‘Time Series end Forecasting (STS04) Problem Set 2 1. State with explanation, which of the following time ates (XJ are weakly stationary: (0) es ae independent and identically distributed razdom variables, each with sn exponential dittutin. (©) Xe = ia + slg where e's are independent ead idetialiy tributed randoms viable, ack with a N(0,2) itsbution aad dependent of X, frsct. (9 X= cea whete ef are independent, ently datbuted (0,1) vas ble. (8) Xc=X for allt where X bas 9 N(0,1) dintsibation (0) Xe ¥ forall, where ¥ baw a Caney detbution. (0 Xe=¥ig where {1} wonky stationary 2s the sequence (7-1-7.9) = (Bsls$) (oth other 95 = 0 orf) > 1) positive semideinite? Justify your answer. 5. Brpain why none ofthe following sequences can be sutcconelation sequences of & ‘weakly stationary time ies: (0) p= Band py = Wo forall £0. (©) py = 12 for ath (6) (p-2.p-tsporeusea)= (08,05, 405,08), the otber p's = 0. 4 Show thatthe sample ACF, {4 :h'€ Z}, is pottive sede, 5. Let = at W+%, where (Xt = 0,21,...) lan ilepedent and identically Lltited soqnoe of random variables with mean 0 and variance of, and a and & se constant, Defi We= 024+ SS Ys Compute its mean, Show that although {Wma tatinary, thas a autoooark ove fonction 7, = cor Wayn) that does ot depend om & Brellydscus your Siding in elation to te sees enoothing 6 Lat € (0px) be glen, U ~ Uaiform|~ ‘that (Xi) ie weakly stationary In ation, show that Sie pms OT port Seri Xe canbe win await (Xa hand delve X; = corlat + U). ProvesoutonstePeen 3 (0) Yea he exponen dnciion bas ne ate (b) No, as Vat) = Varker Heft) Var(Xen1) + (2+ 1e)™ Voi (9 Yen as £0) = Oand = ari) = vale) + va um coe Xia) = oleae sas ele (a) Yes, a8 BUX) = E(X) = 0 and Cou Xi.) = Cove%, 2) = 1. (6) No, as ar(X) = 00. (0) Yes, eat to wei that the mean is constant and covariance only depends on Jag, ing the fact that hese two propertin hol or ‘You Cou ook atthe the proces, Neate ‘where the € ar, for example, id N(0,05), and compute its ACVE Aecoatively, you could consider the px p mats: and show shat thay are positive semidefiite for any » osticla csi actly ncgh tooo check at [33)-[5 4] 1 2,3). Bot for tie si ean, Ti an he oman hi ois iin atic +o ($j) fr i fi re ip emote Tigra nats 3: pn ny mat te geen be coin eo somone takmy oe on (oon nt eae (0 tent ot (Bese ot pose seis rail|a mn mamlla wt my oho hw th Tt mai <0, mm mm isnot postive semidenite, This volves fining eigenvalues of the Toepits matrix shove. In R, you can do the flowing x = toeplise(e(t,0.6.-0.80) eigen) “The output shows you the eigenvalues and the corresponding eigenvectors. One of the cgenvlon i negntve, and ence I snot a postive semideite matrix, which Imples that the given saqueae is mot positive semidefiite 4. rom the definition it ey toe that i {9 € 2) i pontine semi, then. {buh € Z) is positive semidente as wel for any e > 0. Note that the sample ACVF is postive seein (lor a proof, ste the remarks in the lecture nates), Fe, wealso have that te sample ACE is poltive seeinite (as ong ‘fy >0, which would be te cae ithe sre isnot constant), 5, Weave som = ise($%)eon Wi Wea Saath rn) crear a2)(29+1), Fag 1 In/(2n +. 0 I< 20 0 (i> 20, ic dows nt depend on. ‘Tis filter is a low-pas? (or smoothing) filter since it takes the data {2} and removes from it the rapidly Autuaing (or high frequency) component {Xi} 19 Jeove the soul varying elise trend +H 6. Note that x)= 2 [lato snd mene tand = [eal enact Ef Hews cotut oh take = Lent +0) = cos ‘Tn {Xs weakly stationary. Aside remake, 3 docs et 9 %0 200 + 90. Nov becuse Ket Ra = alot UI 4colot— 204 U) = Dean estut HU) = Rene ha sree that Hew (me) Kea 1, Opemended‘Time Series snd Forecasting (S804) Problem Set 3 1. Let (24) bo such that ~ WN (0,02), and et Bebe constants, Prove or prove thet the following proces ae meal stationary. Ifthe proc it idesd weakly stationary, find its mean and ACYP. (9) Aah oz bedi (0) Kaa by, (0) Xam Zecmlet) + in () X= Zoomlety et. 2. Let (Xi) be weakly stationary, and define the process (Yi) by % X= OX lsd the valu of § such that the proces (Ys weakly stationary. Hence show that the processes {9} and (8) dened by Wf aX 05Kien, Hf =¥0 yh ae both weak stationary 4 Prove tht for an MA() model, |<} Can the upper bound be attain 4. What is meat by saying that a time series model bInvertible? Do you think ‘merit ea decable fate of a apdel? Why (not)? 5, Determine which ofthe following process X, ae lnvertibe: Has heat her eaten (9) Me 2M ee Bee tte 6 Carle he flowing two MAC) rode (0) Kem ee beer ee ©) Km ateanter ‘Show hat thes models have the sane stocorslation factions. Find the rote of their characeritc equations. Are the roots alo the same for both model? 1. (4) More generally, or any MA(2) proces 1mm € C ate the Toots of she MA polyaomisl 6(:), show that they canbe replace by 1/m ad 1/m without caging the ACF, That x, MA procases with @(2) = (1 9j2)(1 — 1522) and Oe) = (1-ma)(1~n2) hae the same ACF. Brily comment on how you would generalise ‘ds vsuls to MAG) with g> 2 8. Simulate MA(g) sras in R with your choles of parameter values and check tele sample ACFE, 8. Lote, AN (Qo?) and et | <1 be a constant. Consider the proces Xi = Maha te, eee %s, {) Find the mean and the vain ofthe sre. Is (X;) stationary? () Find Cor(Xi,Xiga for KE N. Argue tht for ase &.Vas(Xi) 8 92/(1— 6) sod Core(Xi,Xiga) 4". Sons sense, {%4) is “asymptotically stationary” (0) Now suppoce X; = «x/ T=. Ie thie new proces stationary? Comment on ‘bow you could ute these findings to rmalate n obarations frm a stationary