Question

In: Economics

1. Explain whether time series that follows a random walk with drift is weakly dependent.

1. Explain whether time series that follows a random walk with drift is weakly dependent.

Solutions

Expert Solution

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.


Related Solutions

According to Hall, consumption spending follows a random walk. 1. What determines changes in consumption in...
According to Hall, consumption spending follows a random walk. 1. What determines changes in consumption in this case? 2. What is the implication of following a random walk for predicting changes in consumption? What is the impact on current consumption of a temporary tax cut according to: 3. the Keynesian consumption function? 4. the permanent-income hypothesis?
A stationary time series Xt follows (1 + 0.7B − 0.3B2 )Xt = 0.4 + (1...
A stationary time series Xt follows (1 + 0.7B − 0.3B2 )Xt = 0.4 + (1 + 0.6B4 )Zt. What is the mean of Xt?
Is the computer capable of producing a truly random walk in a reasonable amount of time?
Is the computer capable of producing a truly random walk in a reasonable amount of time?
Consider the following regression results of B for time series data. The dependent variable is the...
Consider the following regression results of B for time series data. The dependent variable is the log of real consumption and the regressors are all lagged by one period. The coefficients are estimated by OLS method. *, **, and *** indicate that the coefficients are significant at the 10%, 5%, and 1% level, respectively. The F- test in the last row tests the joint hypothesis that all the coefficients except the constant are zero and their p-values are provided in...
plz explain the following two concept Time series Stationary and nonstationary time series
plz explain the following two concept Time series Stationary and nonstationary time series
1. Briefly explain the following: a) Effective population size. b) Random genetic drift. c) Mechanisms which...
1. Briefly explain the following: a) Effective population size. b) Random genetic drift. c) Mechanisms which permit maintenance of genetic variability in natural populations. d) Phylogeny reconstruction methods.
Please succinctly explain the difference between Random Walk and Martingale hypothesis
Please succinctly explain the difference between Random Walk and Martingale hypothesis
1: Explain the term ‘autoregression’ in a time series regression context. 2. Explain the term ‘autocorrelation’...
1: Explain the term ‘autoregression’ in a time series regression context. 2. Explain the term ‘autocorrelation’ and the problems it creates when using OLS regression in time series data.
1: Explain the term ‘autoregression’ in a time series regression context. 2. Explain the term ‘autocorrelation’...
1: Explain the term ‘autoregression’ in a time series regression context. 2. Explain the term ‘autocorrelation’ and the problems it creates when using OLS regression in time series data.
Explain each of the following methods for the analysis of share prices:  Random walk theory...
Explain each of the following methods for the analysis of share prices:  Random walk theory  Technical (or chart) analysis  Fundamental analysis
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT