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Deterministic trend
Stochastic trend
TSP: trend stationary process
DSP: difference stationary process
---ACF: autocorrelation function
PACF: partial autocorrelation function
---ADF test
KPSS test
Page 24 handouts
Stationary: everything ok
Problem: when series is non-stationary and specify what kind of trend we have in the series.
The non-stationarity is due to what?
1. Deterministic: we are able to find one and only one equation to represent it
2. Stochastic aka random: it can have different trends
When the trend is unique I can find an equation to define it.
deterministic trend
deterministic trend
I can regress one in terms of the other.
EVIEWS
In general when we have non stat, before looking for a regression I need to transform the
series in a stationary one. How to detrend the series? Depends from the type of trend we
have: stochastic or deterministic. Two different processes: TSP or DSP.
intercept Slope
stationary series
Adj Close
800
600
400
Adj Close
200
1
573
1145
1717
2289
2861
3433
4005
4577
5149
5721
6293
6865
mean constant and variance non constant. Take differences again to make the variance less
variable. I dont have a de-trended series yet because the variance is not constant yet.
1. Take the log to stabilize the variance and the differences of the log of the prices to
stabilize the mean: get a rate of change
Rt=ln(pt)-ln(pt-1)
The variance in thesecond case remaisn more constant than oin the 1st case.
Compute both: log-difference
transformations!
Diflog_apple=dlog(adj_close)
If yt is DSP there is a stochastic trend and the series is non-stationary! We say that the
series has a unit root.
reject null
KPSS
H0: no unit root stationary
H1:unit root: non stationary
.