AR), Covet, Keay) = EMS BIE Cre gtyy “ 1-$ + gt th yg garahayBEY Copy (Ie BIC IK0) = ba ar a8 29, gr g2t Fan Pet tan D (P¥tma* Eten 4 Eton = 9? Glin 54 Sma) + PEt + Eon < the ox, 3 X14 PP Xtamg + Pena + SEtm_t Steg + i BF Eten F eee‘Time Sertes and Forecasting (87304) Solutions to Problem Set & () This etetialy an MA(2) press and hence must be weakly stationary: The + OBE) +082 The ACVF i Prat, no; reson Keak f boot, he ° otherwi, (0) The mean is BUX) = 0+ DEE) = "The autooraiance at time ¢ and Tog is (without assuming stationarity) on in Keg) = Bao) = oh ence al second onder moments ae independent of time, and ence the process ‘5 weakly statonay, with mean and 34 = Bo? forall (6) The mean ie (XG) = comet) BZ) +n) -EUZi-a) =, ‘The utocommance atte ¢ and lag A it cool, Xan) = cll) oot + hoor Zi 4a) + cowl let + ceow Zi Zens) sine coslet + eMeow 2-1 Zin) inet) inet + ehleor Ze Zina) a hao, cfetialet tele? k= Sofetjeostet—e)e?, hel; 6 otherwise. For weak saionasity, we ned symmetry ofthe autocovarianoas at = 1, ence we need conf singe nfl) eset ~ 6). o sng inl) one) + comet), fet) ome) + ale) i), equation (2) canbe saplied to (cos () ~ sit) ae) = coset) sine) = 0, "This canbe az for allintgers only fsinfe) = 0, Le. eo by for an integer. Forstationaity, we abo need both c(t) sin(et-+<)o? and ie) ease? tobe independent of ¢ But ¢= kr dose the jb, since sin(tet) (eet be ‘aC alias ineger Hence both tems ave O and hence independent oft og, we can cold tt for any integer b Ue crete time serie deine wy Xs = Zeca) + Zs salkat) = (12 ‘ewealiy ation tin ne ct white ne th ea Od mace (2) Toe mean bol 0 and he atc inn ¢ with ag i cen Ra Xin) = alee + ct = Set) ce hich canbe independant oft only when or ge Tn he ort Xen) = Bayt a) ere 2] a, hist hs Perera ence we coool at for any integer ths te seis model dein by X= Zocaaent) = (12) 1s weahly stationary2, Let = B(%) andy = cov(X, Xion) for alates. Then BY) = 4- Hum =O, ‘which is independent of time, and ca KY) = col Xe ~ OX ay Xia — Xp =A tah ‘which is independent of tie ogain. Hence {Y) le weakly stationary forall real valoet of Hence in particular, {Y{") is woakly stationary at @= 0.5. We can then replace X; by ¥{9 sine (¥{"} Se weakly stationary, to cope that {¥) sab weakly stationary at 3, Prom lecture notes for Xi = c+ er, we have st Oe hich implies Jp] < funloss 0 = 41 in which case lol = 4 Tavera noi as an AR representation (wing past observations). Usually, this is desisbe 6s AR models are aay to estimate and orca 5. (9) The ots of 6(2) = 14 fe + fe? ave nia = =lap, which both leone ‘he cloned unit cele: the proces fnverible (©) The soot of 82) = 1 fs le ote the cloned tit cic the process not ‘overt (6) The (repented) root of @(2) = 1— f+ ye i 22-5, whichis outside te dosed unit le: the proces i invert 1 Ror the frst model, we bave: or he eed sd allowing at Heal computation, we ave 3p = 38,73 = Sina = ~6, Recalling that py = 7/9. we obtain the sue sutocorslation fae ‘one for bot node oorever the rots of tho chaactrstis equation fo the sooand model ate }.—}, hich both eine the unit ele For the fest model the rote are 2,~5, which ie outset uit cele, The roots oe diferent; the mond process is wot invertible while the stone is. For an MA(2) proces, the ACF cuts of afte lag 250 we concentrate on p and Suppose that the MA polynomial it 02) = 14 24 2", en te 4 o Tee POTS By plugging inthe flowing two sets of equation (lso note that m snd are conjug, a we can verify thatthe ACFE are the same "This et can be generals to MA(Q), where if 7 € Cae the roots ofthe MA polyomial @(}, ome (oral ofthe roots 1 can be replace by I/m (1-54 < ) without changing the ACE. Spectral analysis turns out to be extremely wf in proving this grneraisation. Openended questic. (a) Wate Xa Rech oat Peat oe tate te So BX, 0 wad EX? m o%(~ o%)/(L— 6). Therefore, (%} i nt (ether seakly or strongly) station (0) ForkeN, om i Keg) = 28+ AME 8A) = phe), Te Slows that se) = oft omy (1 64) > 64/1 64, oy ct ual ea mit 4 saa "letiea) ~Yr=aemi} Now BX; Oand vaiXi) = MI +P tot rong 4 g8-9/ (1 G8) = 22/(1 = 68h Moree, fe SM emt Xian) HS 4a sa gitted gathetya— gh a of = which doee ot depend on ¢ There, the new series i (both weakly aad strong) satonay: ‘When stouating an AR), we can ether sar the initial chunk f data, or simulate the it obsrvation X; from it stationary distribution,‘Time Series and Forecasting (S704) %;, and Xz as independent Gauusian variables with the vavinnoe a abow. Problem Set 4 int: note tht to simulate siagle Gaussian random variable with variance se by 0 the folowing Rode cab ed: 1 Show that in eer for au AR) process with astoreenne polyromia (2) = Even by othe fw 1 6,264 to be cal te paamters (6) mites the nea em + sqrt) + mora Seren eee a ens 4 Find he Ylo-Waller equations or the AR(2) proce GET ee 6e7 cai lal ed Xow 8X1 #2/0%a tee «WHO, Se ew ott yee sur a a in mo BQ CQM vex Se eee asst eect set ae Sree Getta eas soc sess ieee y sales rhe ere ee Sas aa er ere merest (©) Show that (2%) oan be writen in the general Liner mode fon Week 5)? x= (AR)E@ aes the autocovrinos sequence takes the orm sh) 0-0) esata) tastes [Remark this earcse shoneases the fast approuch we dd not purse frther in he lactase ‘8, Wate as R farction fr simulating = seme path from the Hie series model de ‘crib in Question 2. The function should have the flowing features (0) T shold tale 9.91.0 a parameters, whete » i the dazed length of the sample path (6) I should simulate os on id Gaussian soguence with men 20 and vaance (6) Note that fom Question 2, the