Problem Set #8: Time Series

Economics 835: Econometrics

Fall 2014

1 An MA process
Suppose that xt follows an M A(2) process:

xt = m1 t−1 + m2 t−2 + t

where t is a white noise process with mean zero and variance σ2 .
a) Find E(xt ).
b) Find the autocovariance function σ(k) = cov(xt , xt+k ).
c) Is xt covariance stationary?
d) A necessary (but not sufficient) condition for xt to be ergodic is that limk→∞ σ(k) = 0. Is this condition
met?

2 An AR process
Suppose that xt follows an AR(1) process:

xt = axt−1 + t

where t is a white noise process with mean zero and variance σ2 , and |a| < 1. Also assume that
Pr(limi→∞ ai xt−i = 0) = 1.
a) Show that:
∞
X
xt = ai t−i
i=0

b) Find E(xt ).
c) Find var(xt ). You will find the following result useful:
∞
X 1
ai = if |a| < 1
i=0
1−a

d) Find the autocovariance function σ(k) = cov(xt , xt+k ).

e) Is xt covariance stationary?
f) A necessary (but not sufficient) condition for xt to be ergodic is that limk→∞ σ(k) = 0. Is this condition
met?

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ECON 835, Fall 2014 2

3 A nonstationary process
Suppose that:
xt = xt−1 + t
where t is white noise with mean zero and variance σ2 > 0.
a) Show that if they both exist, var(xt ) > var(xt−1 )
b) Is xt covariance stationary?
c) Is ∆xt covariance stationary?

4 A nonergodic process
Let z be a random variable with mean zero and nonzero variance, and let t be a white noise process that
is independent of z. Let
x t = z + t

a) Find E(xt ).
b) Find the autocovariance function σ(k) = cov(xt , xt+k ).
c) Is xt covariance stationary?
d) A necessary (but not sufficient) condition for xt to be ergodic is that limk→∞ σ(k) = 0. Is this condition
met?