Department of Economics James H.

Stock
Harvard University Fall 2016
ECONOMICS 2142
TIME SERIES ANALYSIS

Syllabus

This course examines the models and statistical techniques used to study time series data in
economics. The course has two specific objectives. The first is to equip students who anticipate
using time series data in their Ph.D. research with the tools they need for state-of-the-art empirical
research. The second objective is to lay out the econometric theory of time series analysis, with an
emphasis on recent developments. Problem sets will have both theoretical and empirical
components. The substantive applications in the course will draw primarily from macroeconomics.
All the topics covered in the course are relevant to empirical applications.

There will be 3-4 problem sets containing both theoretical and computational work, plus a final
research paper. The final grade will consist solely of your grades on the problem sets and paper
(50% weight on problem sets, 50% weight on paper). You are encouraged to work together on the
problem sets, but you should write up problem set solutions on your own. The paper should make a
new contribution to the literature on a topic of your choosing related to those covered in the course.
Unless given explicit permission otherwise, the final research paper shall be sole authored. The
paper can be either theoretical or empirical. Some topics will be suggested over the course of the
semester, and the paper topic should be chosen in consultation with the instructor.

Grader (problem sets): Kevin Wang (zwang@hbs.edu)

Textbooks
The primary texts are old but are classic references on the basics: Hamilton (1994) (for models and
methods) and Hayashi (2000) (for GMM and basic limit theorems). Later sections of the course
draws heavily on articles – supplemental readings will be provided subsequently. In any event, the
lectures will be self-contained.

Hamilton, J.D., Time Series Analysis. Princeton: Princeton University Press, 1994. (or
latest edition)

Hayashi, Fumio, Econometrics. Princeton: Princeton University Press, 2000.

Supplemental Texts (more specialized)

Brillinger, D.R, Time Series Data Analysis and Theory, second edition. New York: Holt,
Rinehart and Winston, 1981. (A classic text for spectral estimation and filtering,
with an engineering/statistics orientation.)

Brockwell, P.J. and R.A. Davis, Time Series: Theory and Methods. New York: Springer-
Verlag, 1987. (The most complete single treatment of classical stationary time
series: probability theory, models, and inference.)
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Canova, Fabio, Methods for Applied Macroeconomic Research, Princeton University Press,
2007. (Accessible, still-relevant intro to estimation of linearized DSGEs; other
topics dated.)

DeJong, David N. and Chetan Dave (2007), Structural Macroeconometrics, Princeton

University Press. (A good treatment of estimation of linearized DSGEs)

Durbin, James and Siem Jan Koopman (2012), Time Series Analysis by State Space
Methods, Second Edition. Oxford: Oxford University Press. (Excellent treatment of
latent variable models and filtering, both Gaussian and non-Gaussian.)

Hall, A.R., (2004). Generalized Method of Moments, Oxford: Oxford University Press.
(Everything you every wanted to know and more about GMM under classical
asymptotics.)

Hall, P. and C.C. Heyde (1980). Martingale Limit Theory and its Applications. New York:
Academic Press. (The classic treatment of martingales and convergence on function
spaces.)

Lippi, M. (2006), Discrete-Time Stationary Stochastic Processes: Lecture Notes, at

www.lippi.ws. (Complete and accessible treatment of the probability structure
underlying the classical theory of stationary stochastic processes.)

Lutkepohl, H. (2005) A New Introduction to Multiple Time Series Analysis, New York:
Springer Verlag. (Comprehensive treatment of mechanics, estimation, and inference
in VARs, both frequentist and Bayesian, but missing modern SVAR identification.)

Martin, V., S. Hurn and D. Harris (2012). Econometric Modelling with Time Series:
Specification, Estimation and Testing. Cambridge University Press. (recent, with
focus on likelihood-based methods)

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Preliminary course schedule

Class Day Date Topic PS schedule

1 Wed 31-Aug Stationary stochstic processes, Wold decomposition
Mon 5-Sep Labor Day
2 Wed 7-Sep Wold decomp ctd, fundamentalness, ARMA models
3 Mon 12-Sep Intro to frequency domain; long-run variance
4 Wed 14-Sep Spectral representation thm; multivariate spectral density PS 1 out
5 Mon 19-Sep CLTs for dependent data
6 Wed 21-Sep HAC & HAR
7 Mon 26-Sep Latent variable models and the Kalman Filter (Shephard) PS 1 due
8 Wed 28-Sep NonGaussian filtering 1 (Shephard) PS 2 out
9 Mon 3-Oct NonGaussian filtering 2 (Shephard)
10 Wed 5-Oct NonGaussian filtering 3 (Shephard)
Mon 10-Oct Columbus Day
11 Wed 12-Oct Intro to estimation of DSGEs PS2 due
12 Mon 17-Oct Model selection 1: Information criteria
13 Wed 19-Oct Model selection 2: Bayesian Model Averaging PS 3 out
14 Mon 24-Oct Empirical processes and FCLT
15 Wed 26-Oct FCLT applications: Unit roots; HAR fixed-b asymptotics
16 Mon 31-Oct Testing for instability 1: Breaks
17 Wed 2-Nov Testing for instability 2: Parameter drift
18 Mon 7-Nov GMM 1: classical GMM PS 3 due
19 Wed 9-Nov GMM 2: Weak ID 1 - IV PS 4 out
20 Mon 14-Nov GMM 3: Weak ID 2 - GMM and recent research
21 Wed 16-Nov SVARs 1: Identification problem and overview
22 Mon 21-Nov SVARs 2: Sign restrictions and recent research
Wed 23-Nov Thanksgiving
23 Mon 28-Nov Large models 1: DFMs PS 4 due
24 Wed 30-Nov Large models 2: large VARs, shrinkage, & recent research