variance of Xi, ges byw, simpli to irom Tran orth sample path to “look stationary t would be ep ifthe variance of the eal rab, and Xp, were as above. The finetion shold simulate 1 2‘Time Series and Forecasting (ST304) Solutions to Problem Set 4 ‘The proces canbe written at H(B)sy =e, where B isthe backward shift operator. {2% is causal if al of he (complex) roots of @(2) = 0 ate outs the it cele in C Note that @ ie quadratic polynomial with real conticionts. co either we have to diferent rel roots,» repented rel root ora complex conigate pit. Suppone that © canbe factored a Ht 1 ~az)(1 ~b3) ith a < 2. Then by comparing coeticients of 2 and 2, we ne that ath dena, (6) Repeated root: «= thus (1.x) mt leon the parametric cure $0) = a, ~ fen () Distinct rel roots: saya cd, b= end for omic d wit jl < 1, a] < Lf ‘Then, ber, =e 4d ‘ich ae bounded by the curve fom the fet ease and the Ines + 42 =1 and dy—65 =1. (6) Complex conjugate pair: tam eid, bme—tdwith 4a? <1, Then, r=, drei +) ‘ch ze Bound by the curve andthe ne gy "The combination all thee cate ie the ineror of the given region in the (4.6) plane We conc thatthe stipulated condtons sre equllent to eaiaalty. (6) X: can be written a (1 ~8)(1~ gnB).Xs = ey the charctevstie polynomial tus having roots 1/ey and 1/py both of which are ouside the unit cece Hence the proces is stationary and causl (©) Wecan write X¢= (1—g4B)""(—gaB)e, aed oth expansions exist since loshlgl <1. Bat, @-987 1-987 = 1 ‘ome which we obtain, AsCn1 = An Hence, A= 1-0 = nllen—). Tos ornarie-ner'= (55) [Baral and hence, nee (1 928) geet gen + x )E (raat a (©) Tale h20. From, ves= (5) = (6-8) @ Since BX; © 0, we have 44 = BUX). Then fom (1) and (2) the only ‘onze contution to 7p occur when & = +h, ace «i white not, ‘Tis, (anny (Grae -2) Sak, § ee ~ weed ‘Use geometric progrestion for each sam wo 11 9b) ofall ae i) nee **/0~ san), (iy ot4/0-0. a) + (Bg-7)} tee wot = oar a [ghia ot) ~ gta) aon Tit} to snd ince 95 = 7-9 the rel flows, 2aim AR. < tancrionGgt, 2 =) getlen © roern(a) xe rp, 2) initial variance © (1 ¢ el + @2/ Ce gt ee ~ gr De =D) x1] © eqreCinitial variance) + morm(1) xa fer @ to 58) aE) © (gh + a2) oles) = et og + xLZ + epattenbl sreCinteial variance) # rnora(1) “4 The Vile-Waler equations ae {ove preisly, after dividing everyting by) her a M3001 = 2/9 ore oy = 1 Letting b= yds py =1/8-+2/99y, hus = 3/7. The sition of thle syste of dirnceentions can be writen a x= Aa) + BOs)" fhe 1/8 ar theroota of the chaectrstic uation p= A+B and 3/7 = py = 2/9A~ 1/98. 5/2. Finally, we can derive the rel ing the shore Ay © 2/9 and 2 =1/90= 2/9 = 0, Moree, Consequety, A= 16/21 ant B symmetry ofthe ACE. 5. Plat write X;usag the MA(ce) representation: Hentai 108K 4m POP tis eary fos tat py = 0 when [hl sod. When [fi even, we let Y= Xi Therefor, x com Xe Kiya) = cor¥ Yana) = (08), whese the lat equality follows fom te face that {¥{) 3 an AR) proce with oo 0s. ‘For PAGE, because (Xe) fan AR(2) procs, 0. Lat. 6 = ds = 08 for any [hl > 2, By deiition,‘Time Series end Forocarting (S204) Problem Set 5 1, Conde the falling process NeSO8Kr bem 1g HOA aay whore ced white ois with variance o?, Azgue that thi is an ARMA(G,g) proces, and specify te p and q. Ist causal anor invertible? What isthe ACF ofthis proas? 2. Suppose that a stock return flows the onlloesr dynam X, and that «x 17(0, 4), (4) Simulate the time sees oflngth S000 with ¢ = L amd show the plot of sarap ACE and PACE. (©) Show thatthe ACF of (X;} i ero exept ab lag 0. (6) Could you ako show tht the PACP of |, 20? [NEB This example shows that AGP and PACK are useful mainly for ness tine 3. (@) Let X follow a casa ARG) model Hee Nea he hee ia white aie with men ao and vasianc @, Suppose that we have obervations. Whats the vaiance of £, where = 252i? (©) tat X; follow an MA(1) moe Ma tuate svhere ce white nose with moan 2eto and vatiance o® Suppose that we tve itmervatons, What the valance of war)? When ‘anything umaroal about this result in comparison ith similar rms for a random sample of size n? 1 fe ate 4, Lat (Xi) follows aa MA(L) proces defi by Heat Ger, «WN 94) 1 7 ER each that of | ef | 93 1, and consider Yeates teas tanks 1s {89} weakly stationary? ind the maximum and minimum vine of Yi, aod ive corresponding values of the a thet achive the maxizun/misiruin waianee ‘What do you think he PACF of an MA(g)procers shoul look ik? (+ Nomexaminable — for the reading week [and for those who are keen to know more about PACE!) Suppose that Xs weak stationary with aro mean and real tbe dfiton ofthe PACE. That, for «postive integer, let ven Ken Xena bX eth sna nh a h-achen ht ey minimise the mean-aquated errors Euf and Ev}... The PACF at Ing h is deiced ae eo ERE, ete Bhe ACE of (2) Lat Ry be the A hme wh ee = tennant py = (nna be the wear of agg atacrelin Teadtion,t = (nF he ed vc, ant dence the tei ite of Ken (Reto Real be x where {04a 044) are pike to minimis the meansquarederor E(X; ‘Here we dette the minimum mesraquared erorby F the conelation between ue and nse euXiat takin, Sr (0) Prove that 0: = for i= 3, eputions (©) Prove that 1 Hints make use of the Vie-Waler “ PrP ei oy ty = nts aquare maties con ln be invert locke by wing the fling snveraon formal fa a] [a4 a'BD— CAB)! ABD —ca“*B) cb =(D-CA"'BICA (@-ca By 2where A,B, © and D are mats sub-Nocks of arbitary size (6) Show that given the ACF, ay, (Fj) cam be solved iteratively as follows 909 0,Fi= 3, whee no fe the variance ofthe sere. For he, where, fr h 2 2 Oe Oe aanNtseds RAI Zoedh= 1 "This procedure i also known asthe Durbin-Levineon algorithm.