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Time Series Lecture2

This lecture on time series analysis covered key concepts such as stationarity, autocovariance, autocorrelation, moving average (MA) processes, autoregressive (AR) processes, and linear processes. It also discussed how to estimate the autocorrelation function from a time series using the sample autocorrelation function. Examples were provided to illustrate stationary vs. non-stationary time series as well as MA, AR and linear processes.

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Priya Srikanth
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72 views

Time Series Lecture2

This lecture on time series analysis covered key concepts such as stationarity, autocovariance, autocorrelation, moving average (MA) processes, autoregressive (AR) processes, and linear processes. It also discussed how to estimate the autocorrelation function from a time series using the sample autocorrelation function. Examples were provided to illustrate stationary vs. non-stationary time series as well as MA, AR and linear processes.

Uploaded by

Priya Srikanth
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Introduction to Time Series Analysis. Lecture 2.

Peter Bartlett Last lecture: 1. Objectives of time series analysis. 2. Time series models. 3. Time series modelling: Chasing stationarity.

Introduction to Time Series Analysis. Lecture 2.


Peter Bartlett 1. Stationarity 2. Autocovariance, autocorrelation 3. MA, AR, linear processes 4. Sample autocorrelation function

Stationarity
{Xt } is strictly stationary if for all k, t1 , . . . , tk , x1 , . . . , xk , and h, P (Xt1 x1 , . . . , Xtk xk ) = P (Xt1 +h x1 , . . . , Xtk +h xk ). i.e., shifting the time axis does not affect the distribution. We shall consider second-order properties only.

Mean and Autocovariance


2 Suppose that {Xt } is a time series with E[Xt ] < . Its mean function is

t = E[Xt ]. Its autocovariance function is X (s, t) = Cov(Xs , Xt ) = E[(Xs s )(Xt t )].

Weak Stationarity
We say that {Xt } is (weakly) stationary if 1. t is independent of t, and 2. For each h, X (t + h, t) is independent of t. In that case, we write X (h) = X (h, 0).

Stationarity
The autocorrelation function (ACF) of {Xt } is dened as X (h) X (h) = X (0) Cov(Xt+h , Xt ) = Cov(Xt , Xt ) = Corr(Xt+h , Xt ).

Stationarity
2 Example: i.i.d. noise, E[Xt ] = 0, E[Xt ] = 2 . We have 2 if h = 0, X (t + h, t) = 0 otherwise.

Thus,

1. t = 0 is independent of t. 2. X (t + h, t) = X (h, 0) for all t. So {Xt } is stationary. Similarly for any white noise (uncorrelated, zero mean), Xt W N (0, 2 ).

Stationarity
Example: Random walk, St = i=1 Xi for i.i.d., mean zero {Xt }. 2 We have E[St ] = 0, E[St ] = t 2 , and S (t + h, t) = Cov(St+h , St )
h t

= Cov St +
s=1

Xt+s , St

= Cov(St , St ) = t 2 . 1. t = 0 is independent of t, but 2. S (t + h, t) is not. So {St } is not stationary.


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An aside: covariances

Cov(X + Y, Z ) = Cov(X, Z ) + Cov(Y, Z ), Cov(aX, Y ) = a Cov(X, Y ), Also if X and Y are independent (e.g., X = c), then Cov(X, Y ) = 0.

Random walk
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Stationarity
Example: MA(1) process (Moving Average): Xt = Wt + Wt1 , We have E[Xt ] = 0, and X (t + h, t) = E(Xt+h Xt ) = E[(Wt+h + Wt+h1 )(Wt + Wt1 )] 2 2 (1 + ) if h = 0, = 2 if h = 1, 0 otherwise.
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{Wt } W N (0, 2 ).

Thus, {Xt } is stationary.

ACF of the MA(1) process


MA(1): Xt = Zt + Zt1

0.8

0.6

0.4

/(1+ )

0.2

0 10

10

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Stationarity
Example: AR(1) process (AutoRegressive): Xt = Xt1 + Wt , {Wt } W N (0, 2 ).

Assume that Xt is stationary and || < 1. Then we have E[Xt ] = EXt1 =0 (from stationarity)
2 2 2 E[Xt ] = 2 E[Xt 1 ] +

2 = 1 2

(from stationarity),

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Stationarity
Example: AR(1) process, Xt = Xt1 + Wt , {Wt } W N (0, 2 ). Assume that Xt is stationary and || < 1. Then we have 2 E[Xt ] = 0, = 1 2 X (h) = Cov(Xt+h1 + Wt+h , Xt )
2 E [X t ]

= Cov(Xt+h1 , Xt ) = X (h 1) = |h| X (0) |h | 2 = . 2 1 (check for h > 0 and h < 0)

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ACF of the AR(1) process


AR(1): Xt = Xt1 + Zt 1

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0.3 0.2
|h|

0.1

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Linear Processes
An important class of stationary time series:

Xt = +
j =

j Wtj

where and

2 {Wt } W N (0, w )

, j are parameters satisfying

|j | < .
j =

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Linear Processes

Xt = +
j =

j Wtj

We have X =
2 X (h) = w j =

j h+j .

(why?)

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Examples of Linear Processes: White noise

Xt = +
j =

j Wtj

Choose

, 1 if j = 0, j = 0 otherwise.

2 ). Then {Xt } W N (, W

(why?)

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Examples of Linear Processes: MA(1)

Xt = +
j =

j Wtj

Choose

Then Xt = Wt + Wt1 .

=0 1 if j = 0, j = if j = 1, 0 otherwise.

(why?)

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Examples of Linear Processes: AR(1)

Xt = +
j =

j Wtj

Choose

Then for || < 1, we have Xt = Xt1 + Wt .

=0 j j = 0

if j 0, otherwise.
(why?)

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Estimating the ACF: Sample ACF


Recall: Suppose that {Xt } is a stationary time series. Its mean is = E[Xt ]. Its autocovariance function is (h) = Cov(Xt+h , Xt ) = E[(Xt+h )(Xt )]. Its autocorrelation function is (h) = (h) . (0)

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Estimating the ACF: Sample ACF


For observations x1 , . . . , xn of a time series, n 1 xt . the sample mean is x = n t=1 The sample autocovariance function is (h) = 1 n
n|h|

(xt+|h| x )(xt x ),
t=1

for n < h < n.

The sample autocorrelation function is (h) = (h) . (0)

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Estimating the ACF: Sample ACF


Sample autocovariance function: 1 (h) = n
n|h|

(xt+|h| x )(xt x ).
t=1

the sample covariance of (x1 , xh+1 ), . . . , (xnh , xn ), except that we normalize by n instead of n h, and we subtract the full sample mean.

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Introduction to Time Series Analysis. Lecture 2.


1. Stationarity 2. Autocovariance, autocorrelation 3. MA, AR, linear processes 4. Sample autocorrelation function

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