Sta4853 2

Stochastic Process, ACF, PACF, White Noise, Estimation
§2.1: Stationarity §2.2: Autocovariance and Autocorrelation Functions §2.4: White Noise R: Random Walk Homework 1b
Outline
1 §2.1: Stationarity
2 §2.2: Autocovariance and Autocorrelation Functions
3 §2.4: White Noise
4 R: Random Walk
5 Homework 1b
Arthur Berg Stationarity, ACF, White Noise, Estimation 2/ 21

Stochastic Process
Definition (stochastic process)
A stochastic process is sequence of indexed random variables denoted as Z(ω, t)
where ω belongs to a sample space and t belongs to an index set.
From here on out, we will simply write a stochastic process (or time series) as
{Zt } (dropping the ω).
Notation
For the time units t1 , t2 , . . . , tn , denote the n-dimensional distribution function of
Zt1 , Zt2 , . . . , Ztn as
FZt1 ,...,Ztn (x1 , . . . , xn ) = P (Zt1 ≤ x1 , . . . , Ztn ≤ xn )
Example
iid Qn
Let Z1 , . . . , Zn ∼ N (0, 1). Then FZt1 ,...,Ztn (x1 , . . . , xn ) = j=1 Φ(xj ).

Stochastic Process
Notation
Zt1 , Zt2 , . . . , Ztn as
Example
iid Qn

Stochastic Process
Notation
Zt1 , Zt2 , . . . , Ztn as
Example
iid Qn

Stochastic Process
Notation
Zt1 , Zt2 , . . . , Ztn as
Example
iid Qn

Stationarity
Definition (Strongly Stationarity (aka Stricktly, aka Completely))
A time series {xt } is strongly stationary if any collection
{xt1 , xt2 , . . . , xtn }
has the same joint distribution as the time shifted set
{xt1 +h , xt2 +h , . . . , xtn +h }
Strong stationarity implies the following:

All marginal distributions are equal, i.e. P(Zs ≤ c) = P(Zt ≤ c) for all s, t,
and c. This is what is called “first-order stationary”.
The covariance of Zs and Zt (if exists) is shift-independent, i.e.
E(Zs + h, Zt + h) = E(Zs , Zt ) for any choice of h.
Strong stationarity typically assumes too much. This leads us to the weaker
assumption of weak stationarity.
Stationarity
{xt1 , xt2 , . . . , xtn }
{xt1 +h , xt2 +h , . . . , xtn +h }

Stationarity
{xt1 , xt2 , . . . , xtn }
{xt1 +h , xt2 +h , . . . , xtn +h }

Stationarity
{xt1 , xt2 , . . . , xtn }
{xt1 +h , xt2 +h , . . . , xtn +h }

Mean Function
Definition (Mean Function)
The mean function of a time series {Zt } (if it exists) is given by
Z ∞
µt = E(Zt ) = x ft (x) dx
−∞
Example (Mean of an iid MA(q))

iid
Let at ∼ N (0, σ 2 ) and
Zt = at + θ1 at−1 + θ2 at−2 + · · · + θq at−q
then
µt = E(Zt ) = E(at ) + θ1 E(at−1 ) + θ2 E(at−2 ) + · · · + θq E(at−q ) ≡ 0
(free of the time variable t)

Mean Function
Z ∞
−∞

iid
then

Mean Function
Z ∞
−∞

iid
then

White Noise
Definition (White Noise)

White noise is a collection of uncorrelated random variables with constant mean
and variance.
Notation
at ∼ WN(0, σ 2 ) — white noise with mean zero and variance σ 2
IID WN
If as is independent of at for all s 6= t, then wt ∼ IID(0, σ 2 )
Gaussian White Noise ⇒ IID
Suppose at is normally distributed.
uncorrelated + normality ⇒ independent
Thus it follows that at ∼ IID(0, σ 2 ) (a stronger assumption).

White Noise

and variance.
Notation
IID WN

White Noise

and variance.
Notation
IID WN

White Noise

and variance.
Notation
IID WN

Now your turn!

Mean of a Random Walk with Drift
Suppose Z0 = 0, and for t > 0, Zt = δ + Zt−1 + at where δ is a constant and
at ∼ WN(0, σ 2 ). What is the mean function of Zt ? (That is compute E [Zt ].)

Now your turn!