‘Time Series and Forecasting (57304) ‘Solutions to Problem Set 5 1. Reting the proms (1 058)x, = (0-248 + 0485%}e = (1-058)(1 098), Since += 2 isthe common oot in AR and MA polynomials, the procs cau be simplied vo im (1-098) = 4094-4 ‘Therefore thse actualy an MAA) proces ie. ARMA(pq) with p= Oand g 1s causal (as all MA(a) are causa). It is ls invesble, because the soot forthe MA polynomial i. stting 109s = 0) bo outed the unit cle inaly, the ACF for MA(Q) iy 09/181 an py = for J) >. 2. (a) > noieec-rnoea( S01) > x6-0,t¢(aoiee(1:6000])"2/(Ienesee(1:6000)"2) + notee[2:S001) > acted > pact (0) Fist, the mana ofthe series is ex, -088(1- 7) +E ts comant ‘Second, it is easy to show that EX? < oo. Now for A= 1, oh Kn 08 2 08-285 Hun) = ona («ct y) =080( 83) -088e( ose( 4) =0 ly the symmetry of oma sation. Sal for B= —1, ei Xi) 2. Pinal [b> 1 aXe ad Xi ae ndepdent, ov X, ign = Conse, ACF of {Xi} ne exept a ag () i the lect, we ily mentioned that PACE at is the value of th Ist etemart of the vector meme mal) fn) mr mea we) ny ‘See alo the lst (bons) question ofthis Probl Set. Since =, = 72 = + the whole vector is axe, Thas PACF at any lag (th KEN) in zen, '. For (a), we know fiom the lecture that var() = 258.4 (1-2). Since “m= o74/(1~ #),pesing thie fato the previous formula lads to the required emul. Now, at 0; follows that 1(Baroarerse), wit) eA HOD, AE yam aetna wm f cearcearaon Seed yo monorail carvies oe Yee v emote nag toe aan veigee | “Rncensensonehiwatign ese vonscnst [ax 4. For (Xi), the ACV ie deine by AC) Rate, WaT = 00% mmo, 22 0x4) ome et) neem= Yer . T} soy epee? eats “Pema, 4 fad nan Varina i gt te Siar fe Fiat eect Con Mey KD rom previous exurcise, we know that ¥ fe wes eatonaity (ic, cocking ite tran and ite ACVE), Then defining a = (e.2225)", van) = aT, = . c= ee wo) (SSE (Pa! detigeney ot 0 6 la 0 ee ten 8%y “To find the eigenvalues, set 0 = yA] = (07+ 07) 493 — 204440 +62) 3) (140) — ayo +) — 998 ~ 2, (7cne2)-ay = 2646 S70) + 9 =D De o2¢ mot 5:0) BRO =o + VE. ‘To finda vector a= (2,220) achieviag the seaximam vince, we sae +e + Valea, ay) = (14 + VB 149+ Van (1+ Pay + 603 (+ an +4 (1+ Pag + 002 Toa oi 88+ Vaio > This gives us Bay = VBay = sgn(en, where siga(®) ~ 1 @ > 0, aad be —1 if <0, A souton can be @ = (1/2,sen(0)/V2, 1/2)". Similarly, we have Bis me) = H+ V0, Solving sila uations, we aban /2as = Vay = ~sign( a, 0 tata ctr @ scheving the minimum variance cam be a = (1/2.~sin(9)/V.1/27. Finally if @=0, then var(¥%) does not depend on the choice of, 5. Typically dacaye exponential, but doe not et of var (14) 2 Yar (atta TEaXtat X43) ‘Similarly, we cam obisin (by, a)” = Re ehay «0 .) nal = (6) Suppose tat (0,....ah-2)" minimises Bx, than 1aBd 0 LAB Blut = Elk / BD em OhaaP fori, (Oe ha) = RPh AL. By solving tis stem of tinea equations, we have that Wirt = Levoh = 'b) Using he cect derived in) we can chnktat ul = Bey. There, Bhoa) _ BluesaY/EXt Yeast, PHEX tl ina —bnXicnas~ BW ake BlouXenV/EX? “BluKVEX? — Bhin~asesKs~ OTTER = aKa Xm an EXT Phas hnac _ pa PLR pas ee See PER eit PRP ‘where we usd the fc that E(aeins)= Ofor = I. h—1 nthe thd ie [Now reall tha square maties can sb be inverted blackwise by ning the Iaioning. version fr: [AB] [asa - cam ByCA! -ABD~ CA“'DY jc | (D-CA By ICA (0- cana? ~huasXe EXE = ayaa EX? sXichasXeal/EXP where A.B, C and D are matrix eub- lacks of arbitrary se Therefore, mT i). RR Pa = PER OnUsing th ase matrix inversion oul reves), we av tht (ons sonncl™ = (Reb + Ranh BE Raab) ARG fra {Rix a0 PE ARE Pan) fou Ron Ri Pa ~ PEP 1A ‘Ths ges mayan amnadeaieks B= Monk Pally, we sty the behaviour of Fh. Obviously Fh =p. In (), we proved har Pm mall PERG in) ‘Therefore, todemonsteateF, = P.(~afy) Heufcesto show tbat 1 = ay. Tie indond the cate, Besa Tear Homies) ~ BEARS Pay ona Alou ~ as = Pha ere we used the recursive relation of (as--sahni]® and ayy (which we proved previo) in the last two equations.‘Time Series snd Forecasting (ST904) Problem Set 6 1. Compote the stocorelation and partial autocorelatin function af the AR(2)pro- Ma0smerta ae WN ae!) 2. Lat (4) fallow a eatanl AR(2) model (sown with 20 meus} MaeMate where cir white noe with mean aero aad valance #. Suppose that we have bwerations, Xp (o) Show that the Yale-Wler and (conditions) let squares estimators of the oficlent ¢ are given by, respectively, sti Shake fee Et SE (0) For the (edited unrealistic) case of = 2 sow that FX, 46%, the “Yolo-Walker estimator of # mut be les than 1/24n magni, while the est ques estimstor can bo arbitrarily large in magsitude. What inpieatons do hee rents have for statosary? (c) What the emit foro derived by the matod of moment? (4) What ithe aymptotiedistibation of Gray (no ft poot ie equzed)? How would you construct a confidence interval for $? 2 Let (X%) fellow » cam AR(L) mod, and we Bt ms AR) model to the data Nip ooXae More precisely Baek ta a= WNC), sod we ae fitting x Mir teaXratdsXia te, «eo WN0.0) et $= (64. 