Econometrics

J. Ortega Garcia

Univariate Processes with Unit Roots1

1
This presentation is based on Hamilton(1994), Time series analysis
J. Ortega Garcia Econometrics 2016 1 / 20
1 Definitions
Brownian motion
Functional Central Limit
Continuous Mapping Theorem

2 Assymptotic properties of a Random Walk

Case 1
Case 2
Case 3
Case 4

3 Phillips-Perron Test for Unit Roots

4 Augmented Dickey-Fuller Test for Unit Roots

J. Ortega Garcia Econometrics 2016 2 / 20

 Definitions

1 Definitions
Brownian motion
Functional Central Limit
Continuous Mapping Theorem

2 Assymptotic properties of a Random Walk

Case 1
Case 2
Case 3
Case 4

3 Phillips-Perron Test for Unit Roots

4 Augmented Dickey-Fuller Test for Unit Roots

J. Ortega Garcia Econometrics 2016 3 / 20

 Definitions Brownian motion

Definitions
Brownian motion o Wiener process
Consider a Random Walk
yt − yt−1 = εt ∼ i.i.d N (0, 1) , y0 = 0 (1)
then
yt = ε1 + ε2 + · · · + εt
suposse we view εt as
εt = ε1t + ε2t + · · · + εN−1t + εNt , εit ∼ i.i.d. N (0, 1/N )
we might associate
 N
yt − yt−1/N = εNt  X
 yt − yt−1 = εit ∼ i.i.d N (0, 1) , y0 = 0


yt−1/N − yt−2/N = εN−1t
i=1
.. . t X
N
. = .. 
 X

 yt = εiτ ∼ i.i.d N (0, t)
yt−(N−1)/N − yt−N/N = ε1t
τ =1 i=1
J. Ortega Garcia Econometrics 2016 4 / 20
 Definitions Brownian motion

Definitions
Brownian motion o Wiener process

wich will have exactly the same properties as (1) but is defined also at noninteger dates
{t + i/N }N
i=1 ∀ t. When N → ∞ the result would be a continuous-time process known as
standard Brownian motion denoted W (·)

Standard Brownian Motion W (·)

W (·) is a continuous-time stochastic process, associating each date t ∈ [0, 1] with the
scalar W (t) such that:
a. W (0) = 0
b. For any dates 0 ≤ t1 ≤ t2 ≤ · · · ≤ tk [W (ti ) − W (ti−1 )] ∀ i ∈ {0, 1, . . . , k − 1, k} are
independent multivariate Gaussian with [W (s) − W (t)] ∼ N (0, t − s)
c. For any given realization, W (t) is continuous in t with probability 1.

J. Ortega Garcia Econometrics 2016 5 / 20

 Definitions Functional Central Limit

Definitions
Functional Central Limit Theorem (FCLT)
Central limit theorem
PT
If µt ∼ i.i.d. with mean zero and variance σ 2 , then the sample mean µ̄T = T −1 τ =1 µτ
satisfies √

L
→ N 0, σ 2
T µ̄T −

If we have a sample of size T and we estimate the mean from the first half of the sample2
T /2
X
µ̄T /2 = (T /2)−1 µτ
τ =1
This estimator would also satisfy the CLT
L

(T /2)1/2 µ̄T /2 −−−→ N 0, σ 2
t→∞
2
The half of the sample is the largest integer that is less or equal to T /2. T/2 for T even and (T − 1)/2 for
T odd.
J. Ortega Garcia Econometrics 2016 6 / 20
 Definitions Functional Central Limit

Definitions
Functional Central Limit Theorem (FCLT)

We can generalize cosntructing a variable

Tr
X
−1
XT (r) = T µτ , r ∈ [0, 1]
τ =1


 0 0 ≤ r < 1/T



 u 1 /T 1/T ≤ r < 2/T

 (u + u ) /T
1 2 2/T ≤ r < 3/T
XT (r) = .. .. ..


