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Lecture19 TimeSeriesI

The document discusses basic concepts in time series regression analysis including nature of time series data, data features, issues, examples of models, interpretation of coefficients, and modeling trends and seasonality. It provides examples of static, distributed lag, and regression models with trends or seasonal dummies. Assumptions of models are also addressed.

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7 views20 pages

Lecture19 TimeSeriesI

The document discusses basic concepts in time series regression analysis including nature of time series data, data features, issues, examples of models, interpretation of coefficients, and modeling trends and seasonality. It provides examples of static, distributed lag, and regression models with trends or seasonal dummies. Assumptions of models are also addressed.

Uploaded by

bethanyafeseha
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Basic Regression Analysis:

Time Series Data


CIVL 7012/8012
2

Nature of time series data


• Temporal ordering of observations; may not be
arbitrarily reordered
• Time series data has a separate observation for each
time period –
– e.g. annual traffic volume on a corridor,
– census observations over multiple decades
– Population of a city over multiple years
Data features
• Time periods to consider
– Daily, Weekly, Monthly, Quarterly, Annually,
Quinquennially (every five years), Decennially (every 10
years)
• Since not a random sample, different problems to
consider
– Trends and seasonality will be important
Data issues
• Stationary issue
– Loosely speaking a time series is stationary if its mean
and standard deviation does not vary systematically over
time
• How should we think about the randomness in time series
data?
• The outcome of economic variables (e.g. GNP, Dow Jones) is
uncertain; they should therefore be modeled as random
variables
• Time series are sequences of r.v. (= stochastic processes)
• Randomness does not come from sampling from a population
Example data
• US inflation and unemployment rates 1948-
2003
Here, there are only two time series. There may
be many more variables whose paths over time
are observed simultaneously.

Time series analysis focuses on modeling the


dependency of a variable on its own past, and
on the present and past values of other
variables.
Example of time series regression model
• Static models
– In static time series models, the current value of one variable is modeled as
the result of the current values of explanatory variables

• Examples for static models

There is a contemporaneous relationship between


unemployment and inflation (= Phillips-Curve).

The current murderrate is determined by the current conviction rate, unemployment rate,
and fraction of young males in the population.
Finite distributed lag models
• Finite distributed lag models
– In finite distributed lag models, the explanatory variables are allowed to
influence the dependent variable with a time lag

• Example for a finite distributed lag model


– The fertility rate may depend on the tax value of a child, but for biological and
behavioral reasons, the effect may have a lag

Children born per Tax exemption Tax exemption Tax exemption


1,000 women in year t in year t in year t-1 in year t-2
Interpretation of coefficients: finite
distributed lag models
• Interpretation of the effects in finite distributed lag models

• Effect of a past shock on the current value of the dep.


variable

Effect of a transitory shock: Effect of permanent shock:


If there is a one time shock in a If there is a permanent shock in a past period, i.e.
past period, the dep. variable will the explanatory variable permanently increases by
change temporarily by the one unit, the effect on the dep. variable will be
amount indicated by the the cumulated effect of all relevant lags. This is a
coefficient of the corresponding long-run effect on the dependent variable.
lag.
Lagged effects

For example, the effect is biggest


after a lag of one period. After
that, the effect vanishes (if the
initial shock was transitory).

The long run effect of a permanent


shock is the cumulated effect of all
relevant lagged effects. It does not
vanish (if the initial shock is a per-
manent one).
Example-1
• Example: Static Phillips curve
Contrary to theory, the estimated Phillips
Curve does not suggest a tradeoff
between inflation and unemployment

• Discussion of CLM assumptions The error term contains factors such


as monetary shocks, income/demand
shocks, oil price shocks, supply
shocks, or exchange rate shocks
Assumption.1:

Assumption.2: A linear relationship might be restrictive, but it should be a good


approximation. Perfect collinearity is not a problem as long as unemployment
varies over time.
Example-2
• Example: Effects of inflation and deficits on
interest rates
Interest rate on 3-months T-bill Government deficit as percentage of GDP

The error term represents


other factors that determine
interest rates in general, e.g.
business cycle effects

Assumption.1:

Assumption.2: A linear relationship might be restrictive, but it should be a good


approximation. Perfect collinearity will seldomly be a problem in practice.
Example-3
• Using dummy explanatory variables in time series

Children born per Tax exemption Dummy for World War Dummy for availabity of con-
1,000 women in year t in year t II years (1941-45) traceptive pill (1963-present)

• Interpretation
– During World War II, the fertility rate was temporarily lower
– It has been permanently lower since the introduction of the pill in 1963
Time series with trends

Example for a time


series with a linear
upward trend
Modeling a linear time trend

Abstracting from random deviations, the dependent


variable increases by a constant amount per time unit

Alternatively, the expected value of the dependent


variable is a linear function of time
Modeling an exponential time trend

Abstracting from random deviations, the dependent vari-


able increases by a constant percentage per time unit
Example of a time series with
exponential trend

Abstracting from
random deviations,
the time series has
a constant growth
rate
Using trending variables
• Using trending variables in regression analysis
– If trending variables are regressed on each other, a spurious re- lationship may
arise if the variables are driven by a common trend
– In this case, it is important to include a trend in the regression

• Example: Housing investment and prices

Per capita housing investment Housing price index

It looks as if investment and


prices are positively related
Using trending variables (2)
• Example: Housing investment and prices (cont.)

There is no significant relationship


between price and investment
anymore

• When should a trend be included?


– If the dependent variable displays an obvious trending behaviour
– If both the dependent and some independent variables have trends
– If only some of the independent variables have trends; their effect on the dep.
var. may only be visible after a trend has been substracted
Modeling seasonality in time series
• Modelling seasonality in time series
• A simple method is to include a set of seasonal dummies:

=1 if obs. from december


=0 otherwise
Further exploration (not covered in class)

• Problem of stationarity
• Auto regressive models
• Moving average models
• Autoregressive and moving average models
• Other advanced time series models

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