40:42)7 ee Ie th Val ~ 6S. O,eT5 ‘Show fom thie rent that Viiés 4 (0. ‘Stow ln tat Vib $ N01 +48. Suppore we cbaere a tine erie {4 Feat omies a ‘Ure the values to Bnd the Vale Walla estimates of 6,82 and o# inthe AR(2) model Yeehatetiate @~WNl0o) where Yo= X— 4098 for €= 1-200. Now assuming that the data ae relly 8 ves tion of an AR(2) proces. ind 85% confidence intervals for and dy. Consider the AR(2) proces yok Pe a W007 (1) For what values of ¢ isthe process stationary and casa? (&) The folowing sample moments were computed ater observing Xj... Xap hee 6st Find etinatos of and o by solving Yule-Walker equations (Ifyou find more than ope foltion, which one would you choose] Gy Ot, £4) = Cov Oty +H HE, tee, EHD = Cov (Ey, Be) > oF Gr Otten Be) 0 Yh BUny “B?Yba = oo YorRy, BHT” VW FYe ~ PY =O y sy Wee 9M B= Ke Bret 9, (A = PRO Ww‘Time Series and Forecasting (ST308) Solutions to Problem Set 6 1 inst, note thatthe AR(z) ia causal To obtain the Yole-Wallar estimators we ‘muliply each side by X-4 and we take expectations, Then we at Bn o% na REO Fist notice that y= O and thea 74 ant lnnce the ACF x when his od. 1 lows that mae = 0.89 1 Aso a4 oss! 0 otters a 4. "The PACE for his causal AR(2) BLK bh) = 62 = 08 By definition, the AR(X) lat squares estimator of i the quantity that min- ‘mals the olin sm of mare: S10) = DM oka 1 ) @ @ , 3 Tn#-f) NCO, I-92) BR cg ga ef he ps alt pete 2S = Oke) Keer 0 4 4rae from which we obtain dup = Digs Dates eS Sak, SE? For n= 2 the Yule Waleretinalor for ¢ becomes bow = itty Then (exe e xP + Xbaamx 20 ‘moti . Wrwis$ For the othr estimator me have duo eke Be OF Because X; can take aay valve on the eal a, dg cas astume sy valuon ‘he real axis. The stationaity constraint fr an ARCA) is J) < 1. The Ye ‘Wolke estimator is restricted to only past of tis range, ad the ES estimator ca ako vl outsie of the stationary range Fa dyin Shap hte! From the ear, we ow that (yw ~#) converge to a Normal ditbaton ri mena eo and van Therefore, cols speaking, dw ~N(6.0.- CY 095% condense neve or #8 roneiy (Br —24/0— Shs dow + 2y/(t—dhw/a).. Avo note that the above approximation no longer elds ves: |= 1. For thom who re istered, plete havea ok at “ant not tet” ny ine ser textboak 29 Foran AR(I) model, Now nm 1b of ne| nw n few} a ta mn ow ae. ‘The (5) ety of TF Band | a IFA RIAD ich dive us ds 40.1), Moreover, he (22) entry oT! 1 iset ite page ‘which gives us ytd 44 (0,14 40). (ss) (2) +) ‘Then and we gst “Moreover we ow ftom the ete that for resonaby large n, we have the Cental init Theorem F~N(Q.e/n) ‘hick Uy replacing tho ectiated quantities gives the estimated asymptotic variance one, von ~0c0r? Gone ‘The diagonal ents ofthe previous matrix give the estimated yrances and there exe eR moe a A~ Mle 0.0000) B.~ (62,0080) ‘fom which we have the rapective 95% confidence interval Gi .96vo008 Ga 1 96VEDE ch ch s2205 a 015 5. (@) (40) is couse ll rote of (2) = 0 ae outade |o| = 1. Below we check for ‘hich values of ¢ this ean happen. banc el > 1iflo|< (VB=1)/2= 061 and [ny > 116] < (VS+1)/2-= 18. Putting things togeber, the proces causal 4] <0. (©) The fst three Yale-Walker equations are msen- Pao nao on noon Fao ‘we cam multiply the Ist by and ad the fst we get IA. -4%y, - gbre+0 we none ) TOG — green een na0 CP-DBY, He phe 0? ¢ bee — ~ 3-383 6353nevi, (7, an Poi * ag? ‘which gives using the estimated values $ = 0.509 oF § = —1.965 and we keep the isto zag to pat) sth oe vg eal poe Finals fim (*) wove Bb T= Yo =2 985 = 416307“Fione Sevion and Forerasting (S744) Problem Set 7 1 tet te process (X,} 2a be deine by me Doe where fe) sw #8 white noite sequence with mean seo and variance ot (a) is (X,) weakly stationary? Compute its ACVE, (b) Defice the sample mean X = BE. i. Does v(X) +0 a1 908? July your anawer 2. Suppose that the diy simplo-resurns forthe stock of Daydeeas Limited alow the ARMA model ARON He O2e36 =a (2) Compute coe( Xie) and n(X9). (0) Brest the ARMA model at an MA(2e) mode (6) Given y= 0.01, ee = 002 and Xi = 0.2, compute the one-step prediction 100, What's the associated meumaqured-pradictlonerr? How about the two-step prediction? 8 Prove that given Xi. th Bast step abead predictor that ininises the rearaquared prediction err ls E(XyeabKns-- Xi). T fuppowe we observe Xq Xana Xi KO At. thm the allowing AR(2) New O8N1 018K ae determin the form ofthe hep abe forcast Xk) snd deive its meas-squared- ‘redetometer (MSPE, 5. Case study: London house prices (8) Dowload the dat st that contains average monthly hows pices in the Low on Region fiom January 1905 to December 202 from the Land Regltry webs site netps/Landzegsetry.data.gov-k/app/s2hp/explore/. To do thi ‘it the Land Regitry webs and paxferming the flowing sequence af op cations: customise your earch + select location -+ London —+ Slat dates ~ From 01/1905 (when data recording stat for this index) vo 12/2022, and ovaload as CSV. In R, readin the dats ting the command read. sy and stow the series top frosens league © preces ~strcetty PPE Oy) Besain why often males sens to conser Ue seis of pices on alge yl - ew siti tale. ae the command logp < 0g() to obtain the lege eee @ tke sffrrences wote 09 Denoting the series contsined in p by P, and the series contained in 2ogp by meat ave returns Hig oF portatnpe. GT gente of pies wesitigentive tn ail teams arnpkantve te additive 1 plot both P and Ly and comment on thei most obvious viusl featur. ‘Do these time series appear stationary to you? (©) fe ioplaye stong upwand tend. As explained Sa Lactse 1, one way of ‘iminatag trade by dierencing.Prodace the follwing time serie ia Re The sris of iat dfeences of Zy Wale b + The serie of second diferenes of Le ees) st difleenoe of the Bt dil Wat Pot the time series Uy and Vi (a) Produce the plots of sample axtocorelaticn functions AND sample patil au- tocorelationfasctions for both U and V (Use the act and pact commande ‘Type Pact or tpacf for more information) Based on what we have learned bout the shapes ofthe af and pac fo a differen types of te wren mode ‘is, what ARMA(p,¢) modes would you italy consider for Us and 1? How shout making ue of AIC and BIC? Specify your chown values ofp and 9 (©) Accumtomaer wishes to know your prediction for Pfr the ft three mons 7023, Based onthe data and on the show mds, what i your het guest at to the house pee F? (9 Peroen sila: alysis using dataset of your chic,Fons Tine Series and Forecasting (STS04) s 2° Solutions to Problem Set 7 Kin (14018 +018 +.