stationarity issues in time series modeling david a. dickey north carolina state university

Stationarity Issues in Time Series Stationarity Issues in Time Series Modeling Modeling

David A. DickeyDavid A. Dickey North Carolina State University North Carolina State University

““Stationarity”-what is it?Stationarity”-what is it? Example: Stocks of Silver in the Example: Stocks of Silver in the

NY Commodities Exchange NY Commodities Exchange Two forecasts: Two forecasts: Nonstationary in yellowNonstationary in yellow

– No mean reversion, unbounded error bandsNo mean reversion, unbounded error bands Stationary in greenStationary in green

– Reverts to mean, bounded error bandsReverts to mean, bounded error bands

Silver Series

““Stationarity”-what is it?Stationarity”-what is it? Constant mean Constant mean

Covariance between YCovariance between Y tt, Y, Yt+ht+h function of h only. function of h only.

(h)(h)

[Autocorrelation [Autocorrelation (h) =(h) =(h)/(h)/(0)](0)]

One Lag ModelOne Lag Model YYtt==(Y(Yt-1t-1)+e)+ett

– ““shocks” eshocks” ett~N(0,~N(0,22))

Stationary: |Stationary: ||<1|<1– YYtt==(1(1YYt-1t-1+e+ett

– Regress YRegress Ytt on 1, Y on 1, Yt-1t-1

» Estimators approximately normally Estimators approximately normally distributed in large samplesdistributed in large samples

» Use t test for H0:Use t test for H0:=0=0

One Lag Model with One Lag Model with =1=1 YYtt=1(Y=1(Yt-1t-1)+e)+ett

– “ “shocks” eshocks” ett~N(0,~N(0,22)) YYtt=Y=Yt-1t-1+e+ett

Best forecast of YBest forecast of Ytt is Y is Yt-1t-1

Nonstationary: Nonstationary: =1=1– Regress YRegress Ytt on 1, Y on 1, Yt-1t-1

– Estimators NOT normally distributed even in large Estimators NOT normally distributed even in large samplessamples

– CANNOT use t tables to test for HCANNOT use t tables to test for H00::=0=0– t t test statistictest statistic does NOT have t does NOT have t distributiondistribution!!! !!!

Hypothesis TestHypothesis Test

Model: YModel: Ytt==(Y(Yt-1t-1)+e)+ett

TestTest– HH00: : =1 “Nonstationary, Unit Root”=1 “Nonstationary, Unit Root”

– HH11: |: ||<1 “Stationary (mean reverting)|<1 “Stationary (mean reverting)

Compare t calculated to Compare t calculated to newnew distribution distribution

Two TestsTwo Tests

Model: YModel: Ytt==(Y(Yt-1t-1)+e)+ett

– YYttYYt-1t-1=(=((Y(Yt-1t-1)+e)+et t

– YYttYYt-1t-1= = (1- (1-+ (+ (YYt-1t-1+e+ett

– Regress YRegress YttYYt-1t-1 on 1, Y on 1, Yt-1t-1

– Tests:Tests:

– n(coefficient of Yn(coefficient of Yt-1t-1) ) “Rho” “Rho”

– calculated t test calculated t test “Tau” “Tau”

Some mathSome math

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More mathMore math

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dttWWtesttn 1

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Two SeriesTwo SeriesSAS software: PROC ARIMA

proc gplot; plot (Y Z)*t / overlay;

proc arima; i var=Y nlag=10 stationarity=(adf); i var=Z nlag=10 stationarity=(adf);

Symptoms of NonstationaritySymptoms of Nonstationarity

ACF dies down slowlyACF dies down slowly– ACF is Corr (YACF is Corr (Ytt, Y, Yt-jt-j) plot vs. j) plot vs. j

Nonconstant level when plottedNonconstant level when plotted

Saw plot, ACFs coming up Saw plot, ACFs coming up

The ARIMA Procedure

Name of Variable = Y

Mean of Working Series 110.9728 Standard Deviation 5.286108 Number of Observations 250