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List of References

Primary readings are denoted by “*”, the others are references that are either recent research or
seminal papers in the literature. Only some of this material will be covered in class.

1. Fundamentals of second order stationary time series

Brockwell and Davis, Chs. 1, 3, Sect. 5.7
*Hamilton, Chs. 1-5, 7, 13.
Harvey, Chs. 1, 2.1-2.5, and 6

2. The spectrum and linear filtering theory in the frequency domain

Brockwell and Davis, Ch.4, 6, 10
*Hamilton, Ch. 6
Brillinger, Chs. 3-5

3. Inference in linear time series models

*Berk, K.N. (1974), “Consistent Autoregressive Spectral Density Estimates,” Annals of
Statistics 2, 489-502.
*Hamilton, Ch. 7
*Hayashi, Chapter 2

4. Heteroskedasticity and autocorrelation consistent/robust (HAC/HAR) variance estimation

Andrews, D.W. K. (1991), “Heteroskedasticity and Autocorrelation Consistent Covariance
Matrix Estimation,” Econometrica, 59, 817–858
Ibragimov, R. and Müller, U.K. (2010), “t-statistic based correlation and heterogeneity
robust inference,” Journal of Business and Economic Statistics 28, 453-468.
Kiefer, N., T.J. Vogelsang, and H. Bunzel (2000), “Simple Robust Testing of Regression
Hypotheses,” Econometrica, 69, 695-714.
*Lazarus, E., D. Lewis, and J.H. Stock (2016), “HAR Inference: Kernel Choice, Size
Distortions, and Power Loss,” manuscript.
Müller, Ulrich (2007), “A Theory of Robust Long-Run Variance Estimation,” Journal of
Econometrics, 141, 1331-1352.
Müller, Ulrich (2014), “HAC Corrections for Strongly Autocorrelated Time Series,”
Journal of Business & Economic Statistics 32, 311-340 (including discussion).
*Newey, W.K. and K.D. West (1987), “A Simple Positive Semi-Definite,
Heteroskedasticity and Autocorrelation Consistent Covariance Matrix,”
Econometrica 55, 703-708.
Priestley, M.B. (1981), Spectral Analysis and Time Series. London: Academic Press, chs. 6
and 7.
Sun, Y. (2013), “Heteroscedasticity and Autocorrelation Robust F-Test Using Orthonormal
Series Variance Estimator,” The Econometrics Journal, 16, 1–26.
Sun Y., P.C.B. Phillips, and S. Jin (2008), “Optimal Bandwidth Selection in
Heteroskedasticity-Autocorrelation Robust Testing,” Econometrica, 76(1): 175-194.

5. The Kalman and NonGaussian filter and applications

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General: Durbin and Koopman (2012). Additional references TBD

6. Model selection and model averaging

References TBD

7. Functional central limit theory and applications

7a. Empirical processes and functional central limit theory

Andrews, D.W.K. (1994), “Empirical Process Methods in Economics,” Handbook of
Econometrics, v. IV, 2247-2294.
Hall and Heyde, ch. 4.
Stock, J.H. (1994), “Unit Roots and Trend Breaks,” Handbook of Econometrics, v. IV,
section 2.

7b. Structural breaks and time-varying parameters

Andrews, D.W.K. and W. Ploberger (1994), “Optimal Tests When a Nuisance Parameter is
Present Only Under the Alternative,” Econometrica, 62, 1383-1414.
Bai, J. (1997), “Estimation of a Change Point in Multiple Regressions,” Review of
Economics and Statistics, 551-563.
Elliott, G. and U.K. Müller (2006), “Efficient Tests for General Persistent Time Variation in
Regression Coefficients,” Review of Economic Studies, 73, 907-940.
Müller, Ulrich and Petalas (2010), “Efficient Estimation of the Parameter Path in Unstable
Time Series Models,” Review of Economic Studies 77: 1508-1539.

