Introduction to Time Series Analysis. Lecture 5.

1. AR(1) as a linear process

2. Causality
3. Invertibility

4. AR(p) models

5. ARMA(p,q) models

31
 AR(1) as a linear process

Let {Xt } be the stationary solution to Xt − φXt−1 = Wt , where

Wt ∼ W N (0, σ 2 ).
If |φ| < 1,
∞
X
Xt = φj Wt−j
j=0

is the unique solution:

• This infinite sum converges in mean square, since |φ| < 1 implies
P j
|φ | < ∞.
• It satisfies the AR(1) recurrence.

3
 AR(1) in terms of the back-shift operator

We can write

Xt − φXt−1 = Wt
⇔ (1 − φB) Xt = Wt
| {z }
φ(B)

⇔ φ(B)Xt = Wt

Recall that B is the back-shift operator: BXt = Xt−1 .

4
 AR(1) in terms of the back-shift operator

Also, we can write

∞
X
Xt = φj Wt−j
j=0
∞
X
⇔ Xt = φj B j Wt
j=0
| {z }
π(B)

⇔ Xt = π(B)Wt

5
 AR(1) in terms of the back-shift operator

With these definitions:

∞
X
π(B) = φj B j and φ(B) = 1 − φB,
j=0

we can check that π(B) = φ(B)−1 :

∞
X ∞
X ∞
X
π(B)φ(B) = φj B j (1 − φB) = φj B j − φj B j = 1.
j=0 j=0 j=1

Thus, φ(B)Xt = Wt
⇒ π(B)φ(B)Xt = π(B)Wt
⇔ Xt = π(B)Wt .

6
 AR(1) in terms of the back-shift operator

Notice that manipulating operators like φ(B), π(B) is like manipulating

polynomials:
1
= 1 + φz + φ2 z 2 + φ3 z 3 + · · · ,
1 − φz
provided |φ| < 1 and |z| ≤ 1.

7
 Introduction to Time Series Analysis. Lecture 5.
1. AR(1) as a linear process

2. Causality
3. Invertibility

4. AR(p) models

5. ARMA(p,q) models

8
 AR(1) and Causality

Let Xt be the stationary solution to

Xt − φXt−1 = Wt ,

where Wt ∼ W N (0, σ 2 ).
If |φ| < 1,
∞
X
Xt = φj Wt−j .
j=0

φ = 1?
φ = −1?
|φ| > 1?

9
 AR(1) and Causality

If |φ| > 1, π(B)Wt does not converge.

But we can rearrange

Xt = φXt−1 + Wt
1 1
as Xt−1 = Xt − Wt ,
φ φ
and we can check that the unique stationary solution is
∞
X
Xt = − φ−j Wt+j .
j=1

But... Xt depends on future values of Wt .

10
 Causality

A linear process {Xt } is causal (strictly, a causal function

of {Wt }) if there is a

ψ(B) = ψ0 + ψ1 B + ψ2 B 2 + · · ·
∞
X
with |ψj | < ∞
j=0

and Xt = ψ(B)Wt .

11
 AR(1) and Causality

• Causality is a property of {Xt } and {Wt }.

• Consider the AR(1) process defined by φ(B)Xt = Wt (with
φ(B) = 1 − φB):

φ(B)Xt = Wt is causal
iff |φ| < 1
iff the root z1 of the polynomial φ(z) = 1 − φz satisfies |z1 | > 1.

12
 AR(1) and Causality

• Consider the AR(1) process φ(B)Xt = Wt (with φ(B) = 1 − φB):

If |φ| > 1, we can define an equivalent causal model,

Xt − φ−1 Xt−1 = W̃t ,

where W̃t is a new white noise sequence.

13
 AR(1) and Causality

• Is an MA(1) process causal?

14
 Introduction to Time Series Analysis. Lecture 5.
1. AR(1) as a linear process

2. Causality
3. Invertibility

4. AR(p) models

5. ARMA(p,q) models

15
 MA(1) and Invertibility

Define

Xt = Wt + θWt−1
= (1 + θB)Wt .