-.)0-028)e 1. (@) Te mean of Xi ato In the along, we oly show the rer for ACVP =e (01-02)¢.4 + 032-01 x02} with b> 0 aon oferty We ave = na Sate; Say Dye? an % me DOO ip ONE ay i (0) Xue = 0.1% p+ 9 = 0.29 = -0.002, Prt, 1h m0, tan by wanda sel, the above sexual #76. IF > 0 then Mie = 02% 2h, wget et) ahs « Lie = 029 = 00098, -MSPE(Xico(2)) = ste ‘So the proces is wendy stationary (©) Tomiectuse materia (ee Chapt 2) teat Ulich ta tg V8) BE hen tl Now Kren = 0.1(0.1Xr00 + erst ~ 0.2es00) + e160 — 0:26 ime BSH ) = ena = 001% ome =e ~ 0m ‘Therefore, for n> 3, - & val) < (142) x eR ys e+ ay ety X gu(2) = 0.01X p9~0.02ee9 = 0.00038, MSPE(Xien(2)) = var(cgs=0.1ecs) = 0.0201. rina [SED c}n tn Beyn-+0 2: Hew eh nto oe iio exciton de he nb ‘mation from tin 1 to tine n, Consider So indeed iy Va) = 0 MSPE(Xg(4)) = B [E(( (8) ~ Kya)" Xa} = B{Es(Xoll~ Xyoa)"} 2, () Tei easy to check tat the proces seas and invertible. Nowe so that minimising E(%(0)— Xa) equlvalent to minimlsng the MSPE. Since conn) mo (0181 = Oe) =o a(h) math ton of X hm ner (8) = Hl) ce var erie SSeutieeite ts) 0) X= Xs ~ 280) * BS (Xa) +e) +0 0b) = BOK (te ova(Xp +008 le ety mined at X(t) = Esa) by ale ation ar So va(X) = 1/00 4 Pia, forthe point predictor, Xs) = Xy and Xa(3) taking the conditional expectation, we have that recursively 8%, — 18%, By % (1~018)% = (1-028) alb) = OX A(E- 1) —O48%k—2), 2for any 22. ‘Lets assume that var) = 62. Now for MSPE, we drive the MA(o) representation fer hs AR(2) proces. Since c= (1-088 +0158)%; = (1-038) ~050)%, fom Question 2a Probe: Se weave Ut Xin (14020-4098 +. )408B 4088+ Je ef ohne ach gg oem esas teins MSPE(X,(t)) = 2507 50.90.91) = ate? Mom at (b) Pains often evolve n a “musiplionve” way acording to percentage changes ‘Tooth imagine te investment of oe pound i bank, where the iterert rate is 3% goaly. Aller oe year, we have 1.03 pounds, afte vo yeus 1.0%, ‘ad co on. A logarithmic transformation brings this goometi progresion onto Ucar sale, The advantage of working with linear srends is that they ase ener to elininate, by dierencing ae explained i the fst lecture, Plots produced by > mi 209) > plet.tetaegs) ‘Visual features: song pmard tend in both, except i drop sharply and Douncse adn tmo te pesto: in Yh mide ad towards the eud (nama ‘Snaial vss ant the pandemic). Bacsate ofthe trend, the eriee do not =. really epper stat fe) > w= asstcoep) > v= astttu) > plot tee) > plet.tate) Seo Figure 2 8) ) 4e+05 3e+05 5e+05 0.02 0.02 do togp 125 15 0 rere 100 200 300 Time Figue 1: House prices onthe natural (ef) and log (right) see T 0 Tt 100 200 300 0.06 0.02 0.02 Time igure 2 U; (et) sod ¥, (ah), T ° TIT 100 200 300 Timeta) > ace . Series u los series v 4 3 Le eiecttted § § 8 qrpyot! 3 t geo PLLC 3 a fs te Sh ue a Figue 3: ACF and PACF for U; ‘tp rom) and V (bottom som). > adbrary forecast) > aute.arinaClogp,tentaic) > auto arinn(aogp,se="bie%) ‘Thay al poling toa ARIMA(1.21) mods for og i, Le ARMA(L) for Ve (it 20 mean), Serie: Logp samc, 2,0) wt oat -0.1602 -0.7087 signa"? = 0.00014: og 1ikelsboed = 1009.43 sao--2012.95 AICo=-2012.79 B1C=2001.49 However note that the parameter estimates for dy is no sigicant (which i fie or the purpose of predietion...) (0) > noaerc-trtnaCioge.e(2,2.0) > forecast(aodel,3) We get Point Forecast Le 8M G0 Le 95 95 397 18.20797 15.4978: 13.22515 15.28478 13.25136 398 18,21089 1.28709 12.23900 13.17607 19.2449 399 18.25308 13.48082 15.20053 13.3668: 13.25595 So the prediction for Fy ung ARIMA(1.21 forthe Sst thee months of 2028 se exp(13.20797,exp(2 21040) and exp( 13-2198) vespectiey, The Lear head prediction (with 95% and 80% “condense” interval, and on the lg seal) can also be dived, as Is shown in the folowing (which also iclede bserations fom the pst thre years in the pl) > plor(torecart (node! 12) snetders6) Finally fyou want to do things more earfily, yon should als conse acd ing information om year and month in he plots, sod perhaps sesonal eects {in your model too. () Opex-ente.‘Time Series snd Forecasting (S304) Problem Set & 1. Revisit QS tro Probla Set T Le, London louse prions ~ Case study] and pecforat ‘model diagnosis. 2, The eficont mackatlypothess (EME) states thet itis impossible to "beat the sara” Decause stock mate econ causes exiting share pices to always eect sllslevant information. Ihe Ljung-Box ass employed ota he efcen market ypotbs, what ie the mal ypotbars to be testa? the sample autocorelation ofthe fist 4 lags ofthe monthly Jog-sturas of PTSEO index s W202 hr 0.15, fy =025, be 2 ‘sed on past 6 years of data, the ficient enarket hypothesis essonals? 5, Prove the follwing ft weed nthe augrnntd Dickey-Fllee (ADF) ts: for AR(P) with ee kere eet dykieg te vith 4 V0.0). We have 4 Think about s scenario where (X,) & son-stationary, but ADF test would always od to rjc the ml hypothesis vena noe, What dace tip? [for the following questions - best to attempt after Week 10% lecture |, Bora stationary (both weak and strogly) ARCH() procs (X:) with Xi = ov afm a +orXZ, and «2 Unform|-V5, V9]. Here we assume hat op > 0, (01 € (0,1) and BXP < 0. (o) Detwe BX, BX? (b) Verity that (o2( ~ 19) 5 indod a series of wit oie (©) Find out the ACVP of (%)} and {2} EXD, BXY (0) be {XG) it te! How about (Xf)? (0) Deve the ACES XP9- eva)? ? 