In: Economics
1. Explain whether time series that follows a random walk with drift is weakly dependent.
Ans) Random walks is basically an auto regressive process where we can consider p = 1. Thus, a time series generated by this process cannot be assumed to be weakly dependent.
Function for this is, yt = yt - 1 + e1 =y0 +et + et +1 +.....+e1
et is an I.i.d sequence with mean 0 and variance t2 , assume y0 is known.
The expected value of yt is always y0, but does not depend on t,
Var yt = Var (et +et-1+....+et) =t , so it increases with t.
Thus we can say that a random walk is highly persistent.
Now on the other hand a random walk with drift is an example of a highly persistent series that is also trending
yt = a0 + yt -1 + et = a0+et+ et - 1+....+et + y0.
Hence it can also have a unit root process with drift if et is weakly dependent.
Thus moving ahead with that point, a random walk with drift would signal a linear time dependent component that changes with time.