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Matthieu Stigler Matthieu.Stigler@gmail.com () Stationarity November 14, 2008 1 / 56
Outline
1 2 3
Preliminary Lectures Denitions Time series Description of a time series Stationarity Stationary processes Nonstationary processes The random-walk The random-walk with drift Trend stationarity Economic meaning and examples
Stationarity November 14, 2008 2 / 56
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So-called Nobel Prize has been attributed to Krugman: Economies of scale combined with reduced transport costs also help to explain why an increasingly larger share of the world population lives in cities and why similar economic activities are concentrated in the same locations. [This], in turn, stimulates further migration to cities.
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The increasing returns are: Self production: Learning curve Common production: adoption/network externalities
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Average cost
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Outline
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Preliminary Lectures Denitions Time series Description of a time series Stationarity Stationary processes Nonstationary processes The random-walk The random-walk with drift Trend stationarity Economic meaning and examples
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1 2 3 4 5 6 7 8 9 10 11 12
Stationarity ARMA models for stationary variables Some extensions of the ARMA model Non-stationarity Seasonality Non-linearities Multivariate models Structural VAR models Cointegration the Engle and Granger approach Cointegration 2: The Johansen Methodology Multivariate Nonlinearities in VAR models Multivariate Nonlinearities in VECM models
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Outline
1 2 3
Preliminary Lectures Denitions Time series Description of a time series Stationarity Stationary processes Nonstationary processes The random-walk The random-walk with drift Trend stationarity Economic meaning and examples
Stationarity November 14, 2008 8 / 56
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Outline
1 2 3
Preliminary Lectures Denitions Time series Description of a time series Stationarity Stationary processes Nonstationary processes The random-walk The random-walk with drift Trend stationarity Economic meaning and examples
Stationarity November 14, 2008 9 / 56
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Denition
A time series is a variable X indexed by the time t: Xt t = 1, 2, . . . , T .
Examples
The time t can be annual, monthly, daily... Let be Xt the annual GDP. Let Yt be the monthly temperature Zt be the daily stocks
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Some distinctions
The time series can: Take discrete or continuous values. Be measured at discrete (monthly, daily) or continous time (signal processing, nance). Be measured at regular or irregular intervals. In this lecture, usually we will refer to time series that take continous values and are measured at discrete and regular intervalls.
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Outline
1 2 3
Preliminary Lectures Denitions Time series Description of a time series Stationarity Stationary processes Nonstationary processes The random-walk The random-walk with drift Trend stationarity Economic meaning and examples
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To describe a time serie, we will concentrate on: Its Data Generating Process (DGP) The joint distribution of its elements Its moments :
Its expected value, E[Xt ] t . Its variance, Var[Xt ] 2 0 . Its autocovariance or autocorrelation of order k, Cov[Xt , Xtk ] k .
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Variance
The second moments play an important role in time series and have a slight dierent denition:
Denition
The variance of Xt , denoted by 0 (t), is given by: Var(Xt ) E (Xt E(Xt ))2
Denition
The autocovariance of Xt of order k, denoted by k (t), is given by: Cov(Xt , Xtk ) E [(Xt E(Xt ))(Xtk E(Xtk ))]
Denition
The autocorrelation of Xt of order k, denoted by k (t), is given by: Cov(Xt ,Xtk ) Corr(Xt , Xtk )
Var(Xt ) Var(Xtk )
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Outline
1 2 3
Preliminary Lectures Denitions Time series Description of a time series Stationarity Stationary processes Nonstationary processes The random-walk The random-walk with drift Trend stationarity Economic meaning and examples
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Denition
A process is said to be covariance-stationary, or weakly stationary, if its rst and second moments are time invariant. E(Yt ) = E[Yt1 ] = Var(Yt ) = 0 < Cov(Yt , Ytk ) = k t t t, k
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Weak stationarity
The third condition states that the autocovariances only depend on the decay in the time but not in the time itself. Hence, the structure of the serie does not change with the time. If a process is stationary, k = k
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A stationary process has the propriety to be mean reverting : it will uctuate around its mean. This mean will act as an attractor. It will cross the mean line an innite number of ways.