1. Foran ARCH proces {X2} does cov £1) 0 el foray neti fad an postive integer A? 1. Supine that {X%4) fan ARCH(H) proses with Xo, «NOI, six oot Xs vere a9 > 0, Pro iat (Xp not wey salina: Ptr by swing Bey lfayniooteh xe a segue that he fe’ of ay shock to X? in thie ARCH(L) wil penst“indainiely” sn the ite ints sry the candtion forthe strily stationarity of ARCH(L) nd show that van) = 0,‘Time Series and Forecasting (STS04) Solutions to Problem Set & 1. The command tadiag woul proce the flloving Big. (a ere Figure 1: Resid! nage A. closes ook at the ACE showa that samplo ACFe ar significant at h = 32 and = 24, sgestng that noe erly semonaiy haw een satsactorlly tabs care cf (NB, a year hat 12 months). Alo ung-Box tends to rejeet when going fo lager lags hich Mealy du to the semonality behaviour of Vlog) aswel, ‘Could lo performan ADF test once residuals, which will eect the ml hypothesis ‘heresies as uit rots “The ml hypo tha he ir fgets ite aie Now 83 com 0 th, So Lg-Dx aii (ith mee neo gif ows ‘dh compl wih he of bon oi 848). Sow xs ret hl peta (hoe ht ening 2,8 ads to the tame coelsion) 4. Thi rot can be verid by dict computation, 44 The ADF test only foeuss of unlt roots, Thor ar athe type of now-stationary tine sree such a those with trend or setoral pattern whch the ADF test might ot be deal with propery. For Inlance, couder a series of Lid normal with a near trend, es. > x = 1:1000/3000+rnera(2000) > at seat) whic would almost oprtainiy esd Yo a pve mck smaller than O01. ‘Ths menns that caution would aoe to be eerie when using the ADF (or DF, oF ‘ny uit oot) tet a way of testing stata 5. This question is very similar to what i coore inthe lecture, whare we assumed tat 62! (0,2) isn (@) Veiog the lew of teat expectation, BCX) = Blow) = BAe Xin) = lola Xi) » Elva) =. tn adn, Bath = Boh) = E{(a+mX71}4) = (apt en B(XEa))R(2) = eo tenBXD, sich ie BX) = oe Kes, BUX) = Blo} = Blot 1X0) = EleRELAL Final, xt (a0 + nxt) = (8+ Roum XE + OFX De Since Ef = 14 (unlike the Gaussian eae, which i 8), hence, % (08+ 2m; + 0880%0) 2which Lof(t+0n) ce WHat Taty () let y= od -1). Pow {Blu Fi-a)) = Flee = Fs) =. 1 any to show that Bx? < oo (since EX} < oc) For any b> 0, Btoeena) = ElElemealFion-] = Bltch aBl Egy — Wena = ‘Therefore, (ui indo white nie (6 Fost forthe ACVP of {2}, for any h > Ot sent to se (hy cntoning on Fees) that BRK a4 0. Thats, of = > and f= O fr any A 0, ‘Second, for the ACVP of (17), wing the AR(1) representation of ARCH), 2G oy Ho,XL, +4, Therelore, EX! (ExI?), ‘whee the value for EX} and BX? were deve fom the povions sb question, (@) Brom the previous results (%;) is white nls, whe {XP} nok (which docs tot even have sero meen) (6) For any > 0, agaa, by canitionng on Fists and wing the symmetry of the Aiscbstion of (Le. Be = 0), we have that BX}, = 0 and EXP}, ‘Since EXf exists, we have that the ACP for (7) i at lg 0. nd Oat other igs 6, Assumptions ate needed for tix comviancn tae meaningil For exams, ene ould sequite (XP) < co and EL/*(Xi5)) < oo as a st of sunt coud tions. Under these assumptlons. the statement itu, wbich follows fom EX BUN, =O for any ¢ > ard tha oa fa) = BACK] ~ BIIEYC a] ef Xeall = [BLK f%a)Kea}] = 0. 7 From the lecture, we remarked that 9 ARCH(t) proces le etrcty stationary if 4 < exp{—Elloge)} = 3.5. Since ay = 1, this ARCH) ix indond stonety Suppone that var) < co, becae ofetretetatanity, mee tae pecan on both sides of the flloving equations: Therefore, BUX) = 06+ BUX2) ‘This leds oa contadleton sac ap > O. Therefore, ve(Xi) = 00, ¢0 this ARCH) 1s noe weakly stationary. Purthermor, Blob \Fitga) = Bloo* Xy-s1Fiaj-2) = Bloo + dys jas) wot te Ths Decne oj ob depends on Kise, We cj nde (Biya Migea), Finny we ta th ondtonl pecan ert ith epee FaennFct om Flely Fii) = foabat. ‘Therefore, the contsbution of X? to fy, doe not decay at j-'00, Ass, the ‘ect of any shock in this ARCH) wil port in the “nde fateRp) reprosectedinn Pse pi ht het oye Ye Bier A Bjn te TD Be Ye ay oe pot (i= ply Gus jet: + Spe Ley Geb) Ure Sb t ur = pie eu -- 2 > (pasye ~ GaSe - Og- 5) UF = I> [pte ~ Op, tha 4 = Fett Spa tt Bas spayert = (Fett) +9) ~ (We 4 Ba + * AIL the 1 (Prt Pet tHe)? - ~ EO) + Oe tp) Leh = Cyd LP I~ ge we - ~ foil = pbe“rime Sertes snd Forecasting (S304) Problem Set 0 ‘Note: Final Bxereise Sheet - for toples covered in both Week 10 and Week 11's lectures. |, Suppose that (follows an ARCH) (o} Give a sulin out for (X%4} to be both weakly and strongly stationary. (0) Pred out BX; ond EXP (6) Wie on Nh ARNE ARCH) (a) Bolan why ditty chatergtypelly implies postive comeaton between 2 MH GEG = gts BOM Oe men aS Heat * ‘egged squared-observations. ~D eytetne obs on Ab6 stud te Flores by onto (gy Desve the ACF for 1X?) Q._(6) Sitne on ARCH) proces to rama vey te aon fangs 2. Fora both weakly and strongly statcbary GARCH(L3) proces (X:}. where Haan 4M ¥0,1), a * Bo Mabs | 0 Xb sand where'a; + 8, <1, Sod out its mean, autocovaiance funtion, end fourth uomant, State the consition andr which the fourth omen exe. 3 Given tts XX, tom ARCH) Si ow you weld estimate (o.0,.3)" sng ne eid. 4. (IGARCH revisit) Suppose tat (7) isan {GARCH{L) proces with eon, «Mf KO.) ft + aX there ap/0i. 01 > 0 and ay +4 =, Show that (Xi) tty asionary bot not ‘realy stationary: Furthermore, by showing segue that the fet of any shock to XP or in IGARCH(,) will persist "inde italy inthe fate Sewse's. nepali Son's SL Cmeeve fincton 1 Egon) < goo) Gaver function FG) % g (E00) 