ST5209

NATIONAL UNIVERSITY OF SINGAPORE

Examination
ST5209 ANALYSIS OF TIME SERIES DATA
(Semester 2: AY 2009-2010)
April/May 2010- TimeAllowed: 2 HOURS
INSTRUCTIONS TO CANDIDATES:
1. Thisexam contains FIVEquestions andcomprises EIGHTprintedpages.
2. Answer ALL questions for a totalof60 marks.
3. This is a closed-bookexam withone A4-sized one-side help sheet allowed.
4. Startyoursolution toeachquestionona new page.
5. Non-programmablecalculators maybeused.
6. You must give appropriate reasoning and state all conclusions clearly to receive full
creditfor youranswers.
7. Write your student numberon the front ofyour answer booklet and on any loose
sheetsyou writeon. Ensure loose sheets arefastened totheanswerbooklet.
Continues
-2- ST5209
1. Consider two series:
Xt - O.3Xt-1 + lOt
Yt Xt + O.5lOt
where Xt is a weakly stationary (covariance stationary) process and Ct is white noise
withCt rv WN(O,1).
(a) (3p) Explain the difference between a white noise process and a covariance sta-
tionaryprocess.
(b) (3p) Computethefirst 2autocorrelation coefficients ofYt: Py(1) and py(2).
(c) (3p) Is theseries Yt weakly stationary? Pleasejustifyyour answer.
(d) (3p) Please give theMA(00) representation ofYt ifapplicable.
Continues
3 ST5209
2. Consider the daily closed price series of DAX from 1974 to 1996. The time plot and
the ACF plot ofthe dataare displayed in Figure 1. Thetime plot shows an upward
trendofthepriceseries. ThesampleACFplotshows aslowdecayuptolag100, which
implies "long memory" ofthe price series.
DAXdallyclosedpriceseries
1000
800
600
400
200
0
1974
0.8
g"
OJ " 0.6
t:
8
.s 0.4

.!!!
a.
0.2
E
..
f/J

-0.2
0 10 20 30 40 50 60 10 60 90 100
Lag
Figure 1: Time plot (top) and ACF plot (bottom) for the daily closed price series ofDAX
from 1974 to 1996.
(a) (3p)Inordertodescribetheupwardtrendoftheserieseffectively,onecanconsider
eithera process withtrendstationarityor a random walk process. Now suppose
that yt is a stationary AR(1) process witha deterministic linear trend termand
X
t
is a random walk process:
Oyt-l +It +ct, (1)
Xt - 1 +Wt,
(2)
where101 < 1andYo andXo areinitialvaluesfor yt andX
t
respectively. Moreover
Ct and Wt are white noise processes. Show the difference ofthese two processes
bycomputing their means andvariances.
(b) (3p) In order to select a reasonable model for the price series, we can use the
augmented Dickey Fuller (ADF) test:
= 1fSt-l+L
P
+Ct (3)
i=l
1978 1982 1986 1990 1994 1996
SampleAutOCOO'elatloo Function(ACF)
i
11111
ll)

whereSt arethedailyclosedpriceseriesofDAX. Writedownthenull hypothesis
and thealternativehypothesis oftheADF test.
Continues
4 ST5209
(c) (3p) Thechoice ofpin(3) plays an important role in thetest. Explain how the
test level and power changewith respect tothechoice ofp.
(d) (3p) Forp =10, we obtained theleast squareestimateof1T:
* -0.0122, sd(*) = 0.013
where sd denotes standarddeviation. Compute the test statistic. Given the 5%
critical value is -2.89, what is your statistical conclusion on the hypothesis of
unit root?
Continues
-5- ST5209
3. We have discussed 3 types of ARCH: strong ARCH, semi-strong ARCH and weak
ARCH. In particular, theprocess (e:t) is defined as asemi-strong ARCH(q) process if:
i) E[e:t 1ft-I]=0
ii) a; = w +aIcLl+ ... + aqeLq W > 0,al 2: 0,...,aq 2: 0anda; = Var(et 1F
t
-
I
)
whereF
t
-
1
is theinformation set up totime point t - 1.
(a) (6p) Derive the 2nd and 4th moment functions of a stationary semi-strong
ARCH(l) process. Give the stationarity conditions for a semi-strong ARCH(l)
process.
(b) (3p) Explain how toselect a reasonable initialvalue oftheorder q for an ARCH
model.
(c) (3p) In practice, GARCH(l,l) has been widelyused infinancial studyandmany
otherareas. Briefly explain theadvantage ofusing GARCH models over ARCH
models.
(d) (3p) Write down a GARCH (p,q) process. What are the limitations ofGARCH
model when itis applied tofinancial timeseries analysis? Give one extension of
GARCH model thatcanovercome atleast one limitation.
Continues
-6- ST5209
4. TheFederalReserve BankofSt. Louis provides themonthly I-yearand lO-year Trea-
sury constant maturity rates from April 1953 to October 2000 for 571 observations.
To build up a VAR(p) model to describe thedynamicsofthe (log transformationof)
two series (denoted by Tt), we calculateAIC as follows:
Order 1 2 3 4 5 6
AIC -12.89 -13.15 -13.18 ? -13.21 -13.21
Table: Order-specification statisticsfor themonthly log ratesof I-yearand 10-:year
Treasuryfrom April 1953 toOctober 2000.
(a) (3p) According to AIC, a VAR(4) model is identified. Themaximum likelihood
estimatorof thecovarianceofresiduals IS:
= (0.00343 0.00138)
0.00138 0.00105
ComputethevalueofAICfor p =4.
(b) (3p) Aftersettingtheinsignificantestimatestozeroexceptfor theconstantterm,
we obtainthefitted model:
0 ) (1.22 0.53) (-0.22 -0.67)
Tt = ( 0.01 + 0 1.40 Tt-l + a -0.61 Tt-2
+ Tt-3 + Tt-4 + et
whereet is writenoise. Discuss thelineardependenceofthetwo series according
tothefitted model.
Continues
7- ST5209
5. Figure2shows thetime plot and the PACF plot ofa timeseries data.
. j ~
. i
..
i
'" ""
-,.
Figure 2: Time plot ofYt and the PACF plot ofYt.
(a) (6p) Giventhefollowing results:
134.7513,
t=l
n-l
I)Yt+l - Y)(Yt - y)
-49.2553,
t=l
n-2
2 ~ Y t + 2 - Y)(Yt - y)
53.2394,
t=l
n-3
I)Yt+3 - Y)(Yt - y)
17.1192,
t=l
where y = 0 is the sample mean of the 100 observations, compute the first 3
autocorrelation coefficients, p(I), p(2), p(3). Moreover, testthenull hypothesis
Ho: Pi =0,
for j =1,2,3respectively.
(b) (3p) Select theinitial value ofthe order p and q for an ARMA(p,q) model and
justifyyour selection.
(c) (3p) Estimatetheselectedmodel by usingYule-Walker equations.
(d) (3p) Given thelast 10 observations:
Y91 = -0.61, Y92 1.47, Y93 =-1.18, Y94 1.87, Y95 = -1.60,
Y96 =0.99, Y97 -1.87, Y98 =0.54, Y99 = -0.53, YlOO = -0.01,
reportthepointpredictionfor YI01 andYI02'
Continues
ST5209 8
END OF PAPER