c) The standard VAR can be estimated using ordinary least square (OLS)
or seemingly unrelated regression (SUR). State the conditions under which each
of these methods should be considered.
d) The standard form VAR can be estimated, but cannot be used to recover
the primitive VAR estimates. State why and provide condition(s) under which
this can be resolved.

Question 4
Consider the following rst-order vector autoregression (VAR) model in struc-
tural form.

yt = b10 − b12 zt + γ11 yt−1 + γ12 zt−1 + εyt (3)

zt = b20 − b21 yt + γ21 yt−1 + γ22 zt−1 + εzt (4)
where εyt and εzt are the white noise processes
a) Write the VAR in standard form. Show that the error term of the VAR
in standard form are white noise processes.
b) Using VAR in standard form, derive the condition for stability.
c) Discuss the meaning of the Impulse Response Functions (irf) and its
importance in VAR modelling.

Question 5
Consider the following rst-order vector autoregression (VAR) model in struc-
tural form.

yt = γ11 yt−1 + γ12 zt−1 + eyt (5)

zt = γ21 yt−1 + γ22 zt−1 + ezt (6)
where yt → I(1) and zt → I(1).
a) Explain under what conditions the two processes are cointegrated.
b) How would you test for cointegration?

Question 6
Consider the autoregressive distributed lag, ARDL, model given by

yt = θ0 − θ1 yt−1 + γ0 xt + γ1 xt−1 + εt (7)

a) Derive the corresponding error correction model (ECM), and
b) Explain how it is related to co-integration?