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Strong stationarity
Denition
f (Z1 , Z2 , ..., Zt ) = f (Z1+k , Z2+k , ..., Zt+k ) . Implies weak stationarity Denition not very useful as informations about the density function are dicult to obtain
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ergodicity
Denition
limn E [|Y (yi , . . . , yi+k )Z (yi+n , . . . , yi+n+l )|] = E [Y (yi , . . . , yi+k )] E [Z (yi+n , . . . , yi+n+l )]
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Outline
1 2 3
Preliminary Lectures Denitions Time series Description of a time series Stationarity Stationary processes Nonstationary processes The random-walk The random-walk with drift Trend stationarity Economic meaning and examples
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Example 1
Denition
An independent white noise process is a sequence of independant elements with same expected value and variance. We will denote it t iid(0, 2 )
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Example 2
Consider the rst order auto-regressive process AR(1) with a constant: Yt = c + Yt1 + t t iid(0, 2 )
Theorem
An AR(1) process is asymptotically stationary if || < 1 We will need fot its proof to remember the properties of a geometric progression:
= 1 + + 2 + 3 + . . . =
1 1
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Proof.
The AR(1) can be written as:
t1 t1
Yt = c
i=0
+ Y0 +
i=0
i ti
c + 1
t1
i ti
i=0
Var(Xt ) =
Cov(Xt , Xtj ) =
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Outline
1 2 3
Preliminary Lectures Denitions Time series Description of a time series Stationarity Stationary processes Nonstationary processes The random-walk The random-walk with drift Trend stationarity Economic meaning and examples
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Corollary
An AR(1) process is nonstationary if || 1. Furthemore, if: || = 1 it is dierence stationary || > 1 it is explosive.
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Outline
1 2 3
Preliminary Lectures Denitions Time series Description of a time series Stationarity Stationary processes Nonstationary processes The random-walk The random-walk with drift Trend stationarity Economic meaning and examples
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Proof.
The AR(1) process without constant Yt = Yt1 + t with || = 1 can be rewritten as:
t1
t iid(0, 2 )
Yt = Y0 +
i=0
ti
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The AR(1) process with || = 1 is called a random walk. It is said to be dierence stationary.
Denition
The dierence operator takes the dierence between a value of a time serie and its lagged value. Xt Xt Xt1
Denition
A process is said to be dierence stationary if it becomes stationary after being dierenced once. Note: a dierence stationary process is also called integrated of order 1 and denoted by Xt I (1)
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Theorem
A random walk is dierence stationary.
Proof.
Yt = Yt Yt1 = Yt1 + t Yt1 = t
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E(Yt ) = 0( if Y0 = 0) Var(Yt ) =
2 12 j 2 12
Cov(Yt , Ytj ) =
Corr(Yt , Ytj ) = j
Yt ti
=1
Is mean reverting
Matthieu Stigler Matthieu.Stigler@gmail.com ()
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60 Stationarity
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RW
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E(Yt ) = 0( if Y0 = 0) Var(Yt ) =
2 12 j 2 12
Cov(Yt , Ytj ) =
Corr(Yt , Ytj ) = j
Yt ti
=1
Is mean reverting
Matthieu Stigler Matthieu.Stigler@gmail.com ()
Yt = 0 + 0t + 0.3Yt 1
20
Yt = 0 + 0t + 0.95Yt 1
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5 0
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10 0
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40 t
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Yt = 0 + 0t + 0.5Yt 1
50
Yt = 0 + 0t + 1Yt 1
15
Y 0 20 40 t 60 80 100
0 10 0
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Stationarity
Outline
1 2 3
Preliminary Lectures Denitions Time series Description of a time series Stationarity Stationary processes Nonstationary processes The random-walk The random-walk with drift Trend stationarity Economic meaning and examples
Stationarity November 14, 2008 37 / 56
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Yt = at + Y0 +
i=0
ti
Expectation is also time-varying: E(Xt ) = Y0 + at Var(Xt ) = . . . = f (t) Cov(Xt , Xtj ) = . . . = f (t) But it is still dierence stationary:
Proof.