If |θ| < 1, we can write

(1 + θB)−1 Xt = Wt
⇔ (1 − θB + θ 2 B 2 − θ 3 B 3 + · · · )Xt = Wt
∞
X
⇔ (−θ)j Xt−j = Wt .
j=0

That is, we can write Wt as a causal function of Xt .

We say that this MA(1) is invertible.

16
 MA(1) and Invertibility

Xt = Wt + θWt−1
P∞ j
If |θ| > 1, the sum j=0 (−θ) Xt−j diverges, but we can write

Wt−1 = −θ −1 Wt + θ −1 Xt .

Just like the noncausal AR(1), we can show that

∞
X
Wt = − (−θ)−j Xt+j .
j=1

That is, we can write Wt as a linear function of Xt , but it is not causal.

We say that this MA(1) is not invertible.

17
 Invertibility

A linear process {Xt } is invertible (strictly, an invertible

function of {Wt }) if there is a

π(B) = π0 + π1 B + π2 B 2 + · · ·
∞
X
with |πj | < ∞
j=0

and Wt = π(B)Xt .

18
 MA(1) and Invertibility

• Invertibility is a property of {Xt } and {Wt }.

• Consider the MA(1) process defined by Xt = θ(B)Wt (with
θ(B) = 1 + θB):

Xt = θ(B)Wt is invertible
iff |θ| < 1
iff the root z1 of the polynomial θ(z) = 1 + θz satisfies |z1 | > 1.

19
 MA(1) and Invertibility

• Consider the MA(1) process Xt = θ(B)Wt (with θ(B) = 1 + θB):

If |θ| > 1, we can define an equivalent invertible model in terms of a
new white noise sequence.
• Is an AR(1) process invertible?

20
 Introduction to Time Series Analysis. Lecture 5.
1. AR(1) as a linear process

2. Causality
3. Invertibility

4. AR(p) models

5. ARMA(p,q) models

21
 AR(p): Autoregressive models of order p

An AR(p) process {Xt } is a stationary process that satisfies

Xt − φ1 Xt−1 − · · · − φp Xt−p = Wt ,

where {Wt } ∼ W N (0, σ 2 ).

Equivalently, φ(B)Xt = Wt ,
where φ(B) = 1 − φ1 B − · · · − φp B p .

22
 AR(p): Constraints on φ

Recall: For p = 1 (AR(1)), φ(B) = 1 − φ1 B.

This is an AR(1) model only if there is a stationary solution to
φ(B)Xt = Wt , which is equivalent to |φ1 | = 6 1.
This is equivalent to the following condition on φ(z) = 1 − φ1 z:

∀z ∈ R, φ(z) = 0 ⇒ z 6= ±1
equivalently, ∀z ∈ C, φ(z) = 0 ⇒ |z| =
6 1,

where C is the set of complex numbers.

23
 AR(p): Constraints on φ

Stationarity: ∀z ∈ C, φ(z) = 0 ⇒ |z| =

6 1,
where C is the set of complex numbers.
φ(z) = 1 − φ1 z has one root at z1 = 1/φ1 ∈ R.
But the roots of a degree p > 1 polynomial might be complex.
For stationarity, we want the roots of φ(z) to avoid the unit circle,
{z ∈ C : |z| = 1}.

24
 AR(p): Stationarity and causality

Theorem: A (unique) stationary solution to φ(B)Xt = Wt

exists iff

φ(z) = 1 − φ1 z − · · · − φp z p = 0 ⇒ |z| =
6 1.

This AR(p) process is causal iff

φ(z) = 1 − φ1 z − · · · − φp z p = 0 ⇒ |z| > 1.

25
 Recall: Causality

A linear process {Xt } is causal (strictly, a causal function

of {Wt }) if there is a

ψ(B) = ψ0 + ψ1 B + ψ2 B 2 + · · ·
∞
X
with |ψj | < ∞
j=0

and Xt = ψ(B)Wt .

