Tran
CHAPTER 10
1. STATIONARITY CONDITIONS
The BJ method applies only to stationary realizations, or to those which can be made
stationary by suitable transformation.
The following are the conditions that AR coefficients must satisfy for an ARIMA model to
be stationary:
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1 + 2 < 1
2 ! 1 < 1
1 + 2 + ... + p < 1
For p > 2, rely primarily on visual inspection
of the data and the behavior of the estimated
ACF to check for stationarity. If the estimated ACF
does not fall rapidly toward zero at lower lags,
we suspect nonstationarity.
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2. INVERTIBILITY CONDITIONS
The following are the summary of the conditions that an MA process or an ARIMA process
must satisfy for them to be invertible.
2 + 1 < 1
2 ! 1 < 1
1 + 2 + ... + q < 1
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ARMA(2,2) ? (exercise!)
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Let Zt = Yt -
[Recall Cov(x,y) = E[(x!Ex)(y!Ey)], here Ex = 0, and Ey = 0; i.e. E(Zt)=0, E(Zt-1)=0. Can you
Econ 415/Tran Chapter 10/Page 3
prove them?]
(1) Yt = C + 1Yt-1 + at
which can be rewritten as
where at is white noise with E(at) = 0, E(at, as) = 2a for t=s and = 0 for t s
= 1Var(Zt-1) + Cov(at,Zt-1)
= 10 = 1 (by definition of 1)
= 12Var(Zt-2)
2 = 120.
Thus k = 1k0.
Now if 1 > 1, k 6 4 as k 6 4.
This means that event 10 years ago has a much stronger effect on that current value of the data than
an event that happened just last year. An event 100 years ago would have even more a dramatic
effect on today/s observation than an event that occurred 10 years ago. This is not very reasonable.
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In the above k 1 = k/0 = Cov(Zt, Zt-k)/Var(Zt), ACF will explode as k 6 4. Thus, if ACF
does not damp out or only die out slowly at higher lags, it indicates that the data is nonstationary.
The situation is even worse if the variance Var(Zt) Var(Zt-1) not constant through time. In this
case, we would have to estimate up to 2n parameters (n means + n variances) with only n
observations.
It can also be shown that a model which violates the stationarity restrictions will produce
forecasts whose variance increases without limit, an undesirable result.
Also if any of the roots of (B) < 1, ACF will explode. Thus the roots have to be outside the
unit circle.
(2) Examine the estimated ACF to see if the ACF coefficients move rapidly toward zero.
"Rapidly" means the absolute value of t-statistic < 1.6 by about lag 5 or 6. If not, nonstationary.
(3) See if
*1* < 1 for AR(1) or ARMA(1,q)
1 + 2 < 1
2 ! 1 < 1
Thus, the stationarity condition does not impose restrictions on the value of 1.
(1) , or
(2)
Econ 415/Tran Chapter 10/Page 5
which yields
(3)
(4)
Continuing substituting for at-2, at-3, ..., MA(1) process can be expressed as
(5)
Thus if 1 > 1 then the distant past observations (Zt-k) have greater influence on the present
(Zt) than the more recent past observations. Thus, it is more reasonable to assume that *1* < 1.
B.
Define
Thus ACF is
Econ 415/Tran Chapter 10/Page 6
(1)
(2)
Thus the ACF's are the same, and we are unable to go back, to invert, uniquely from the ACF to
process (1) or to process (2).
C. The BJ models are invertible if all of the roots of the MA polynomials (B) lie outside the unit
circle.
Suppose
(at is a linear combination of infinite weighted sum of Zt). Otherwise, at cannot be computed.