Yt = Yt Yt1 = a + Yt1 + t Yt1 = a + t
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Outline
1 2 3
Preliminary Lectures Denitions Time series Description of a time series Stationarity Stationary processes Nonstationary processes The random-walk The random-walk with drift Trend stationarity Economic meaning and examples
Stationarity November 14, 2008 39 / 56
4 5
Trend stationarity
Yt = a + bt + Yt1 + t1
t1 t1 t1
Yt = a
i=0
i + a
i=0
i + t Y0 +
i=0
i ti
i (t i) +
i=0 i=0
i ti
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Proof.
Yt = a + bt + Yt1 + t1 = a + bt + (a + b(t 1) + Yt2 + t2 ) + ti = a(1 + ) + bt + b(t 1) + 2 Yt2 + t2 + t1 = a(1 + ) + bt + b(t 1) + 2 (a + b(t 2) + Yt3 + t3 ) + t2 + t1 = a(1 + + 2 ) + b(t + (t 1) + 2 (t 2)) + 3 Yt3 + t3 + t2 + t1 = ...
t1 t1 t1
= Y0 + a a +b 1
+b
i=0 t1 i=0 i=0
(t i) +
i=0 t1
i ti
i (t i) +
i=0
i ti
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Stationarity
Thus the model Yt = a + bt + Yt1 + t1 has: E(Xt ) = f (t) Var(Xt ) = f (t) Cov(Xt , Xtj ) = f (t) It is non-stationary as its expectation is time varying. However, its variance does not vary with time! This process is called trend-stationary: if one detrends it, the series is stationary:
Proposition
Yt a + bt + Yt1 + t1 is not stationary Yt bt = a + Yt1 + t1 is stationary
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Comparisons between Trend and dierence stationarity: TS DGP: DGP E(Yt ) Var(Yt ) Cov(Yt , Ytj )
Yt ti
DS Yt = c + Yt1 + t Yt = Y0 + ct +
t1 i=0 t1
Yt = + t + t
+ t 2 0 0 = f (s)
Y0 + ct t 2 (t j) 2 =a = f (s)
E[yt+s yt+s|t ]2
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So both TS and DS exhibit a trend tendency but with stable or increasing variance. This trend is said: Deterministic: TS process Stochastic: DS process
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Yt = 0 + 0.5t + 0.3Yt 1
AR(1) AR(1)+e Y 100
Yt = 0.5 + 0t + 1Yt 1
AR(1) RW
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0 0
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Yt = 0 + 0.5t + 0.5Yt 1
100 AR(1) AR(1)+e Y 60
Yt = 0.5 + 0t + 1Yt 1
AR(1) RW AR(1)+e RW+e
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Stationarity
Outline
1 2 3
Preliminary Lectures Denitions Time series Description of a time series Stationarity Stationary processes Nonstationary processes The random-walk The random-walk with drift Trend stationarity Economic meaning and examples
Stationarity November 14, 2008 49 / 56
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6.0
1900
1940
1980
Nominal GNP
11 12 13 14 15 5 0
Matthieu Stigler Matthieu.Stigler@gmail.com () 1860 1900 1940 1980
1
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Total Employment
10.0 10.5 11.0 11.5 6.0
GNP Deflator
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Real Wages
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Velocity of money
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Stock Prices
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Results
13 series can be viewed as DS, one (unemployment) as TS. The distinction between the two classes of processes is fundamental and aceptance of the purely stochastic view of non-stationarity has broad implications for our understanding of the nature of economic phenomena
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We conclude that macroeconomic models that focus on monetary disturbances as a source of purely transitory (stationary) uctuations may never be successful in explaining a very large fraction of output uctuations and that stochastic variation due to real factors is an essential element of any model of economic uctuations.
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Fill var and cov page 33 Please check 35 and 36 Give title plots 38 39 Page 4: The axes should really begin with 0;0 so that only 2 lines of the rect should be visible
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