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Name : CAVIN POLSON KALLELY

class : S.Y.B.Sc ACTUARIAL SCIENCE
college : THAKUR COLLEGE OF
SCIENCE & COMMERCE
subject : ACTUARIAL STATISTICS -4
assignment topic : STATIONARITY ,
WEAK STATIONARITY & MARKOV
PROPERTY OF TIME SERIES
exam : ce2 ( sem-3)
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GUIDELINES
 Stationarity in time series analysis

 IMPORTANCE OF BEING STATIONARY TIME SERIES

 INTRODUCTION TO STOCHASTIC PROCESS

 STATIONARITY

 Strong stationarity

 Weak stationarity

 THE MARKOV PROPOERTY

 Stationarity
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in time series analysis

 Why is stationarity important?

 Before diving into formal definitions of stationarity, and the related concepts upon which it builds, it
is worth considering why the concept of stationarity has become important in time series analysis
and its various applications.

 In the most intuitive sense, stationarity means that the statistical properties of a process generating
a time series do not change over time.

 It does not mean that the series does not change over time, just that the way it changes does not
itself change over time.

 The algebraic equivalent is thus a linear function, perhaps, and not a constant one; the value of a
linear function changes as 𝒙 grows, but the way it changes remains constant — it has a constant
slope; one value that captures that rate of change.
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IMPORTANCE OF BEING STATIONARY
TIME SERIES
 This is important , First, because stationary processes are easier to analyze.

 Without a formal definition for processes generating time series data (yet; they are called
stochastic processes and we will get to them in a moment), it is already clear that stationary
processes are a sub-class of a wider family of possible models of reality.

 This sub-class is much easier to model and investigate.

 The above informal definition also hints that such processes should be possible to predict, as the
way they change is predictable.

 Although it sounds a bit streetlight effect-ish that simpler theories or models should become
more prominent, it is actually quite a common pattern in science, and for good reason.

 In many cases simple models can be surprisingly useful, either as building blocks in
constructing more elaborate ones, or as helpful approximations to complex phenomena.

 As it turns out, this also true for stationary processes.

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INTRODUCTION TO STOCHASTIC
PROCESS

 A real stochastic process is a family of real random variables

𝑿={xᵢ(ω); i∈T}, all defined on the same probability space (Ω, F, P).

 The set T is called the index set of the process.

 If T⊂ℤ, then the process is called a discrete stochastic process.

 If T is an interval of ℝ, then the process is called a continuous

stochastic process.
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STATIONARITY

 Having a basic definition of stochastic processes to build on, we can

now introduce the concept of stationarity.

 Intuitively, stationarity means that the statistical properties of the

process do not change over time.

 However, several different notions of stationarity have been suggested

in econometric literature over the years.

 An important distinction to make before diving into these definitions is

that stationarity — of any kind — is a property of a stochastic
process, and not of any finite or infinite realization of it (i.e. a time
series of values).
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Strong stationarity
 Strong stationarity requires the shift-invariance (in time) of the finite-dimensional distributions of a
stochastic process.

 This means that the distribution of a finite sub-sequence of random variables of the stochastic process
remains the same as we shift it along the time index axis.

 For example, all i.i.d. stochastic processes are stationary.

 Formally, the discrete stochastic process 𝑿={xᵢ ; i∈ℤ} is stationary if

FX[ xt(1+r),………xt(n+r)] = FX[xt1, ,…..xtn]

 for T⊂ℤ with n∈ℕ and any τ∈ℤ. [Cox & Miller, 1965] For continuous stochastic processes the
condition is similar, with T⊂ℝ, n∈ℕ and any τ∈ℝ instead.

 This is the most common definition of stationarity, and it is commonly referred to simply as stationarity. It
is sometimes also referred to as strict-sense stationarity or strong-sense stationarity.
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Weak stationarity
 Weak stationarity only requires the shift-invariance (in time) of the
first moment and the cross moment (the auto-covariance).

 This means the process has the same mean at all time points, and
that the covariance between the values at any two time points, t and
t−k, depend only on k, the difference between the two times, and
not on the location of the points along the time axis.

 Formally, the process {xᵢ ; i∈ℤ} is weakly stationary if:

1. The first moment of xᵢ is constant; i.e. ∀t, E[xᵢ]=𝜇
2. The second moment of xᵢ is finite for all t; i.e. ∀t, E[xᵢ²]<∞ (which
also implies of course E[(xᵢ-𝜇)²]<∞; i.e. that variance is finite for all t)
3. The cross moment — i.e. the auto-covariance — depends only
on the difference u-v; i.e. ∀u,v,a, cov(xᵤ, xᵥ)=cov(xᵤ₊ₐ, xᵥ₊ₐ)
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THE MARKOV PROPOERTY

 Markov property is a particular type of stochastic process.

 The past history of the variable &the way that the present has
emerged from the past are Irrelevant .

 Markov property is also known as memorylessness.

 In Markov processes ,changes in successive periods of time are

independent .

 This means that variances are additivie

 Standard Deviations are not additive .

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THE MARKOV PROPOERTY

 A discrete-time, discrete-state stochastic process possesses the
Markov property if

 P{Xn+1 = j|Xn= i, Xn−1 = in−1, . . . , X1 = i1, X0 = i0} = pij

for all i0, i1, …, in-1, in, i, j, n ≥ 0

 Time frame: presence n, future n+1, past {i0, i1, …, in1} .

 Meaning of the statement: Given presence, the past and the

future are conditionally independent • the past and the future are
certainly dependent .
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REFERENCES

 GOOGLE

 WIKIPEDIA