5. (On maximum likelihood estimation) FO, ory (0) Given observations X).....2y Got ARCH(2). Assuing ID nora! evors {ca}, wht i the condition! aod of Ny Nase agen Xa nd 3? How would you us a ikiiod Saal approsh to estimate parameters in anon)? (0) Hlow would you 1 a iketnoo ned apron to estate parameter in emma 4 (On kurtosis of GARCH-type models) oR Ractonis 73 (8) (EGARCH) Assume that the following EGARCH(L1) proces s seams om fi “then 3, Le. the unconditional distribution of X; has tals heavier than normal Erg a tee ans Se 24h toe tallecal—Benid. a 0D, swrten ae Xrmasthis = Dobbs te vehece 2 N(0,2), eS! M(Ge%), {e) and (x) are independent, and 26) > 0 ie a know funtion. Ae & special form, we fake g(s) = en(e), sod amune that {1} oth weaklt and strongly stationary. Show thatthe rts of apnin greater than 3, the uoconditional disaibatin of 2X, aa tte Dever than normal Ze Fes ECLA «Bere Ketmat dig ok | X79) Kees move ero? Cea, ek #Compete moment : © Fee (2 Gatenate Mornent Re neve feo / : senaditiened on th fe Separate nate eR Fane - po ae eee a tals poten: ; | - ; titiaget pegeat 7 i nie a ON util sore mur (rte 2 Ong : - Wet ener - - Pn uation‘Time Series and Forecasting (ST304) Solutions to Problem Set 9 1, By defal (without stating otherwise, we serum that « 8 (0,1). (0) ar $09 21h ayes > 0. () Similac exerci as before. Using the law of iterated expectation, BLK) = Blove) = Beloved Fn) = Blo Ki-a Xia) = FloBla) =o. In ation, BX) = BUetd) = (aps enXty +n +32 2)2) = (oo + onBLX2) + BOE ELE) = a0 + (a: +on)E(XZ), shiek yields w= =S (0) XP m9 onX2 + 02XP 4m where = o2(2— 1) (@) Vototity string implies that extreme obscreation in absolut valve tend to be followed by asotherexzeme observation in cssute we. This typlelly ko implies postive correlation betwee lagged squaed-obeertions (6) The ACE fo (7) the same a that for AR(2) wth the coresponding dy = ‘oy aud gy =a. For that we Bers Shet 4, Quation 3. (0) For example, in Roe could use the gare a funtion rom the TBA pacing, Asbrary (TEND scogarch-sin(alpare(t,0,0.5), 2 = 100000, ntrens=s0000) acta) 4 as compared th yerarima, et et (ar=<(0,0.5)) at) Dit Kees, aM NO). atm droh.s +00 XE a where nyo, 6s > 0. Note tht the normality sumption isnot eri he. All ‘the results below can be cally generalitable at long asthe erordsebution is has ‘2aomeen and unit-variance (NB, the fourth moment of GARCH(1,1) dopends ox he kurtosis of). Flat, EX; = Baal Next, takig exportation on bth sides of P= ofe yaks BUX) = BiB(oP) +9 + anBLXE) = RELXE) +06 + vB(XP) = 0+ + NBL. Since (14) wes stationary. wv have that BX? < 00,20 BX? = ag/(— a1 ~ i). Moreover, wing the independence between ey and ot Xion or age using the conditional expectation, lke we did for ARCH), B(XiXi-) = EeoeX-n) = 0 ‘Therefore, a9 = o9/(1~ 0) ~ fy) and y= Of any #0. Final, EX} = UdBof = Bot = lo tat + fet = 30) + ofBXL + Bot, +2oreuBXE. + 2ooHiBot., +2 diBot 3) Sioce Be. = EX}, = oy/(1~ 01 ~ By), ven the existence ofthe BX, we have that of = Bef. (va strong stationasity in GARCE(,1)). Phgging these nto the previous equation leds to Bef = of + Soho + sff + 20f(a1 +61)/(1~ a ~ fi) + 20018 ‘Themir, et map tcea (Sata) where the fourth moment exist f= 2a = 62 2ay8: > 0.By the AR presentation of (1), AP xoobaXt,teaXba be ete 128.0 store w= of(@ =1) a white note procs, We can revit it as Yaxa+v, tere xf Axe x , a yo}, 1 xP xt wellalls Fol™ aay I oXb Xa, ~ Although the value of X-y and Xp is unobaereable, t has ite impact on our ‘estimates when mi oacnably large, As & conveation, we could sat X = Xp = Px.=0, ‘Tharfore, the Inst nates xinatr (LSE) of (25 23..05)7 bs = arpmingeil¥ ~ X09 = (XTX) XY, Flom the lecture we remarked that @ GARCH(L1) proces i ect stationary if (log(ore + 4)) <0. To verify this condition, we note that log) concave, 20 ‘we cam se Jensess inequality allows: B(og(oud + 1)}< log Blove + loglay +83) ‘Suppote that va(X) < oo, bons of tit stationarity, wo can take expectation on bot sides of the follwing equations Xeotd, A= (Bohs toot erXE IE. co. 0 GARCHU.!) For th second pat, act thet falling elements fom the previous argument, we Inve that Ele AF) = BOA AA) = Pleo 00+ BO FD He, aLF- +90 + Bie oR) eo (a+ BIB l%) =o FEF) 00 09 + BoB 7) += Jao 4 E(eH1F) = joe. 5. (a) Note chat XiFia ~.N(0,02) with conitionl probability dnsty funtion IGF) = Fer Xea) = eet" inte of = a6 +X? +aaXf., By iterating this conden argument, we obtain I RAG Na) =H ROAD Ma) FONG og fa. Xe Xt) = PPAR Kea ib 1S aloe + kbs + 00kE a Rata tants a Ago, as © convention, we st X- ‘stimator (MLE) can thes be obtained by maximising the above log Hkathood (bic is function of ap, ay and) mural. (b) Consider he case of GARCH(1.2), where = Xo = 0, The masiam Uatbood ebm oo + XP, tanks + Boh o Note that (1) sas the conect log Walton! for GARCH(12) when pivesng Jn), Saeetore, to obtain the MLE, we only aed to beable to expresso? interms of past observations. Rewriting (3) using the baat operator yields oa (AB) Mays oaXP +aX2) =F MB + OB oy +eX? y+ 08XE) = em/(t= A) anh + Cor Prd + lon + PradikEy + ‘Teuscatiag the above equation at = 0 ao setting X; =O fr all <0) gives usa way to estimate of asa faction of an.ax.2a,B wing (Xin. Xe}- The ‘maxim likelihood etimatar (MLE can then be oblained by maxtnisig the stove lgkethood (wtih ea feton ofa ,2 a8) moeialy 15, For both cases, note that EX; = 0 (usa independence between ey and hy), aa Ext = Bid Ble), ‘Theron, exe POD. Bd) mle), EXPE” HEP HIE ?* a5 is = 1 and tet) = E((0)} > (BLOM). 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