110 MOVING AVERAGE AND AUMREGRESSIVE PROCESSES

(a) Show that the best linear unbiased estimator for fi is

BG = (x'v;lx)-lx'v;;y,
where X = (xl,.. . ,x,)', y = (Yl,. .. Y,)', and V,, = V b } is nonsingular.
(b) Given Y l ,. . . Y,, Xi+,,and V,, = Cov(y, Y,,,), show that the best linear
unbiased predictor of U,+, = x:+# + Z,,, is

d+,&+ bi,(Y - XSO) 1

where b,, =Vi:V,,.

41. Consider a stationary and invertible time series Y, given by

where xJm= lwj}< w,Zm, - 171< 00, and the e, are uncorrelated (0, a') random
variables. Show that

where t,,= t(Y,-

V
I,, . , ,Y,J is the best lineat predictor of given

42. In Theorem 2.9.1, the fact that the system of equationsV,,b =V,, is consistent
is used. Show that this system is always consistent and that y'b,, in (2.9.2) is
unique ae. for different choices of generalized inverses of V,,.

43. Consider a sequence satisfying el =Z,(po+ /31e:-l)1'2, where Z, M(0, l), -

/3, > 0 and 0 d /3, < 1. That is, the distribution of e, given the past is N(0,h,),
+
where h, = Po p,e:- I . Thus, the conditional variance depends on the past
errors. The model
Y, = cuU,-, + e,
is a special case of autoregressive conditionally heteroscedastic models called
an ARCH(1) model. See Engle (1982). Note that

-,
) =e ~: : [ B ~ + P ~~ z( B: -~ + B ~ ~ : - ~ ) I . . .
e:=~:(~o+~~

=A 5 ' A z:-j)
j=o i-0
as,

where it is assumed that the process started with finite variance in the
indefinite past.
EXERCISES 111

(a) Show that {e,} is a sequence of uncorrelated [0, (1 - PI)-'&,] random

variables.
(b) Show that if 38; < 1, then E{e:} exists. Find E{e:}.
(c) Consider X, = e:. Assuming 3& C 1, show that X, is stationary. Give its
autocorrelation function.
(d) Consider the stationary ARCH(1) model, Y, = atY,...l -t- e,, where Ia,l C 1.
Assume (a,, Po,Pi) are known.
(i) What is the best predictor fn+s for Yn+, given Yl, . .. ,Y,?
(ii) Find V{Y,+, - ?,,+,}, the unconditional forecast error variance.
(iii) Find V{(Yn+,- fn+,)I(el, . . . ,en)},the conditional forecast e r r o ~
variance.
(iv) Show that V{(Y,+, - fn+,)l(eI, .
. .,en)}may be less than V{(Y,+,-
~ + , ) ~ ( e.,.., , e n ) } for some &, fll, a,,and e:. (That is, the
conditional forecast error variance for two-stepahead forecasting
may be less than that for one-stepahead forecasting.)
(v) Show that

s-w
[ ( e l , .. . , e n ) } =(1 - a 2I -)I u2
limV{Y,+, - fn+$ as.,

where U
' = (1 - #31)-1P,.
44. Use the facts that, for -0.5 < d < 0.5 and h > 0,
2d-Lid-I <id-l(l +h-Ij)d-l eid-1
for I C i C h ,
(i +h)Zd-Z<jd-I(j +h)d-l <2d-lj2d-2
for i > h
to show that y ( h ) of (2.11.3) is bounded above by clhZd-'and bounded
below by czh2", where c I and c2 are constants.

45. Let and {b,}rmbe sequences of real numbers satisfying

m m

3 arb,-, .
3 brar-,=,'--
m rn

c,=
j=.-OO