Autocorrelation

Lag Correlation -1 9 8 7 6 5 4 3 2 1 0 1 2 3 4 5 6 7 8 9 1 Std Error 0 1.00000 | |********************| 0 1 0.97219 | . |******************* | 0.063246 2 0.94506 | . |******************* | 0.107523 3 0.91741 | . |****************** | 0.136771 4 0.89025 | . |****************** | 0.159498 5 0.86479 | . |***************** | 0.178269 6 0.84145 | . |***************** | 0.194326 7 0.81771 | . |**************** | 0.208391 8 0.79836 | . |**************** | 0.220853 9 0.77912 | . |**************** | 0.232110 10 0.75671 | . |*************** | 0.242346

YY series ACF series ACF

The ARIMA Procedure

Name of Variable = Z

Mean of Working Series 100.5022 Standard Deviation 2.402392 Number of Observations 250

AutocorrelationsLag Correlation -1 9 8 7 6 5 4 3 2 1 0 1 2 3 4 5 6 7 8 9 1 0 1.00000 | |********************| 1 0.90796 | . |****************** | 2 0.81755 | . |**************** | 3 0.72228 | . |************** | 4 0.63703 | . |************* | 5 0.56707 | . |*********** | 6 0.51964 | . |********** | 7 0.47865 | . |********** | 8 0.46026 | . |********* | 9 0.44466 | . |********* | 10 0.42313 | . |******** |

"." marks two standard errors

ZZ series ACF series ACF

The ARIMA Procedure

Augmented Dickey-Fuller Unit Root Tests

Type Lags Rho Pr < Rho Tau Pr < Tau F Pr > F

Zero Mean 0 0.1014 0.7059 0.71 0.8675 1 0.0880 0.7027 0.59 0.8422 2 0.0719 0.6989 0.45 0.8101 Single Mean 0 -6.8507 0.2817 -2.30 0.1724 2.99 0.3095 1 -6.8539 0.2815 -2.16 0.2211 2.57 0.4147 2 -7.1478 0.2624 -2.07 0.2564 2.29 0.4861

Trend 0 -7.3468 0.6313 -2.46 0.3502 3.64 0.4500 1 -7.3273 0.6328 -2.30 0.4295 3.07 0.5636 2 -7.5909 0.6114 -2.19 0.4905 2.65 0.6489

Tests on Tests on YY

Tests on Tests on ZZ The ARIMA Procedure

Augmented Dickey-Fuller Unit Root Tests

Type Lags Rho Pr < Rho Tau Pr < Tau F Pr > F

Zero Mean 0 -0.0087 0.6803 -0.05 0.6647 1 -0.0237 0.6769 -0.15 0.632 2 -0.0393 0.6733 -0.24 0.5997

Single Mean 0 -22.8511 0.0051 -3.45 0.0104 5.96 0.0136 1 -24.5443 0.0034 -3.48 0.0095 6.06 0.0114 2 -28.8542 0.0015 -3.69 0.0050 6.80 0.0010

Trend 0 -24.6119 0.0236 -3.61 0.0312 6.53 0.0449 1 -26.2971 0.0161 -3.60 0.0319 6.48 0.0461 2 -30.7682 0.0057 -3.77 0.0196 7.13 0.0283

Higher Order ProcessesHigher Order Processes YtYt-1Yt-2Yt-3et

Yt= Yt-Yt-1 =

Yt-1Yt-1Yt-

2et [ coefficient ] Augmenting lags ADF stands for Augmented Dickey-Fuller

Testing for no mean reversion: H0:

Regress Yt-Yt-1 on 1, Yt-1, Yt-1-Yt-2, Yt-2-Yt-3 Nonstandard | N(__, __) |

Higher Order ProcessesHigher Order Processes Q1: How many lags??? Regress Yt on 1,Yt-1, Yt-1Yt-2

| N(__, __) | so . . . Just use usual t tests and p-values!!!

Q2: Why “Unit Root” Tests ?? B(Yt)= Yt-1

(B B2B3)(Yt = et

root of B B2B3 at B=1 means 1 1213 = 0

Check Silver Series for Check Silver Series for Augmenting Lags Augmenting Lags

PROC REG; MODEL DEL= LSILVER DEL1 DEL2 DEL3 DEL4; TEST DEL2=0, DEL3=0, DEL4=0;

MeanSource DF Square F Value Pr > F

Numerator 3 4589.63459 1.31 0.2753Denominator 133 3515.48242

Unit Root test in PROC REG Unit Root test in PROC REG

PROC REG; MODEL DEL= LSILVER DEL1;

