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Stationarity
What it is and what it is for
(Weak) Stationarity
Xt is stationary if:
the series fluctuates around a constant long run
mean
Xt has finite variance which is not dependent upon time
Covariance between two values of Xt depends only on the
difference apart in time (e.g. covariance between Xt and Xt-1 is
the same as for Xt-8 and Xt-9)
E(Xt) =
(mean is constant in t)
Var(Xt) = 2
(variance is constant in t)
Cov(Xt ,Xt+k) = (k) (covariance is constant in t)
If data not stationary, spurious regression problem
Xt = ut
ut ~ IID(0, 2 )
0.6
0.4
0.2
0
-0.2
-0.4
-0.6
ut ~ IID(0, 2 )
2003 Q1
2002 Q2
2001 Q3
2000 Q4
2000 Q1
1999 Q2
1998 Q3
1997 Q4
1997 Q1
1996 Q2
1995 Q3
1994 Q4
1994 Q1
1993 Q2
1992 Q3
120
100
80
60
40
20
0
UK GDP Level
1.0
ACF-Y
0.9
0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1
2003 Q1
2002 Q2
2001 Q3
2000 Q4
2000 Q1
1999 Q2
1998 Q3
1997 Q4
1997 Q1
1996 Q2
1995 Q3
1994 Q4
1994 Q1
1993 Q2
1.4
1.2
1
0.8
0.6
0.4
0.2
0
1992 Q3
12
0.50
0.25
0.00
-0.25
-0.50
-0.75
Xt = X0 + u1 + u2 ++ ut (take expectations)
E(Xt) = E(X0 + u1 + u2 ++ ut) = E(X0) = constant
Variance is not constant in t:
Var(Xt) = Var(X0) + Var(u1) ++ Var(ut)
= 0 + 2 ++ 2 = t 2
14
Random walk
Xt = Xt-1 + ut
ut ~ IID(0, 2 )
2.5
2
1.5
1
0.5
0
15
AR (k) process
MA(k) process
ARMA (p,l) process
If you k-th difference the data, then you have
ARIMA (p,k,l) estimation of ARIMA models
is a subject of next lecture
17
Spurious Regression
( spurious correlation)
Problem that time-series data usually includes trend
Result:
Spurious correlation (variables with similar trends
are correlated)
Spurious regression (independent variable with
similar trend looks as dependent = strong statistical
relationship)
coefficient significant (high adjusted-R2, large
t-statistics) ... even if unrelated in economic
terms
18
2.
3.
Cointegration + ECM
= Long-run relationship + short-run adjustment
19
10
0
0
50
100
150
200
250
300
350
400
450
500
200
150
100
50
0
-50
-100
-150
21
-200
0
50
100
150
200
250
300
350
400
450
500
0.25
0.00
-0.25
0
1.0
50
100
150
200
250
300
350
400
450
500
ACF-whitenoise
0.5
0.0
-0.5
10
22
10.0
7.5
5.0
2.5
0.0
0
1.00
50
100
150
200
250
300
350
400
450
500
ACF-randomwalk
0.75
0.50
0.25
10
23
Dickey-Fuller Test
Test based on Yt = Yt-1 + ut
- DF test to determine whether =1
Yes unit root non-stationary
No no unit root
Dynamic model:
Subtract Yt-1 ... Yt - Yt-1 = (-1)Yt-1 + ut
Reparameterise: Yt = Yt-1 + ut
where = (-1)
Test =0 equivalent to test =1
24
Critical values
DF/ADF use t- and F-statistics but critical values are
not standard
Problems:
distributions of these statistics are non-standard
special tables of critical values (derived from
numerical simulations)
Usual t- and F-tests not valid in presence of unit
roots
26