 .
. .

 u1 + u2 + · · · + uT −1 /T

 (T − 1)/T ≤ r < T /T

(u1 + u2 + · · · + uT ) /T r =1

J. Ortega Garcia Econometrics 2016 7 / 20

 Definitions Functional Central Limit

Definitions
Functional Central Limit Theorem (FCLT)
Then √ √
√ Tr Tr
−1/2
X Tr Tr X
T XT (r) = T µτ = √ · µτ
τ =1 T T r τ =1
| {z } |
√{z }
→ r L
−
→ N (0,σ2 )
Therefore √

L
→ N 0, rσ 2
T XT (r) −
√ L
T XT (r) /σ −
→ N (0, r)
and √
T L
(XT (r2 ) − XT (r1 )) −
→ N (0, r2 − r1 )
σ
√ L
T XT /σ (·) −→ W (·) (2)
(2) is known as the Functional central limit theorem
J. Ortega Garcia Econometrics 2016 8 / 20
 Definitions Continuous Mapping Theorem

Definitions
Continuous Mapping Theorem (CMT)

Continuous mapping theorem CMT

L
The CMT states that if ST −
→ S (·) and g (·) is a continuous functional then
L
g (ST (·)) −
→ g (S (·))

If If
g (ST (·)) = √
σST (·) [ST (·)]2
g (ST (·)) = √
ST (·) = T XT (·) /σ ST (·) = T XT (·)
and for FCLT then h√ i2
L
√ L T XT (·) → σ 2 [W (·)]2
−
T XT /σ (·) −
→ W (·)

then √ L
T XT (·) −
→ σW (·)
J. Ortega Garcia Econometrics 2016 9 / 20
 Assymptotic properties of a RW

1 Definitions
Brownian motion
Functional Central Limit
Continuous Mapping Theorem

2 Assymptotic properties of a Random Walk

Case 1
Case 2
Case 3
Case 4

3 Phillips-Perron Test for Unit Roots

4 Augmented Dickey-Fuller Test for Unit Roots

J. Ortega Garcia Econometrics 2016 10 / 20

 Assymptotic properties of a RW

Assymptotic properties of a Random Walk

J. Ortega Garcia Econometrics 2016 11 / 20

 Assymptotic properties of a RW Case 1

Assymptotic properties of a Random Walk

No constant term but or time trend in the regression; true process is a Random Walk

J. Ortega Garcia Econometrics 2016 12 / 20

 Assymptotic properties of a RW Case 2

Assymptotic properties of a Random Walk

Constant term but no time trend included in the regression; true process is a Random Walk

J. Ortega Garcia Econometrics 2016 13 / 20

 Assymptotic properties of a RW Case 3

Assymptotic properties of a Random Walk

Constant term but no time trend included in the regression; true process is Random Walk with Drift

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 Assymptotic properties of a RW Case 4

Assymptotic properties of a Random Walk

Constant term and time trend included in the regression; true process is Random Walk whit or without
Drift

J. Ortega Garcia Econometrics 2016 15 / 20

 Phillips-Perron Test for Unit Roots

1 Definitions
Brownian motion
Functional Central Limit
Continuous Mapping Theorem

2 Assymptotic properties of a Random Walk

Case 1
Case 2
Case 3
Case 4

3 Phillips-Perron Test for Unit Roots

4 Augmented Dickey-Fuller Test for Unit Roots

J. Ortega Garcia Econometrics 2016 16 / 20

 Augmented Dickey-Fuller Test for Unit Roots

1 Definitions
Brownian motion
Functional Central Limit
Continuous Mapping Theorem

2 Assymptotic properties of a Random Walk

Case 1
Case 2
Case 3
Case 4

3 Phillips-Perron Test for Unit Roots

4 Augmented Dickey-Fuller Test for Unit Roots

J. Ortega Garcia Econometrics 2016 17 / 20

 Augmented Dickey-Fuller Test for Unit Roots

Augmented Dickey-Fuller Test for Unit Roots

J. Ortega Garcia Econometrics 2016 18 / 20

 Augmented Dickey-Fuller Test for Unit Roots

Augmented Dickey-Fuller Test for Unit Roots

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 Augmented Dickey-Fuller Test for Unit Roots

Augmented Dickey-Fuller Test for Unit Roots

J. Ortega Garcia Econometrics 2016 20 / 20