Parameter Variable DF Estimate t Value Pr > |t|

Intercept 1 75.58073 2.76 0.0082

LSILVER 1 -0.11703 -2.78 0.0079 DEL1 1 0.67115 6.21 <.0001

Unit Root test in PROC ARIMAUnit Root test in PROC ARIMAPROC ARIMA DATA=SILVER; I VAR=SILVER STATIONARITY=(ADF=(1));

Augmented Dickey-Fuller Unit Root Tests

Type Lags Tau Pr < Tau

Zero Mean 1 -0.28 0.5800

Single Mean 1 -2.78 0.0689 Trend 1 -2.63 0.2697

And now. . .the And now. . .the restrest of the story of the story

Type Lags Tau Pr < Tau

Zero Mean ????? (A) Single Mean 1 -2.78 0.0689 Trend ????? (B)

(A) Assumes mean is 0 (or known and subtracted off)

Has different (pair of) distributions !!

(B) Allows for TREND under H1

Has third (pair of) distributions !!!!

Silver - Need 2Silver - Need 2ndnd Difference? Difference?DDtt = = YYtt = Y = Ytt-Y-Yt-1t-1

Q: Does D (also) have a unit root ?Q: Does D (also) have a unit root ?

Regress Regress DDtt on D on Dt-1t-1 using /NOINT (why?) using /NOINT (why?)

No augmenting lags (why?) No augmenting lags (why?)

I VAR=Y(1) STATIONARITY = . . .I VAR=Y(1) STATIONARITY = . . .

Type Lags Tau Pr < Tau

Zero Mean 0 -3.42 0.0010Single Mean 0 -3.39 0.0158Trend 0 -3.62 0.0383

AutocorrelationsAutocorrelations Lag Covariance Correlation -1 9 8 7 6 5 4 3 2 1 0 1 2 3 4 5 6 7 8 9 1Lag Covariance Correlation -1 9 8 7 6 5 4 3 2 1 0 1 2 3 4 5 6 7 8 9 1 0 7612550 1.00000 | |********************|0 7612550 1.00000 | |********************| 1 7604217 0.99891 | .|********************|1 7604217 0.99891 | .|********************| 2 7595529 0.99776 | .|********************|2 7595529 0.99776 | .|********************| 3 7586855 0.99662 | . |********************|3 7586855 0.99662 | . |********************| 4 7578152 0.99548 | . |********************|4 7578152 0.99548 | . |********************| 5 7569481 0.99434 | . |********************|5 7569481 0.99434 | . |********************| 6 7560553 0.99317 | . |********************|6 7560553 0.99317 | . |********************| 7 7551925 0.99204 | . |********************|7 7551925 0.99204 | . |********************| 8 7543869 0.99098 | . |********************|8 7543869 0.99098 | . |********************| 9 7535957 0.98994 | . |********************|9 7535957 0.98994 | . |********************| 10 7528240 0.98892 | . |********************|10 7528240 0.98892 | . |********************| 11 7519890 0.98783 | . |********************|11 7519890 0.98783 | . |********************| 12 7511672 0.98675 | . |********************|12 7511672 0.98675 | . |********************| "." marks two standard errors"." marks two standard errors

Output from SAS PROC ARIMAOutput from SAS PROC ARIMA

Augmented Dickey-Fuller Unit Root TestsAugmented Dickey-Fuller Unit Root Tests Type Type LagsLags Rho Pr < Rho Rho Pr < Rho Zero Mean Zero Mean 0 1.3567 0.9565 0 1.3567 0.9565 1 1.3481 0.95571 1.3481 0.9557 Single Mean Single Mean 0 0.4065 0.9744 0 0.4065 0.9744 1 0.3500 0.97251 0.3500 0.9725 Trend Trend 0 -6.3073 0.7203 0 -6.3073 0.7203 1 -6.5833 0.69811 -6.5833 0.6981