26
AR(p): Roots outside the unit circle implies causal (Details)

∀z ∈ C, |z| ≤ 1 ⇒ φ(z) 6= 0
∞
1 X
⇔ ∃{ψj }, δ > 0, ∀|z| ≤ 1 + δ, = ψj z j .
φ(z) j=0
 j
⇒ ∀|z| ≤ 1 + δ, |ψj z j | → 0, |ψj |1/j |z| → 0
∞
1 X
⇒ ∃j0 , ∀j ≥ j0 , |ψj |1/j ≤ ⇒ |ψj | < ∞.
1 + δ/2 j=0

m
X
So if |z| ≤ 1 ⇒ φ(z) 6= 0, then Sm = ψj B j Wt converges in mean
j=0
square, so we have a stationary, causal time series Xt = φ−1 (B)Wt .

27
 Calculating ψ for an AR(p): matching coefficients

Example: Xt = ψ(B)Wt ⇔ (1 − 0.5B + 0.6B 2 )Xt = Wt ,

so 1 = ψ(B)(1 − 0.5B + 0.6B 2 )
⇔ 1 = (ψ0 + ψ1 B + ψ2 B 2 + · · · )(1 − 0.5B + 0.6B 2 )
⇔ 1 = ψ0 ,
0 = ψ1 − 0.5ψ0 ,
0 = ψ2 − 0.5ψ1 + 0.6ψ0 ,
0 = ψ3 − 0.5ψ2 + 0.6ψ1 ,
..
.

28
 Calculating ψ for an AR(p): example

⇔ 1 = ψ0 , 0 = ψj (j ≤ 0),
0 = ψj − 0.5ψj−1 + 0.6ψj−2
⇔ 1 = ψ0 , 0 = ψj (j ≤ 0),
0 = φ(B)ψj .

We can solve these linear difference equations in several ways:

• numerically, or
• by guessing the form of a solution and using an inductive proof, or
• by using the theory of linear difference equations.

29
Calculating ψ for an AR(p): general case

φ(B)Xt = Wt , ⇔ Xt = ψ(B)Wt
so 1 = ψ(B)φ(B)
⇔ 1 = (ψ0 + ψ1 B + · · · )(1 − φ1 B − · · · − φp B p )
⇔ 1 = ψ0 ,
0 = ψ1 − φ1 ψ0 ,
0 = ψ2 − φ1 ψ1 − φ2 ψ0 ,
..
.
⇔ 1 = ψ0 , 0 = ψj (j < 0),
0 = φ(B)ψj .

30
 ARMA(p,q): Autoregressive moving average models

An ARMA(p,q) process {Xt } is a stationary process that

satisfies

Xt −φ1 Xt−1 −· · ·−φp Xt−p = Wt +θ1 Wt−1 +· · ·+θq Wt−q ,

where {Wt } ∼ W N (0, σ 2 ).

• AR(p) = ARMA(p,0): θ(B) = 1.

• MA(q) = ARMA(0,q): φ(B) = 1.

32
 ARMA processes

Can accurately approximate many stationary processes:

For any stationary process with autocovariance γ, and any k >
0, there is an ARMA process {Xt } for which

γX (h) = γ(h), h = 0, 1, . . . , k.

33
 ARMA(p,q): Autoregressive moving average models

An ARMA(p,q) process {Xt } is a stationary process that

satisfies

Xt −φ1 Xt−1 −· · ·−φp Xt−p = Wt +θ1 Wt−1 +· · ·+θq Wt−q ,

where {Wt } ∼ W N (0, σ 2 ).

Usually, we insist that φp , θq 6= 0 and that the polynomials

φ(z) = 1 − φ1 z − · · · − φp z p , θ(z) = 1 + θ1 z + · · · + θq z q

have no common factors. This implies it is not a lower order ARMA model.

34