Bocconi University. 20236 – Time Series Analysis.

Final assignment “on theory”

May 2, 2020

This assignment is evaluated, and it is mandatory for the exams of May and June 2020

1. Simple exponential smoothing is a clever algorithm for recursively computing one-step-ahead point
forecasts. Describe it briefly.
Can one quantify the uncertainty about the point forecasts provided by this algorithm?

2. Let (Yt )t≥1 be a univariate time series. When is it stationary?

Now suppose you have dataP(Y1 = y1 , . . . , YT = yT ). Is the following statement “one can estimate the
T
yt
mean by the sample mean t=1T ” appropriate? Motivate your answer.

3. In these days, everybody is expressing opinions on the measures to be taken to contrast the pandemic..
Let us consider a survey on a panel of n = 100 individuals, where each individual is asked: “What do
you think about [a specific form of] lockdown?” (1 =“disagree”; 2= “in favor”; 3= “uncertain”). The
interviews are taken weekly, for five weeks (t = 0, 1, . . . , 4), starting on March 3, 2020.
Let yi,t denote the answer of individual i at time t. We regard the individual data as a sample from the
categorical time series (Yi,t )t≥0 . We model the individual time series as independent and identically
distributed Markov chains. To start with, let us assume that the Markov chains are homogeneous.
(a) Suppose the observed matrices of transition counts are

t = 0 \t = 1 1 2 3 t = 1 \t = 2 1 2 3
1 35 0 5 40 1 40 5 10 55
2 0 20 10 30 2 0 15 5 20
3 20 0 10 30 3 10 5 10 25

t = 2 \t = 3 1 2 3 t = 3 \t = 4 1 2 3
1 5 40 5 50 1 5 5 0 10
2 0 25 0 25 2 20 60 5 85
3 5 20 0 25 3 0 0 5 5

(a) Compute the maximum likelihood estimate (MLE) of the transition matrix.
(b) What is the MLE of the probability of a transition from “”disagree” at week t − 1 to “no longer in
disagreement” (i.e., in favor or uncertain) at week t?
(c) Let us now look at p1,2 = P (Yt = 2 | Yt−1 = 1). Provide the asymptotic confidence interval of level
0.90 for p1,2 . (The 0.9 quantile of a standard Gaussian distribution is 1.28, the 0.95 quantile is 1.65,
the 0.975 quantile is 1.96).
(c) In fact, the assumption of homogeneous Markov chains appears restrictive. Let us relax the assump-
tion of homogeneity, allowing the transition matrix to depend on time: Pt = [pi,j (t)], where pi,j (t) is
the probability of a transition from state i at time t − 1, to state j at time t. Compute the MLE of
p1,2 (t) for t = 2 and for t = 4.

1
 4. Let (Yn )n≥0 be a Markov chain, with state-space Y = {1, . . . , M }. What can you say about the limit
behavior of the marginal probability law P (Yn = j), j = 1, . . . , M , for n → ∞?

5. (a) Define a state-space process, where the observable Yt is m-dimensional and the latent state θt is
p-dimensional.
Then, write the expression of the joint density p(θ0 , θ1 , θ2 , y1 , y2 ).
(b) Finally, define a random walk plus noise model, and show that the latent process (θt ) is Markov.

6. As an introduction to state space models for time series analysis, we gave some basic notions of Bayesian
inference, and in particular we studied Bayesian inference for the mean of a Gaussian population.
i.i.d
Consider Yt | θ ∼ N (θ, σ 2 ), with σ 2 known, and θ a random variable with prior distribution
N (m0 , C0 ). Given a sample (y1 , . . . , yn ), how would you pursue inference on θ, in the Bayesian ap-
proach?
P10
Suppose m0 = 1, C0 = 4, σ 2 = 1, n = 10 and sample mean i=1 yi /10 = 3. What is the posterior
distribution of θ is this case?

7. Suppose that, in a certain area, there are Nt start-up companies at time t. One wants to model the
time series (Yt ), where Yt is the number of “failures” among the Nt companies at time t. A popular
failure model assumes that
ind
Yt ∼ Binomial(Nt , θ),

where Nt is known, and θ is the unknown probability of failure, which is assumed to be constant over
time. A more realistic model may assume that such probability varies over time.
Can you propose a dynamic extension of the above model, that allows for a time-varying θt , and
temporal dependence for the series (Yt )?

8. (a) Consider a general state-space process. Explain what is the difference between the filtering and the
smoothing distributions.
(b) Consider a linear, Gaussian state-space model, where Yt is the m-dimensional observation and θt
the p-dimensional latent state at time t. What is the distribution of Yt | θt , y1:t−1 ? And what is the
distribution of θt | θt−1 , y1:t−1 ? Explain the assumptions you are using.
OPTIONAL QUESTION (no need to go into it): What is the distribution of θt | θt−1 , y1:t ?

9. What is the forecast function, in DLMs? Compute the forecast function for the linear growth model.

10. Consider the time series (Yi,t , xi,t )t≥1 , where xi,t =Investments and Yi,t = GDP for country i, i =
1, . . . , m. Let m = 2. A simple, country-specific model could assume
i.i.d
Yi,t = αi + βi xi,t + i i ∼ N (0, σi2 ).

Or, one could think of a seemingly unrelated regression (SUR) model: what would be the different
modeling assumptions of a SUR model? Write the SUR model, and explain.
Would you propose a SUR model, if m = 15? Briefly motivate your answer.