DifferencesDifferences

AutocorrelationsAutocorrelations Lag Covariance Correlation -1 9 8 7 6 5 4 3 2 1 0 1 2 3 4 5 6 7 8 9 1Lag Covariance Correlation -1 9 8 7 6 5 4 3 2 1 0 1 2 3 4 5 6 7 8 9 1 0 4003.285 1.00000 | |********************|0 4003.285 1.00000 | |********************| 1 102.471 0.02560 | .|* |1 102.471 0.02560 | .|* | 2 -117.368 -.02932 | *|. |2 -117.368 -.02932 | *|. | 3 -235.578 -.05885 | *|. |3 -235.578 -.05885 | *|. | 4 -26.946567 -.00673 | .|. |4 -26.946567 -.00673 | .|. | 5 -46.750761 -.01168 | .|. |5 -46.750761 -.01168 | .|. | 6 -77.100469 -.01926 | .|. |6 -77.100469 -.01926 | .|. | 7 -224.055 -.05597 | *|. |7 -224.055 -.05597 | *|. | 8 -27.874814 -.00696 | .|. |8 -27.874814 -.00696 | .|. | 9 132.415 0.03308 | .|* |9 132.415 0.03308 | .|* | 10 316.534 0.07907 | .|** |10 316.534 0.07907 | .|** | 11 -254.117 -.06348 | *|. |11 -254.117 -.06348 | *|. | 12 200.979 0.05020 | .|* |12 200.979 0.05020 | .|* | "." marks two standard errors"." marks two standard errors

Inverse AutocorrelationInverse Autocorrelation Ming Chang thesisMing Chang thesis Dual model Dual model

(1(1B) YB) Ytt= e= ett dual is Y dual is Ytt = (1 = (1B) eB) ett

AR(1) MA(1) AR(1) MA(1) Chang shows IACF dies off slowly if you Chang shows IACF dies off slowly if you

overdifference. overdifference.

Differenced DJIA IACFDifferenced DJIA IACF

Inverse Autocorrelations Lag Correlation -1 9 8 7 6 5 4 3 2 1 0 1 2 3 4 5 6 7 8 9 1 1 -0.51119 | **********|. | 2 0.01380 | .|. | 3 -0.00533 | .|. | 4 0.01061 | .|. | 5 -0.02324 | .|. | 6 0.00722 | .|. | 7 0.02122 | .|. | 8 -0.01617 | .|. | 9 0.02831 | .|* | 10 -0.04860 | *|. | 11 0.02759 | .|* | 12 -0.00422 | .|. |

22ndnd Differenced DJIA IACF Differenced DJIA IACFJust for illustration, here is the inverse autocorrelation you would get if you differenced these differences once more, that is, if you took the second difference of the original series. Note the roughly triangular appearance, suggesting that you should have stopped after the first difference

Inverse Autocorrelations Lag Correlation -1 9 8 7 6 5 4 3 2 1 0 1 2 3 4 5 6 7 8 9 1 1 0.89720 | .|****************** | 2 0.80302 | .|**************** | 3 0.70785 | .|************** | 4 0.60466 | .|************ | 5 0.50498 | .|********** | 6 0.41173 | .|******** | 7 0.32523 | .|******* | 8 0.23836 | .|***** | 9 0.15871 | .|*** | 10 0.09447 | .|** | 11 0.05758 | .|* | 12 0.01735 | .|. |

Rho and FRho and F YtYt-1Yt-2et

Factor: Yt Yt-1Yt-1et

Rho(1) Estimate ( H0) by regression

(2) Divide n[estimate] by ( estimate-1)

FFRegress Regress Yt on on 1, t, 1, t, Yt-1 , Yt-1

Test underlined items with F (3 numerator df) Test underlined items with F (3 numerator df)

Trend is Trend is notnot Unit Root Unit Root

YYtt = a + b t + Z = a + b t + Ztt with Z with Ztt stationary stationary

YYt-1t-1 = a + b(t-1) + Z = a + b(t-1) + Zt-1t-1

YYtt = b + = b + ZZt t with with ZZtt an an overdifferencedoverdifferenced

seriesseries !! !!

Example: Example:

Amazon.com Example (volume)Amazon.com Example (volume)

PROC REG; MODEL DV = DATE LAGV DV1-DV4; TEST DV3=0, DV4=0;

Parameter Variable DF Estimate t Value Pr > |t| Type I SS

Intercept 1 -17.49220 -5.26 <.0001 0.00848 date 1 0.00147 5.41 <.0001 0.01395 LAGV 1 -0.21914 -5.80 <.0001 26.67803 DV1 1 -0.15446 -3.08 0.0022 0.94211 DV2 1 -0.18447 -3.72 0.0002 3.52898 DV3 1 -0.04433 -0.94 0.3477 0.07997 DV4 1 -0.05774 -1.31 0.1923 0.48763