Mean of a Random Walk with Drift
at ∼ WN(0, σ 2 ). What is the mean function of Zt ? (That is compute E [Zt ].)
Note that
Zt = δ + Zt−1 + at
= 2δ + Zt−2 + at + at−1 (Zt−1 = δ + Zt−2 + at−1 )
..
.
t
X
= δt + aj
j=1
Therefore we see
 
Xt t
X
µt = E [Zt ] = E [δt] + E  aj  = δt + E [aj ] = δt
j=1 j=1
The Covariance Function

Definition (Covariance Function)
The covariance function of a random sequence {Zt } is
γ(s, t) = cov(Zs , Zt ) = E [(Zs − µs ) (Zt − µt )]
So in particular, we have
var(Zt ) = cov(Zt , Zt ) = γ(t, t) = E (Zt − µt )2

Also note that γ(s, t) = γ(t, s) since cov(Zs , Zt ) = cov(Zt , Zs ).

Example (Covariance Function of White Noise)
Let at ∼ WN(0, σ 2 ). By the definition of white noise, we have
(
σ2, s = t
γ(s, t) = E(as , at ) =
0, s 6= t




(
σ2, s = t
γ(s, t) = E(as , at ) =
0, s 6= t




(
σ2, s = t
γ(s, t) = E(as , at ) =
0, s 6= t

Example (Covariance Function of MA(1))

Let at ∼ WN(0, σ 2 ) and Zt = at + θat−1 (where θ is a constant), then
γ(s, t) = cov(at + θat−1 , as + θas−1 )

= cov(at , as ) + θ cov(at , as−1 )+
+ θ cov(at−1 , as ) + θ2 cov(at−1 , as−1 )
If s = t, then
γ(s, t) = γ(t, t) = σ 2 + θ2 σ 2 = (θ2 + 1)σ 2
If s = t − 1 or s = t + 1, then
γ(s, t) = γ(t, t + 1) = γ(t, t − 1) = θσ 2
So all together we have


2 2
(θ + 1)σ ,
 ifs = t
γ(s, t) = θσ 2 , if|s − t| = 1

0, else



= cov (at , as ) + θ cov (at , as−1 )+
+ θ cov (at−1 , as ) + θ 2 cov (at−1 , as−1 )
If s = t, then
γ(s, t) = γ(t, t) = σ 2 + θ2 σ 2 = (θ2 + 1)σ 2
If s = t − 1 or s = t + 1, then
γ(s, t) = γ(t, t + 1) = γ(t, t − 1) = θσ 2


2 2
(θ + 1)σ ,
 ifs = t
γ(s, t) = θσ 2 , if|s − t| = 1

0, else



If s = t, then
γ(s, t) = γ(t, t) = σ 2 + θ2 σ 2 = (θ2 + 1)σ 2
If s = t − 1 or s = t + 1, then
γ(s, t) = γ(t, t + 1) = γ(t, t − 1) = θσ 2


2 2
(θ + 1)σ ,
 ifs = t
γ(s, t) = θσ 2 , if|s − t| = 1

0, else



If s = t, then
γ(s, t) = γ(t, t) = σ 2 + θ2 σ 2 = (θ2 + 1)σ 2
If s = t − 1 or s = t + 1, then
γ(s, t) = γ(t, t + 1) = γ(t, t − 1) = θσ 2


2 2
(θ + 1)σ ,
 ifs = t
γ(s, t) = θσ 2 , if|s − t| = 1

0, else



If s = t, then
γ(s, t) = γ(t, t) = σ 2 + θ2 σ 2 = (θ2 + 1)σ 2
If s = t − 1 or s = t + 1, then
γ(s, t) = γ(t, t + 1) = γ(t, t − 1) = θσ 2


2 2
(θ + 1)σ ,
 ifs = t
γ(s, t) = θσ 2 , if|s − t| = 1

0, else

Now your turn!

Covariance Function of a Random Walk with Drift
at ∼ WN(0, σ 2 ). What is the covariance function of Zt ? (That is compute
cov (Zs , Zt ).)

Now your turn!

Covariance Function of a Random Walk with Drift
at ∼ WN(0, σ 2 ). What is the covariance function of Zt ? (That is compute
cov (Zs , Zt ).)
From the representation

t
X
Zt = δt + aj
j=1
We see
 
s
X t
X
γ(s, t) = cov(Zs , Zt ) = cov  aj , ak 
j=1 k=1
s X
X t
= cov (aj , ak ) = min(s, t)σ 2
j=1 k=1

The Autocorrelation Function
Definition (Correlation Function)

The correlation function of a random sequence {Zt } is
γ(s, t)
ρ(s, t) = p
γ(s, s)γ(t, t)
Cauchy-Schwartz inequality ⇒ |ρ(s, t)| ≤ 1

The Autocorrelation Function
Definition (Correlation Function)

The correlation function of a random sequence {Zt } is
γ(s, t)
ρ(s, t) = p
γ(s, s)γ(t, t)
Cauchy-Schwartz inequality ⇒ |ρ(s, t)| ≤ 1

Weak Stationarity
Definition (Weak Stationarity)

A weakly stationary time series is a finite variance process that
(i) has a mean function, µ, that is constant (so it doesn’t depend on t);
(ii) has a covariance function, γ(s, t), that dependents on s and t only through
the difference |s − t|.
From now on when we say stationary, we mean weakly stationary.

For stationary processes, the mean function is µ (no t).
Since γ(s, t) = γ(s + h, t + h) for stationary processes, we have
γ(s, t) = γ(s − t, 0).
Therefore we can view the covariance function as a function of only one
variable (h = s − t); this is the autocovariance function γ(h).

Weak Stationarity


γ(s, t) = γ(s − t, 0).

Weak Stationarity


γ(s, t) = γ(s − t, 0).

Weak Stationarity


γ(s, t) = γ(s − t, 0).

Outline
4 R: Random Walk
5 Homework 1b

Autocovariance and Autocorrelation Functions
Definition (Autocovariance Function)

The autocovariance function of a stationary time series is
γh = γ(h) = E [(Zt+h − µ) (Zt − µ)]
(for any value of t).
Definition (Autocorrelation Function)

The autocorrelation function of a stationary time series is
γ(h)
ρh = ρ(h) =
γ(0)

Autocovariance and Autocorrelation Functions
Definition (Autocovariance Function)

The autocovariance function of a stationary time series is
γh = γ(h) = E [(Zt+h − µ) (Zt − µ)]
(for any value of t).
Definition (Autocorrelation Function)

The autocorrelation function of a stationary time series is
γ(h)
ρh = ρ(h) =
γ(0)

Properties of the Autocovariance/Autocorrelation Functions

γ0 = var(Zt ); ρ0 = 1
|γk | ≤ γ0 ; |ρk | ≤ 1
γk = γ−k ; ρk = ρ−k
γk and ρk are positive semidefinite (p.s.d.), i.e.
X n X n
αi αj γ|ti −tj | ≥ 0
i=1 j=1
n X
n
and X
αi αj ρ|ti −tj | ≥ 0
i=1 j=1
for any set of times t1 , . . . , tn and any real numbers α1 , . . . , αn .
Proof.
Pn
Define X = i=1 αi Zti , then
n X
X n n X
X n
0 ≤ var(X) = αi αj cov(Zti , Ztj ) = αi αj γ|ti −tj |
i=1 j=1 i=1 j=1


γ0 = var(Zt ); ρ0 = 1
|γk | ≤ γ0 ; |ρk | ≤ 1
X n X n
i=1 j=1
n X
n
and X
i=1 j=1
Proof.
Pn
n X
X n n X
X n
i=1 j=1 i=1 j=1


γ0 = var(Zt ); ρ0 = 1
|γk | ≤ γ0 ; |ρk | ≤ 1
X n X n
i=1 j=1
n X
n
and X
i=1 j=1
Proof.
Pn
n X
X n n X
X n
i=1 j=1 i=1 j=1


γ0 = var(Zt ); ρ0 = 1
|γk | ≤ γ0 ; |ρk | ≤ 1
X n X n
i=1 j=1
n X
n
and X
i=1 j=1
Proof.
Pn
n X
X n n X
X n
i=1 j=1 i=1 j=1


γ0 = var(Zt ); ρ0 = 1
|γk | ≤ γ0 ; |ρk | ≤ 1
X n X n
i=1 j=1
n X
n
and X
i=1 j=1
Proof.
Pn
n X
X n n X
X n
i=1 j=1 i=1 j=1

Outline
4 R: Random Walk
5 Homework 1b

White Noise
White noise, denoted by at ∼ WN(0, σ 2 ), is by definition a weakly stationary

process with autocovariance function
(
σ2, k = 0
γk =
0, k 6= 0
and autocorrelation function

(
1, k = 0
ρk =
6 0
0, k =
Not all white noise is boring like iid N (0, σ 2 ).

For example, stationary GARCH processes can have all the properties of white
noise.

White Noise
White noise, denoted by at ∼ WN(0, σ 2 ), is by definition a weakly stationary

process with autocovariance function
(
σ2, k = 0
γk =
0, k 6= 0
and autocorrelation function

(
1, k = 0
ρk =
6 0
0, k =
Not all white noise is boring like iid N (0, σ 2 ).

For example, stationary GARCH processes can have all the properties of white
noise.

