TIME SERIES

Solutions to Exercise Sheet 4

1. (a) We may write
Xt =
=
=
=
=
..
.

1 Xt+1 1 Zt+1 1 Zt
1 (1 Xt+2 1 Zt+2 1 Zt+1 ) 1 Zt+1 1 Zt
2 Xt+2 2 Zt+2 ( + )2 Zt+1 1 Zt
2 (1 Xt+3 1 Zt+3 1 Zt+2 ) 2 Zt+2 ( + )2 Zt+1 1 Zt
3 Xt+3 3 Zt+3 ( + )3 Zt+2 ( + )2 Zt+1 1 Zt

= Xt+k Zt+k Zt ( + )

k1
X

j1 Zt+j .

j=1

This can be rewritten as

k

(Xt+k Zt+k ) = Xt + Zt + ( + )

k1
X

j1 Zt+j .

j=1

Taking expectations, we obtain

lim E
Xt

+ 1 Zt + ( + )

k1
X
j=1

j1 Zt+j

lim 2k E (Xt+k Zt+k )2

= 0
if |1 | < 1 and the variance of Xt is bounded. Hence, we have
1

Xt = Zt ( + )

j1 Zt+j

j=1

in the mean square sense.

(b) For 2, we may write
( ) =

j j+

j=0

= 2 1( + ) 1 + ( + )( + ) + ( + )( + ) +1
+ ( + )2 ( + ) +2 + . . .

= 2 1 {( + ) + ( + )2 (1 + 2 + 4 + . . .)}
= 2 1 (1)
if || < 1. It follows immediately that ( ) = 1 (1) for 2.

2. To derive the approximate confidence intervals for ( ), we use the fact that the sample
b ) is approximately normally distributed with mean ( )
autocorrelation function (
and variance w /n, where
w =

{(k + ) + (k ) 2( )(k)}2 .

k=1

An approximate 95% confidence interval for ( ) is then

s
b ) 1.96
I = (

wb
.
n

For the MA(2) model, we have non-zero autocorrelations ( ) for = 0, 1, 2 and

zero autocorrelations for all other values of . When = 1 and = 2, we obtain
w11 = {(2) + 1 22 (1)}2 + {(1) 2(1)(2)}2 + 2 (2)
and
w22 = {(1) 2(1)(2)}2 + {1 22 (2)}2 + 2 (1) + 2 (2).
For | | > 2, we obtain
w = 22 (2) + 22 (1) + 1.
Since the autocorrelation function for | | > 2 is zero for an MA(2), the confidence
intervals at these lags can be used for testing non-significance of the autocorrelations,
that is, for checking the model fit.
b
b
3. Given that (1)
= 0.5357, (2)
= 0.3961 and n = 84, we obtain the following estimates
of w for the MA(2) process:

wb

0.84522
= 0.92715

1.88774

if
if
if

| | = 1,
| | = 2,
| | > 2.

These give the following approximate 95% confidence intervals for ( ):

(0.339092, 0.732308)
I = (0.190184, 0.602016)

(0.293824, 0.293824)

if
if
if

| | = 1,
| | = 2,
| | > 2.