TIME SERIES QUESTIONS

Question One
Write short notes on the following (Use example/illustration where possible)
a) Univariate times series and multivariate time series
Answer

Univariate Times Series analyses the behavior of a single variable based on its own
history

e.g. 𝑌𝑡 = 𝐶 + 𝜑1 𝑌𝑡−1 + 𝜑2 𝑌𝑡−2 + 𝜀𝑡

On the other hand, Multivariate Time Series deals with the relationship among group of
variables over time

e.g. 𝐶𝑡 = 𝐶 + 𝜑1 𝑌𝑡 + 𝜑2 𝑊𝑡 + 𝜀𝑡

b) Second Order Stationary

Answer
A stochastic process, 𝑌𝑡 is said to be second order stationary if it satisfies the following
properties:
-mean is time invariant (constant);
-variance is time invariant (constant); and
-autocovariances do not depend on time but on time lag
Also known as weakly stationary, or covariance stationary
Mathematically, it can be represented as:
𝐸(𝑌𝑡 ) = 𝜇, ∀𝑡

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 𝑉𝑎𝑟(𝑌𝑡 ) = 𝐸(𝑌𝑡 − 𝜇)2 = 𝜎 2 , ∀𝑡
𝐸[(𝑌𝑡 − 𝜇)(𝑌𝑡+𝑘 − 𝜇)] = 𝛾𝑘 , for 𝑘 ≠ 0 i.e. does not depend on 𝑡 but on 𝑘
where: 𝑘 = the length of time separating the observations
𝑡 = the date of observation
c) Most macroeconomic time series are difference stationary
Answer
This means that macroeconomic time series variables can be made stationary through
differencing
d) For stationary time series, the autocorrelogram dies off gradually, whereas for
nonstationary time series it tapers off quickly (True/False, explain)
Answer
False
For stationary time series, the autocorrelogram tapers off quickly, whereas for
nonstationary time series it dies off gradually, OR
If the autocorrelations at various lags hover around zero (decrease of autocorrelogram is
fast) → Stationary Time Series
If the autocorrelation coefficient starts at a very high value at lag 1 and declines very
slowly (decrease of autocorrelogram is gradual) →Non-stationary Time Series.
e) Show that a random walk model with drift is a non-stationary process
Answer

A random walk model with drift is given by 𝑌𝑡 = 𝛿 + 𝑌𝑡−1 + 𝜇𝑡 where 𝜇𝑡 ~𝐼𝐼𝐷(0, 𝜎 2 )

and 𝛿 is a drift parameter
From above:
𝑌1 = 𝛿 + 𝑌0 + 𝜇1
𝑌2 = 𝛿 + 𝑌1 + 𝜇2 = 2𝛿 + 𝑌0 + 𝜇1 + 𝜇2
𝑌3 = 𝑌2 + 𝜇3 = 3𝛿 + 𝑌0 + 𝜇1 + 𝜇2 + 𝜇3
Generally,

𝑌𝑡 = 𝑌0 + 𝑡𝛿 + ∑ 𝜇𝑡

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 Thus:
𝐸(𝑌𝑡 ) = 𝑌0 + 𝑡𝛿
𝑉𝑎𝑟(𝑌𝑡 ) = 𝑡𝜎 2

Since both mean 𝐸(𝑌𝑡 )and 𝑉𝑎𝑟(𝑌𝑡 ) are time variant then random walk model with drift is
a non-stationary process.

Question Two

i. Fill the following table if the value of the random process𝑌 in 2010 is 3

𝑡 𝑌𝑡 𝑌𝑡−1 ∆𝑌𝑡
2011 5
2012 9
2013 12
2014 17
2015 19
2016 18
2017 15

Answer

𝑡 𝑌𝑡 𝑌𝑡−1 ∆𝑌𝑡
2011 5 3 2
2012 9 5 4
2013 12 9 3
2014 17 12 5
2015 19 17 2
2016 18 19 -1
2017 15 18 -3

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 ii. From the Tanzania M1 money supply for the period 1978 to 2014, the following
regression results were obtained:

̂𝑡 = 0.2618 + 0.0159𝑡 − 0.0044𝑀𝑡−1

∆𝑀
𝑡(= 𝜏) = (0.7919)(4.4227) (−3.0046)
𝑅 2 = 0.0670𝑑 = 0.7172
Note: The 1, 5, and 10 percent critical 𝜏 values are −3.9811, −3.4210, and −3.1329 respectively

Comment on the stationarity of the above regression

Answer

Since the computed absolute𝑡 (= 𝜏) value of 3.0046 is smaller than any of these critical values
in absolute terms, the conclusion is that the M1 time series is nonstationary; that is, it contains a
unit root or it is 𝐼(1)

Question Three

Catherine is a financial analyst who works at ABC Company. She wants to analyze her financial
statements. However, she finds herself in dilemma on what data she can use. As an
econometrician what would you advise Catherine in these scenarios? Give justifications to your
answer.

a. Comparing financial statements of ABC company with XYZ company in

2021.