Test 1 Results for Dependent Variable DV

Mean Source DF Square F Value Pr > F Numerator 2 0.28380 0.99 0.3715 Denominator 497 0.28602

ACF Levels:ACF Levels: Lag Covariance Correlation -1 9 8 7 6 5 4 3 2 1 0 1 2 3 4 5 6 7 8 9 1 0 2.503910 1.00000 | |********************| 1 2.327538 0.92956 | . |******************* | 2 2.225324 0.88874 | . |****************** | 3 2.193509 0.87603 | . |****************** | 4 2.155492 0.86085 | . |***************** | 5 2.127643 0.84973 | . |***************** | 6 2.099292 0.83841 | . |***************** | 7 2.069929 0.82668 | . |***************** | 8 2.062194 0.82359 | . |**************** | 9 2.051450 0.81930 | . |**************** | 10 2.011864 0.80349 | . |**************** | 11 2.006564 0.80137 | . |**************** | 12 1.996735 0.79745 | . |**************** | 13 1.960231 0.78287 | . |**************** | 14 1.951272 0.77929 | . |**************** | 15 1.940939 0.77516 | . |**************** | 16 1.919167 0.76647 | . |*************** | 17 1.906896 0.76157 | . |*************** | 18 1.905406 0.76097 | . |*************** | 19 1.892168 0.75569 | . |*************** | 20 1.857199 0.74172 | . |*************** | 21 1.846038 0.73726 | . |*************** | 22 1.826167 0.72933 | . |*************** | 23 1.816151 0.72533 | . |*************** | 24 1.821228 0.72735 | . |*************** |

"." marks two standard errors

IACF - DifferencesIACF - Differences Lag Correlation -1 9 8 7 6 5 4 3 2 1 0 1 2 3 4 5 6 7 8 9 1 1 0.48216 | . |********** | 2 0.44816 | . |********* | 3 0.34266 | . |******* | 4 0.30682 | . |****** | 5 0.25213 | . |***** | 6 0.24854 | . |***** | 7 0.23624 | . |***** | 8 0.18675 | . |**** | 9 0.14088 | . |*** | 10 0.20330 | . |**** | 11 0.13295 | . |*** | 12 0.11437 | . |** | 13 0.15524 | . |*** | 14 0.11829 | . |** | 15 0.09978 | . |** | 16 0.10919 | . |** | 17 0.09049 | . |** | 18 0.06653 | . |*. | 19 0.02886 | . |*. | 20 0.09515 | . |** | 21 0.05504 | . |*. | 22 0.07104 | . |*. | 23 0.06065 | . |*. | 24 0.02284 | . | .

The ARIMA Procedure

Augmented Dickey-Fuller Unit Root Tests

Type Lags Rho Pr < Rho Tau Pr < Tau F Pr > F

Zero Mean 2 0.0144 0.6861 0.02 0.6909Single Mean 2 -14.2100 0.0474 -2.60 0.0944 3.42 0.1920Trend 2 -85.7758 0.0007 -6.35 <.0001 20.18 0.0010

Do the test:

Fit AR(3) plus trend. Diagnostics: Autocorrelation Check of Residuals

To Chi- Pr >Lag Square DF ChiSq -----Autocorrelations-----

6 1.59 3 0.6615 -0.015 . . . -0.000 12 10.89 9 0.2835 -0.025 . . . 0.072 18 12.43 15 0.6460 -0.036 . . . 0.031 24 18.97 21 0.5872 30 23.75 27 0.6439 36 30.32 33 0.6014 42 37.56 39 0.5358 48 39.37 45 0.7087

ExtensionsExtensions

S. E. Said shows that models with lagged eS. E. Said shows that models with lagged ett terms can terms can still be tested by ADF tests. still be tested by ADF tests.

Nobel Prize “cointegration” idea:Nobel Prize “cointegration” idea: Two or more unit root processes have Two or more unit root processes have stationarystationary linear combination. linear combination. Compute, e.g. YCompute, e.g. Ytt = ln(S = ln(Stt/L/Ltt) and test for ) and test for stationarity.stationarity.

http://www4.stat.ncsu.edu/~dickey Click: SAS Code from Presentations

Thanks !Thanks !Questions ?Questions ?