8. Generalized Method of Moments and weak instruments/weak identification

Andrews, D.W.K., M. Moreira, and J.H. Stock (2006). “Optimal Two-Sided Invariant
Similar Tests for Instrumental Variables Regression”, Econometrica 74, 715-752.
Andrews, I. and A. Mikusheva (2014), “Conditional Inference with a Functional Nuisance
Parameter,” manuscript.
*Hayashi, Ch. 3 and 4 or Hamilton, Ch. 14.
Hall, A.R., ch. 4-5
*Hansen, L.P. and Singleton, K. (1982), “Generalized Instrumental Variable Estimation of
Nonlinear Rational Expectation Models,” Econometrica 1269-1286 and errata,
January 1984, 267-68.
*Hansen, L.P., J. Heaton, and A. Yaron (1996), “Finite Sample Properties of Some
Alternative GMM Estimators,” Journal of Business and Economic Statistics 14,
262-280.
Mavroeidis, S., M. Plagborg-Møller, and J.H. Stock (2014) “Empirical Evidence on
Inflation Expectations in the New Keynesian Phillips Curve,” Journal of Economic
Literature 52:1, 124-188.
Staiger, D. and J.H. Stock (1997), “Instrumental Variables Regression with Weak
Instruments,” Econometrica 65, no. 3, 557-586
*Stock, J.H. and J. Wright (2000), “GMM with Weak Identification,” Econometrica 68,
1055 – 1096.

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9. Vector Autoregressions and Structural VARs

*Baumeister, C. and J.D. Hamilton (2015), “Sign Restrictions, Structural Vector
Autoregressions, and Useful Prior Information,” manuscript, USCD.
Blanchard, O.J., and Quah, D. (1989), “Dynamic Effects of Aggregate Demand and Supply
Disturbances,” American Economic Review 79, 655-673.
King, Robert G., C.I. Plosser, J.H. Stock, and M.W. Watson (1991), “Stochastic Trends and
Economic Fluctuations,” American Economic Review 81, no. 4, 819-840.
Moon, H.R. and F. Schorfheide (2012), “Bayesian and Frequentist Inference in Partially
Identified Models,” Econometrica 80(2), 755-782.
Ramey, V. (2015), “Structural Shocks,” manuscript, prepared for Handbook of
Macroeconomics, volume 2.
Rigobon, R. (2003). “Identification through Heteroskedasticity,” The Review of Economics
and Statistics 85, 777-792.
Rigobon, R. and B. Sack (2004). “The impact of Monetary Policy on Asset Prices,” Journal
of Monetary Economics 51, 1553-1575.
Rudebusch, G.D. (1998), “Do Measures of Monetary Policy in a VAR Make Sense?”
International Economic Review, 39, 907 – 931.
*Sims, C.A. (1980), “Macroeconomics and Reality,” Econometrica 48, pp 1-48.
Sims, C.A. and T. Zha (1999), “Error Bands for Impulse Responses,” Econometrica 1113-
1155.
*Stock, J.H. and M.W. Watson (2016), “Factor Models and Structural Vector
Autoregressions in Macroeconomics,” prepared for Handbook of Macroeconomics,
volume 2 (Section 4)
Uhlig, H. (2005). “What are the effects of monetary policy on output? Results from an
agnostic identification procedure.” Journal of Monetary Economics 52, 381–419.
*Uhlig, H. (2015), “Shocks, Sign Restrictions, and Identification,” Econometric Society
World Congress slides

10. Large models

10a. Dynamic factor models and FAVAR

Bai, J., and S. Ng (2002), “Determining the number of factors in approximate factor
models”, Econometrica 70:191-221.
Bai, J., and S. Ng, (2006), “Confidence Intervals for Diffusion Index Forecasts and
Inference for Factor-Augmented Regressions,” Econometrica, 74, 1133-1150.
Bernanke, B.S., J. Boivin and P. Eliasz (2005), “Measuring the effects of monetary policy: a
factor-augmented vector autoregressive (FAVAR) approach”, Quarterly Journal of
Economics 120: 387–422.
Boivin, J. and M.P. Giannoni (2006). “DSGE Models in a Data-Rich Environment,” NBER
WP12772.
Sargent, T.J., and C.A. Sims (1977), “Business cycle modeling without pretending to have
too much a-priori economic theory”, in: C. Sims et al., eds., New Methods in
Business Cycle Research (Federal Reserve Bank of Minneapolis, Minneapolis).
Stock, J.H., and M.W. Watson (2002a). “Forecasting Using Principal Components from a
Large Number of Predictors,” Journal of the American Statistical Association
97:1167–1179.

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*Stock, J.H. and Mark W. Watson (2011), “Dynamic Factor Models,” Ch. 2 in M.J.
Clements and D.F. Hendry (eds.), Oxford Handbook on Economic Forecasting.
Oxford: Oxford University Press
*Stock, J.H. and M.W. Watson (2016), “Factor Models and Structural Vector
Autoregressions in Macroeconomics,” prepared for Handbook of Macroeconomics,
volume 2

10b. Large VARs

References TBD

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