Answer:

Cross sectional data

In econometrics, cross section data refers to data that is collected from a sample of individuals,
firms, or other economic units at a single point in time. This type of data is in contrast to time
series data, which is collected over multiple time periods. Cross section data is used to study the
relationships between different economic variables, such as income and education level, or
consumer spending and age. Econometric techniques such as regression analysis are commonly

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used to analyze cross section data and make inferences about the population from which the
sample was drawn. It is commonly used in fields such as labor economics, consumer economics,
and micro-econometrics.

b. Analyzing the trend and performance of XYZ company since its

inauguration.

Answer:

Time series data

Time series data refers to data that is collected and recorded at regular intervals over time. This
could include things like stock prices, weather data, or sensor readings. The intervals at which
the data is collected can be fixed (e.g. every minute, every hour, every day) or irregular. Time
series data is often analyzed to identify trends, patterns, and forecast future values.

Question Four

Explain the main components of time series data. Which of these would be most prevalent in
data relating to inflation?

Answer:

For data relating to inflation, the trend component would likely be the most prevalent, as it
would indicate the overall direction of inflation over time. This would be important for
understanding whether inflation is increasing or decreasing and at what rate.

Question Five

The least-squares trend line for an annual time series containing 40 observations (from 1961 to
2000) on real net sales (in billions of constant 1995 dollars) is: Y = 1.2 + 0.5Xi

a. Interpret the Y intercept, b0, in this linear trend model

b. Interpret the slope, b1, in this linear trend model

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Answer:

a. The Y intercept, b0, in this linear trend model represents the predicted value of Y when X = 0.
In this case, the Y intercept is 1.2, which means that the predicted value of real net sales (in
billions of constant 1995 dollars) when X = 0 is 1.2 billion dollars.

b. The slope, b1, in this linear trend model represents the change in Y for every unit change in X.
In this case, the slope is 0.5, which means that for every unit increase in X (which represents the
year in this case), the predicted value of real net sales (in billions of constant 1995 dollars) is
expected to increase by 0.5 billion dollars.

Question Six

a. What is time series?

Answer:

Time series data refers to data that is collected and recorded at regular intervals over time. This
could include things like stock prices, weather data, or sensor readings. The intervals at which
the data is collected can be fixed (e.g. every minute, every hour, every day) or irregular. Time
series data is often analyzed to identify trends, patterns, and forecast future values.

b. The trend line equation of a time series with middle year 2007 is given by
Y = 95 + 3. 9t.
Estimate a trend value for the year 2015. Also eliminate the trend
assuming the actual value to be 125. 2

Answer

To estimate a trend value for the year 2015, we can substitute t = 2015 - 2007 = 8 into the trend
equation. This gives us Y = 95 + 3.9(8) = 126.2.

To eliminate the trend assuming the actual value to be 125.2, we can subtract the trend value
(126.2) from the actual value (125.2) to get the residual or detrended value, which is -1.

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 c. Mention the components of a time series.

Answer:

The components of a time series include:

i. Trend:

The overall direction of the data over time, whether it is increasing, decreasing, or staying the
same.

ii. Seasonality:

Repeating patterns or cycles within the data that occur at regular intervals, such as daily,
weekly, or yearly.

iii. Cyclical:

Fluctuations in the data that occur at irregular intervals and may be related to economic or
other external factors.

iv. Irregularity:

Random or unpredictable fluctuations in the data that cannot be explained by trend, seasonality,
or cyclical factors.

Question Seven

From the U.K. private sector housing starts (X) for the period 1948 to 1984, Terence Mills
obtained the following regression results:
∆Xt = 31.03 − 0.188Xt−1
se = (12.50) (0.080)
(t =) τ (−2.35)
Note: The 5 percent critical τ value is −2.95 and the 10 percent critical τ value is −2.60.
a. On the basis of these results, is the housing starts time series stationary or non-
stationary? Alternatively, is there a unit root in this time series? How do you know?

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 Answer
Since |τ| is less than the critical |τ| value, it seems that the housing start time series is non-
stationary. Therefore, there is a unit Root in this time series.
b. If you were to use the usual t test, is the observed t value statistically significant? On
this basis, would you have concluded that this time series is stationary?
Answer
Ordinarily, an absolute t value of as much as 2.35 or greater would be significant at the 5%
level. But because this unit root situation, the true |τ| value here is 2.95. This show why one has
to be careful in using the t statistic indiscriminately.
c. Now consider the following regression results:
∆2Xt = 4.76 − 1.39∆Xt−1 + 0.313∆2Xt−1
se = (5.06) (0.236) (0.163)
(t = )τ (−5.89)
where ∆2 is the second difference operator, that is, the first difference of the first difference.
The estimated τ value is now statistically significant. What can you say now about the
stationarity of the time series in question?
Answer
Since the |τ| of ∆Xt is much greater than the corresponding critical value, we conclude that
there is no second unit root in the housing start time series.

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