NonStationarity Flashcards
What is a random walk process?
A process where the current value of x is equal to its value in the last period plus a random disturbance value, ε
What is the formula for a random walk process?
xt = xt-1+εt (note: this is an MA process where θ=1)
Does a disturbance far in the past have the same influence on xt as a more recent disturbance?
Yes
Is the Variance constant?
No, it is a value σ² which does not converge/ is infinite. Hence it is non-stationary
What is an integrated process of order 1?
A process with one unit root that can be made stationary by differentiating it one time
How do we difference a process?
We form the equation with ‘L’ and factorise this
We note that (1-L)yt = yt-yt-1 = Δyt
i.e. xt=1.3xt-1-0.3xt-2+εt
(1-1.3L+0.3L²)xt=εt
(1-L)(1-0.3L)xt=εt
Δxt=0.3Δxt-1+εt
How do we represent the second difference?
(1-L)²yt=Δyt-Δyt-1=Δ²yt
What does stationarity depend on in a linear process with normally distributed disturbances? (2)
Mean and Variance
What is a Deterministic Trend Process?
A process where our series is simply a function of a constant, time and a disturbance i.e. x(t) = α + βt +ε(t) This is nonstationary due to the time variable It is, however, trend stationary because it evolves around a common trend
How do we make a Deterministic trend process stationary?
If we know the trend, we can make a new variable, z(t), which is the difference between the old series and the trend. This will remove the trend (detrending)
What is the value of z(t)?
z(t) = x(t) - βt
What is a Random Walk with Drift?
It is a random walk with a constant that is different from 0 x(t) = α + x(t-1) + ε(t) E[x(t)] = αt (i.e. not constant over time) V[x(t)] is not defined
How do we make a random walk with drift stationary?
Through differencing Δx(t) = α + ε(t)
What is the formula for a Random walk with drift and deterministic trend?
x(t) = α + βt +x(t-1) + ε(t)
What is the expected value of x(t) and the Variance of x(t) in this process (Random Walk with Drift and Deterministic Trend)?
E[x(t)] = ƒ(t) = V[x(t)] so time is important for both
How do we make this series stationary (Random Walk with Drift and Deterministic Trend)?
- Difference (Δx(t) = α + βt + ε(t))
- Detrending (z(t) = Δx(t) - α - βt, z(t) = ε(t)
How can we use the AC and PAC to determine if a process is stationary or nonstationary?
A nonstationary process will have declining ACs but in a linear rather than and exponential pattern
How do we determine a random walk process through correlograms?
If there are no ACs or PACs, it is a random walk process
How do we use correlograms to identify unit root?
ACs will be decreasing linearly and very slowly
The PAC will be ~1 and then non existent