Outline
4 R: Random Walk
5 Homework 1b

Random Walk Simulation in R

2 iid
Simulate the random walk Zt = .2 + Zt−1Pt+ at where at ∼ N (0, σ ).
Hint: use the representation Zt = .2t + j=1 aj !
> w = rnorm(200,0,1)
> x = cumsum(w)
> wd = w +.2
> xd = cumsum(wd)
> plot.ts(xd, ylim=c(-5,55))
> lines(x)
> lines(.2*(1:200), lty="dashed")

Outline
4 R: Random Walk
5 Homework 1b

Homework 1b
Read the following sections from the textbook

§2.5: Estimation of the Mean, Autocovariances, and Autocorrelations
§2.6: Moving Average and Autoregressive Representations of Time Series
Processes
Do the following exercise.
Prove that a time series of iid random variables is strongly stationary.

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Stochastic Process, ACF, PACF, White Noise, Estimation

2 §2.2: Autocovariance and Autocorrelation Functions

3 §2.4: White Noise

Arthur Berg Stationarity, ACF, White Noise, Estimation 2/ 21

FZt1 ,...,Ztn (x1 , . . . , xn ) = P (Zt1 ≤ x1 , . . . , Ztn ≤ xn )

Arthur Berg Stationarity, ACF, White Noise, Estimation 3/ 21

FZt1 ,...,Ztn (x1 , . . . , xn ) = P (Zt1 ≤ x1 , . . . , Ztn ≤ xn )

Arthur Berg Stationarity, ACF, White Noise, Estimation 3/ 21

FZt1 ,...,Ztn (x1 , . . . , xn ) = P (Zt1 ≤ x1 , . . . , Ztn ≤ xn )

Arthur Berg Stationarity, ACF, White Noise, Estimation 3/ 21

FZt1 ,...,Ztn (x1 , . . . , xn ) = P (Zt1 ≤ x1 , . . . , Ztn ≤ xn )

Arthur Berg Stationarity, ACF, White Noise, Estimation 3/ 21

{xt1 , xt2 , . . . , xtn }

has the same joint distribution as the time shifted set

{xt1 +h , xt2 +h , . . . , xtn +h }

Strong stationarity implies the following:

{xt1 , xt2 , . . . , xtn }

has the same joint distribution as the time shifted set

{xt1 +h , xt2 +h , . . . , xtn +h }

Strong stationarity implies the following:

{xt1 , xt2 , . . . , xtn }

has the same joint distribution as the time shifted set

{xt1 +h , xt2 +h , . . . , xtn +h }

Strong stationarity implies the following:

{xt1 , xt2 , . . . , xtn }

has the same joint distribution as the time shifted set

{xt1 +h , xt2 +h , . . . , xtn +h }

Strong stationarity implies the following:

Example (Mean of an iid MA(q))

Zt = at + θ1 at−1 + θ2 at−2 + · · · + θq at−q

µt = E(Zt ) = E(at ) + θ1 E(at−1 ) + θ2 E(at−2 ) + · · · + θq E(at−q ) ≡ 0

(free of the time variable t)

Example (Mean of an iid MA(q))

Zt = at + θ1 at−1 + θ2 at−2 + · · · + θq at−q

µt = E(Zt ) = E(at ) + θ1 E(at−1 ) + θ2 E(at−2 ) + · · · + θq E(at−q ) ≡ 0

(free of the time variable t)

Example (Mean of an iid MA(q))

Zt = at + θ1 at−1 + θ2 at−2 + · · · + θq at−q

µt = E(Zt ) = E(at ) + θ1 E(at−1 ) + θ2 E(at−2 ) + · · · + θq E(at−q ) ≡ 0

(free of the time variable t)

Definition (White Noise)

Arthur Berg Stationarity, ACF, White Noise, Estimation 6/ 21

Definition (White Noise)

Arthur Berg Stationarity, ACF, White Noise, Estimation 6/ 21

Definition (White Noise)

Arthur Berg Stationarity, ACF, White Noise, Estimation 6/ 21

Definition (White Noise)

Arthur Berg Stationarity, ACF, White Noise, Estimation 6/ 21

Now your turn!

Arthur Berg Stationarity, ACF, White Noise, Estimation 7/ 21

Now your turn!

The Covariance Function

γ(s, t) = cov(Zs , Zt ) = E [(Zs − µs ) (Zt − µt )]

var(Zt ) = cov(Zt , Zt ) = γ(t, t) = E (Zt − µt )2

Also note that γ(s, t) = γ(t, s) since cov(Zs , Zt ) = cov(Zt , Zs ).

Arthur Berg Stationarity, ACF, White Noise, Estimation 8/ 21

The Covariance Function