"use strict"; const {Fragment: _Fragment, jsx: _jsx, jsxs: _jsxs} = arguments[0]; const {useMDXComponents: _provideComponents} = arguments[0]; function _createMdxContent(props) { const _components = { annotation: "annotation", blockquote: "blockquote", br: "br", em: "em", h2: "h2", h3: "h3", li: "li", math: "math", mfrac: "mfrac", mi: "mi", mn: "mn", mo: "mo", mover: "mover", mrow: "mrow", msub: "msub", msup: "msup", ol: "ol", p: "p", semantics: "semantics", span: "span", strong: "strong", ul: "ul", ..._provideComponents(), ...props.components }; return _jsxs(_Fragment, { children: [_jsx(_components.h2, { children: _jsx(_components.strong, { children: "Learning Outcomes" }) }), "\n", _jsx(_components.p, { children: "This article explains how to handle nonstationary time-series data in an exam setting, emphasizing the distinction between covariance-stationary, trend-stationary, and unit-root processes, unit roots, cointegration, and error-correction models. It clarifies when standard regressions in levels are likely to be spurious and how appropriate transformations or cointegration methods restore valid inference. It shows how to identify unit roots, specify and interpret the Dickey–Fuller test, and decide whether a series should be modeled in levels or first differences. The article also covers practical choices around first differencing and highlights common pitfalls such as misusing standard critical values for unit-root and cointegration tests. In addition, it discusses cointegration, the Engle–Granger procedure for testing long-run relationships, and the interpretation of stationary residuals from a cointegrating regression. Finally, it presents the structure and intuition of error-correction models, focusing on how the error-correction term and speed-of-adjustment coefficient capture short-run adjustments toward long-run equilibrium in applied and exam-style questions." }), "\n", _jsx(_components.h2, { children: _jsx(_components.strong, { children: "CFA Level 2 Syllabus" }) }), "\n", _jsx(_components.p, { children: "For the CFA Level 2 exam, you are required to understand time-series analysis with nonstationary data, with a focus on the following syllabus points:" }), "\n", _jsxs(_components.ul, { children: ["\n", _jsx(_components.li, { children: "Explaining the concept of a unit root and its impact on time-series analysis" }), "\n", _jsx(_components.li, { children: "Describing and applying the Dickey–Fuller test to detect nonstationarity" }), "\n", _jsx(_components.li, { children: "Demonstrating transformation of series with unit roots using first differencing" }), "\n", _jsx(_components.li, { children: "Explaining the process to test for and establish cointegration" }), "\n", _jsx(_components.li, { children: "Interpreting error-correction models (ECMs) and their use in modeling relationships between cointegrated series" }), "\n", _jsx(_components.li, { children: "Discussing implications for regression analysis when time-series variables are nonstationary and/or cointegrated" }), "\n"] }), "\n", _jsx(_components.h2, { children: _jsx(_components.strong, { children: "Test Your Knowledge" }) }), "\n", _jsx(_components.p, { children: _jsx(_components.em, { children: "Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision." }) }), "\n", _jsxs(_components.p, { children: ["A quantitative analyst is examining quarterly data on a stock index level (", _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", children: _jsxs(_components.semantics, { children: [_jsx(_components.mrow, { children: _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "P" }), _jsx(_components.mi, { children: "t" })] }) }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "P_t" })] }) }) }), _jsx(_components.span, { className: "katex-html", "aria-hidden": "true", children: _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.8333em", verticalAlign: "-0.15em" } }), 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children: _jsx(_components.span, {}) }) })] }) })] })] }) })] }), "), aggregate earnings per share (", _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", children: _jsxs(_components.semantics, { children: [_jsxs(_components.mrow, { children: [_jsx(_components.mi, { children: "E" }), _jsx(_components.mi, { children: "P" }), _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "S" }), _jsx(_components.mi, { children: "t" })] })] }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "EPS_t" })] }) }) }), _jsx(_components.span, { className: "katex-html", "aria-hidden": "true", children: _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.8333em", verticalAlign: "-0.15em" } }), _jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.13889em" }, children: "EP" }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.05764em" }, children: "S" }), _jsx(_components.span, { className: "msupsub", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsx(_components.span, { className: "vlist", style: { height: "0.2806em" }, children: _jsxs(_components.span, { style: { top: "-2.55em", marginLeft: "-0.0576em", marginRight: "0.05em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.7em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsx(_components.span, { className: "mord mathnormal mtight", children: "t" }) })] }) }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.15em" }, children: _jsx(_components.span, {}) }) })] }) })] })] }) })] }), "), and the three‑month Treasury-bill rate (", _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", children: _jsxs(_components.semantics, { children: [_jsx(_components.mrow, { children: _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "R" }), _jsx(_components.mi, { children: "t" })] }) }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "R_t" })] }) }) }), _jsx(_components.span, { className: "katex-html", "aria-hidden": "true", children: _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.8333em", verticalAlign: "-0.15em" } }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mord 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She estimates AR(1) models and runs Dickey–Fuller tests on each level series, then applies Engle–Granger cointegration tests."] }), "\n", _jsx(_components.p, { children: "Summary of her results:" }), "\n", _jsxs(_components.ul, { children: ["\n", _jsxs(_components.li, { children: ["For ", _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", children: _jsxs(_components.semantics, { children: [_jsx(_components.mrow, { children: _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "P" }), _jsx(_components.mi, { children: "t" })] }) }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "P_t" })] }) }) }), _jsx(_components.span, { className: "katex-html", "aria-hidden": "true", children: _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.8333em", 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style: { height: "0.15em" }, children: _jsx(_components.span, {}) }) })] }) })] })] }) })] }), " and ", _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", children: _jsxs(_components.semantics, { children: [_jsxs(_components.mrow, { children: [_jsx(_components.mi, { children: "E" }), _jsx(_components.mi, { children: "P" }), _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "S" }), _jsx(_components.mi, { children: "t" })] })] }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "EPS_t" })] }) }) }), _jsx(_components.span, { className: "katex-html", "aria-hidden": "true", children: _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.8333em", verticalAlign: "-0.15em" } }), _jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.13889em" }, children: "EP" }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.05764em" }, children: "S" }), _jsx(_components.span, { className: "msupsub", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsx(_components.span, { className: "vlist", style: { height: "0.2806em" }, children: _jsxs(_components.span, { style: { top: "-2.55em", marginLeft: "-0.0576em", marginRight: "0.05em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.7em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsx(_components.span, { className: "mord mathnormal mtight", children: "t" }) })] }) }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.15em" }, children: _jsx(_components.span, {}) }) })] }) })] })] }) })] }), ", the DF test statistics on the level series are less negative than the 5% critical values; on the first differences, DF statistics are more negative than the critical values."] }), "\n", _jsxs(_components.li, { children: ["For ", _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", children: _jsxs(_components.semantics, { children: [_jsx(_components.mrow, { children: _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "R" }), _jsx(_components.mi, { children: "t" })] }) }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "R_t" })] }) }) }), _jsx(_components.span, { className: "katex-html", "aria-hidden": "true", children: _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.8333em", verticalAlign: "-0.15em" } }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.00773em" }, children: "R" }), _jsx(_components.span, { className: "msupsub", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsx(_components.span, { className: "vlist", style: { height: "0.2806em" }, children: _jsxs(_components.span, { style: { top: "-2.55em", marginLeft: "-0.0077em", marginRight: "0.05em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.7em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsx(_components.span, { className: "mord mathnormal mtight", children: "t" }) })] }) }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.15em" }, children: _jsx(_components.span, {}) }) })] }) })] })] }) })] }), ", the DF test on the level series yields a statistic more negative than the 5% critical value."] }), "\n", _jsxs(_components.li, { children: ["A regression of ", _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", children: _jsxs(_components.semantics, { children: [_jsxs(_components.mrow, { children: [_jsx(_components.mi, { children: "ln" }), _jsx(_components.mo, { children: "⁡" }), _jsx(_components.mo, { stretchy: "false", children: "(" }), _jsx(_components.mi, { children: "E" }), _jsx(_components.mi, { children: "P" }), _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "S" }), _jsx(_components.mi, { children: "t" })] }), _jsx(_components.mo, { stretchy: 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coefficients and ", _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", children: _jsxs(_components.semantics, { children: [_jsxs(_components.mrow, { children: [_jsxs(_components.msup, { children: [_jsx(_components.mi, { children: "R" }), _jsx(_components.mn, { children: "2" })] }), _jsx(_components.mo, { children: "=" }), _jsx(_components.mn, { children: "0.96" })] }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "R^2 = 0.96" })] }) }) }), _jsxs(_components.span, { className: "katex-html", "aria-hidden": "true", children: [_jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.8141em" } }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.00773em" }, children: "R" }), 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A DF test applied to the residuals rejects the null of a unit root at 5%."] }), "\n", _jsxs(_components.li, { children: ["A regression of ", _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", children: _jsxs(_components.semantics, { children: [_jsxs(_components.mrow, { children: [_jsx(_components.mi, { mathvariant: "normal", children: "Δ" }), _jsx(_components.mi, { children: "ln" }), _jsx(_components.mo, { children: "⁡" }), _jsx(_components.mo, { stretchy: "false", children: "(" }), _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "P" }), _jsx(_components.mi, { children: "t" })] }), _jsx(_components.mo, { stretchy: "false", children: ")" })] }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "\\Delta \\ln(P_t)" })] }) }) }), _jsx(_components.span, { className: "katex-html", "aria-hidden": "true", children: _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "1em", verticalAlign: "-0.25em" } }), _jsx(_components.span, { className: "mord", children: "Δ" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.1667em" } }), _jsx(_components.span, { className: "mop", children: "ln" }), _jsx(_components.span, { className: "mopen", children: "(" }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.13889em" }, children: "P" }), _jsx(_components.span, { className: "msupsub", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsx(_components.span, { className: "vlist", style: { height: "0.2806em" }, children: _jsxs(_components.span, { style: { top: "-2.55em", marginLeft: "-0.1389em", marginRight: "0.05em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.7em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsx(_components.span, { className: "mord mathnormal mtight", children: "t" }) })] }) }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.15em" }, children: _jsx(_components.span, {}) }) })] }) })] }), _jsx(_components.span, { className: "mclose", children: ")" })] }) })] }), " on ", _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", children: _jsxs(_components.semantics, { children: [_jsxs(_components.mrow, { children: [_jsx(_components.mi, { mathvariant: "normal", children: "Δ" }), _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "R" }), _jsx(_components.mi, { children: "t" })] })] }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "\\Delta R_t" })] }) }) }), _jsx(_components.span, { className: "katex-html", "aria-hidden": "true", children: _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.8333em", verticalAlign: "-0.15em" } }), _jsx(_components.span, { className: "mord", children: "Δ" }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.00773em" }, children: "R" }), _jsx(_components.span, { className: "msupsub", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsx(_components.span, { className: "vlist", style: { height: "0.2806em" }, children: _jsxs(_components.span, { style: { top: "-2.55em", marginLeft: "-0.0077em", marginRight: "0.05em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.7em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsx(_components.span, { className: "mord mathnormal mtight", children: "t" }) })] }) }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.15em" }, children: _jsx(_components.span, {}) }) })] }) })] })] }) })] }), " yields ", _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", children: _jsxs(_components.semantics, { children: [_jsxs(_components.mrow, { children: [_jsxs(_components.msup, { children: [_jsx(_components.mi, { children: "R" }), _jsx(_components.mn, { children: "2" })] }), _jsx(_components.mo, { children: "=" }), _jsx(_components.mn, { children: "0.05" })] }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "R^2 = 0.05" })] }) }) }), _jsxs(_components.span, { className: "katex-html", "aria-hidden": "true", children: [_jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.8141em" } }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.00773em" }, children: "R" }), _jsx(_components.span, { className: "msupsub", children: _jsx(_components.span, { className: "vlist-t", children: _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.8141em" }, children: _jsxs(_components.span, { style: { top: "-3.063em", marginRight: "0.05em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.7em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsx(_components.span, { className: "mord mtight", children: "2" }) })] }) }) }) }) })] }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2778em" } }), _jsx(_components.span, { className: "mrel", children: "=" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2778em" } })] }), _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.6444em" } }), _jsx(_components.span, { className: "mord", children: "0.05" })] })] })] }), " and no significant coefficients."] }), "\n"] }), "\n", _jsx(_components.p, { children: "Use this information to answer Questions 1–4." }), "\n", _jsxs(_components.ol, { children: ["\n", _jsxs(_components.li, { children: ["\n", _jsx(_components.span, { children: "Based on the unit-root tests, which classification of processes is most appropriate?" }), _jsxs(_components.ol, { type: "a", children: [_jsx(_components.li, { children: "PtP_tPt and EPStEPS_tEPSt are I(0); RtR_tRt is I(1)." }), _jsx(_components.li, { children: "PtP_tPt and EPStEPS_tEPSt are I(1); RtR_tRt is I(0)." }), _jsx(_components.li, { children: "All three series are I(1)." }), _jsx(_components.li, { children: "All three series are I(0)." })] }), "\n"] }), "\n", _jsxs(_components.li, { children: ["\n", _jsx(_components.span, { children: "The regression of ln⁡(EPSt)\\ln(EPS_t)ln(EPSt) on ln⁡(Pt)\\ln(P_t)ln(Pt) is best interpreted as:" }), _jsxs(_components.ol, { type: "a", children: [_jsx(_components.li, { children: "A spurious regression because both variables are nonstationary in levels." }), _jsx(_components.li, { children: "A valid long-run cointegrating relationship between earnings and prices." }), _jsx(_components.li, { children: "A short-run relationship that should be estimated in first differences." }), _jsx(_components.li, { children: "An AR(1) model because the dependent variable is lagged once." })] }), "\n"] }), "\n", _jsxs(_components.li, { children: ["\n", _jsx(_components.span, { children: "Given the test outcomes, which modeling approach is most appropriate for the relationship between PtP_tPt and EPStEPS_tEPSt?" }), _jsxs(_components.ol, { type: "a", children: [_jsx(_components.li, { children: "Regress Δln⁡(Pt)\\Delta \\ln(P_t)Δln(Pt) on Δln⁡(EPSt)\\Delta \\ln(EPS_t)Δln(EPSt) only." }), _jsx(_components.li, { children: "Regress ln⁡(Pt)\\ln(P_t)ln(Pt) on ln⁡(EPSt)\\ln(EPS_t)ln(EPSt) in levels with usual t‑tests." }), _jsx(_components.li, { children: "Estimate an error-correction model with Δln⁡(Pt)\\Delta \\ln(P_t)Δln(Pt) as the dependent variable." }), _jsx(_components.li, { children: "Use a pure random-walk model for ln⁡(Pt)\\ln(P_t)ln(Pt) with no role for EPStEPS_tEPSt." })] }), "\n"] }), "\n", _jsxs(_components.li, { children: ["\n", _jsx(_components.span, { children: "Regarding the regression of Δln⁡(Pt)\\Delta \\ln(P_t)Δln(Pt) on ΔRt\\Delta R_tΔRt, which statement is most accurate?" }), _jsxs(_components.ol, { type: "a", children: [_jsx(_components.li, { children: "The low R2R^2R2 proves the relationship is spurious due to nonstationarity." }), _jsx(_components.li, { children: "The regression is likely valid because both variables are stationary and show no relationship." }), _jsx(_components.li, { children: "The regression should be re-estimated in levels to increase explanatory power." }), _jsx(_components.li, { children: "The presence of cointegration between PtP_tPt and EPStEPS_tEPSt implies that RtR_tRt must also be cointegrated." })] }), "\n"] }), "\n"] }), "\n", _jsx(_components.h2, { children: _jsx(_components.strong, { children: "Introduction" }) }), "\n", _jsx(_components.p, { children: "Analysis of time-series data in finance frequently uncovers patterns such as persistence, trends, or seasonal fluctuations. However, not all time-series data are suitable for standard regression analysis; the property of stationarity is critical for reliable statistical inference. Economic and financial data often exhibit nonstationarity because of trends, structural changes, or random walk behavior. This article examines unit roots (a primary cause of nonstationarity), details statistical methods for testing and correcting for nonstationarity, and introduces cointegration and error-correction models as solutions for valid inference between related nonstationary variables." }), "\n", _jsxs(_components.blockquote, { children: ["\n", _jsxs(_components.p, { children: [_jsx(_components.strong, { children: "Key Term: Unit Root" }), _jsx(_components.br, {}), "\n", "A characteristic of a time series where the coefficient on the lagged dependent variable equals one (in an AR(1) model), making the series nonstationary and causing its variance to increase without bound over time."] }), "\n", _jsxs(_components.p, { children: [_jsx(_components.strong, { children: "Key Term: Covariance Stationary" }), _jsx(_components.br, {}), "\n", "A time series whose mean, variance, and autocovariances are constant over time. Such series are stable around a fixed mean and are suitable for standard statistical analysis and AR modeling."] }), "\n"] }), "\n", _jsx(_components.h3, { children: "Covariance Stationarity and AR(1) Models" }), "\n", _jsx(_components.p, { children: "Many time-series models used in the curriculum are autoregressive (AR). The simplest is the AR(1):" }), "\n", _jsx(_components.span, { className: "katex-display", children: _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", display: "block", children: _jsxs(_components.semantics, { children: [_jsxs(_components.mrow, { children: [_jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "x" }), _jsx(_components.mi, { children: "t" })] }), _jsx(_components.mo, { children: "=" }), _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "b" }), _jsx(_components.mn, { children: "0" })] }), _jsx(_components.mo, { children: "+" }), _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "b" }), _jsx(_components.mn, { children: "1" })] }), _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "x" }), _jsxs(_components.mrow, { children: [_jsx(_components.mi, { children: "t" }), _jsx(_components.mo, { children: "−" }), _jsx(_components.mn, { children: "1" })] })] }), _jsx(_components.mo, { children: "+" }), _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "ε" }), _jsx(_components.mi, { children: "t" })] })] }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "x_t = b_0 + b_1 x_{t-1} + \\varepsilon_t" })] }) }) }), _jsxs(_components.span, { className: "katex-html", "aria-hidden": "true", children: [_jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.5806em", verticalAlign: "-0.15em" } }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mord mathnormal", children: "x" }), _jsx(_components.span, { className: "msupsub", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsx(_components.span, { className: "vlist", 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children: _jsx(_components.span, {}) }) })] }) })] }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2222em" } }), _jsx(_components.span, { className: "mbin", children: "+" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2222em" } })] }), _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.9028em", verticalAlign: "-0.2083em" } }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mord mathnormal", children: "b" }), _jsx(_components.span, { className: "msupsub", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsx(_components.span, { className: "vlist", style: { height: "0.3011em" }, children: _jsxs(_components.span, { style: { top: "-2.55em", marginLeft: "0em", marginRight: "0.05em" }, children: [_jsx(_components.span, { className: 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"strut", style: { height: "0.5806em", verticalAlign: "-0.15em" } }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mord mathnormal", children: "ε" }), _jsx(_components.span, { className: "msupsub", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsx(_components.span, { className: "vlist", style: { height: "0.2806em" }, children: _jsxs(_components.span, { style: { top: "-2.55em", marginLeft: "0em", marginRight: "0.05em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.7em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsx(_components.span, { className: "mord mathnormal mtight", children: "t" }) })] }) }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.15em" }, children: _jsx(_components.span, {}) }) })] }) })] })] })] })] }) }), "\n", _jsxs(_components.p, { children: ["where ", _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", children: _jsxs(_components.semantics, { children: [_jsx(_components.mrow, { children: _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "ε" }), _jsx(_components.mi, { children: "t" })] }) }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "\\varepsilon_t" })] }) }) }), _jsx(_components.span, { className: "katex-html", "aria-hidden": "true", children: _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.5806em", verticalAlign: "-0.15em" } }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mord mathnormal", children: "ε" }), _jsx(_components.span, { className: "msupsub", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsx(_components.span, { className: "vlist", style: { height: "0.2806em" }, children: _jsxs(_components.span, { style: { top: "-2.55em", marginLeft: "0em", marginRight: "0.05em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.7em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsx(_components.span, { className: "mord mathnormal mtight", children: "t" }) })] }) }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.15em" }, children: _jsx(_components.span, {}) }) })] }) })] })] }) })] }), " is white noise. For this process to be covariance stationary:"] }), "\n", _jsxs(_components.ul, { children: ["\n", _jsxs(_components.li, { children: ["The expected value ", _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", children: _jsxs(_components.semantics, { children: [_jsxs(_components.mrow, { children: [_jsx(_components.mi, { children: "E" }), _jsx(_components.mo, { stretchy: "false", children: "(" }), _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "x" }), _jsx(_components.mi, { children: "t" })] }), _jsx(_components.mo, { stretchy: "false", children: ")" })] }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "E(x_t)" })] }) }) }), _jsx(_components.span, { className: "katex-html", "aria-hidden": "true", children: _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: 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_jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.15em" }, children: _jsx(_components.span, {}) }) })] }) })] }), _jsx(_components.span, { className: "mclose", children: ")" })] }) })] }), " must be constant and finite."] }), "\n", _jsxs(_components.li, { children: ["The variance ", _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", children: _jsxs(_components.semantics, { children: [_jsxs(_components.mrow, { children: [_jsx(_components.mi, { mathvariant: "normal", children: "Var" }), _jsx(_components.mo, { children: "⁡" }), _jsx(_components.mo, { stretchy: "false", children: "(" }), _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "x" }), _jsx(_components.mi, { children: "t" })] }), _jsx(_components.mo, { stretchy: "false", children: ")" })] }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "\\operatorname{Var}(x_t)" })] }) }) }), _jsx(_components.span, { className: "katex-html", "aria-hidden": "true", children: _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "1em", verticalAlign: "-0.25em" } }), _jsx(_components.span, { className: "mop", children: _jsx(_components.span, { className: "mord mathrm", children: "Var" }) }), _jsx(_components.span, { className: "mopen", children: "(" }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mord mathnormal", children: "x" }), _jsx(_components.span, { className: "msupsub", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsx(_components.span, { className: "vlist", style: { height: "0.2806em" }, children: _jsxs(_components.span, { style: { top: "-2.55em", marginLeft: "0em", marginRight: "0.05em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.7em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsx(_components.span, { className: "mord mathnormal mtight", children: "t" }) })] }) }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.15em" }, children: _jsx(_components.span, {}) }) })] }) })] }), _jsx(_components.span, { className: "mclose", children: ")" })] }) })] }), " must be constant and finite."] }), "\n", _jsxs(_components.li, { children: ["The covariance ", _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", children: _jsxs(_components.semantics, { children: [_jsxs(_components.mrow, { children: [_jsx(_components.mi, { mathvariant: "normal", children: "Cov" }), _jsx(_components.mo, { children: "⁡" }), _jsx(_components.mo, { stretchy: "false", children: "(" }), _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "x" }), _jsx(_components.mi, { children: "t" })] }), _jsx(_components.mo, { separator: "true", children: "," }), _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "x" }), _jsxs(_components.mrow, { children: [_jsx(_components.mi, { children: "t" }), _jsx(_components.mo, { children: "−" }), _jsx(_components.mi, { children: "k" })] })] }), _jsx(_components.mo, { stretchy: "false", children: ")" })] }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "\\operatorname{Cov}(x_t, x_{t-k})" })] }) }) }), _jsx(_components.span, { className: "katex-html", "aria-hidden": "true", children: _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "1em", verticalAlign: "-0.25em" } }), _jsx(_components.span, { className: "mop", children: _jsx(_components.span, { className: "mord mathrm", style: { marginRight: "0.01389em" }, children: "Cov" }) }), _jsx(_components.span, { className: "mopen", children: "(" }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mord mathnormal", children: "x" }), _jsx(_components.span, { className: "msupsub", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsx(_components.span, { className: "vlist", style: { height: "0.2806em" }, children: _jsxs(_components.span, { style: { top: "-2.55em", marginLeft: "0em", marginRight: "0.05em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.7em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsx(_components.span, { className: "mord mathnormal mtight", children: "t" }) })] }) }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.15em" }, children: _jsx(_components.span, {}) }) })] }) })] }), _jsx(_components.span, { className: "mpunct", children: "," }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.1667em" } }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mord mathnormal", children: "x" }), _jsx(_components.span, { className: "msupsub", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsx(_components.span, { className: "vlist", style: { height: "0.3361em" }, children: _jsxs(_components.span, { style: { top: "-2.55em", marginLeft: "0em", marginRight: "0.05em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.7em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsxs(_components.span, { className: "mord mtight", children: [_jsx(_components.span, { className: "mord mathnormal mtight", children: "t" }), _jsx(_components.span, { className: "mbin mtight", children: "−" }), _jsx(_components.span, { className: "mord mathnormal mtight", style: { marginRight: "0.03148em" }, children: "k" })] }) })] }) }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.2083em" }, children: _jsx(_components.span, {}) }) })] }) })] }), _jsx(_components.span, { className: "mclose", children: ")" })] }) })] }), " for any lag ", _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", children: _jsxs(_components.semantics, { children: [_jsx(_components.mrow, { children: _jsx(_components.mi, { children: "k" }) }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "k" })] }) }) }), _jsx(_components.span, { className: "katex-html", "aria-hidden": "true", children: _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.6944em" } }), _jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.03148em" }, children: "k" })] }) })] }), " must depend only on ", _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", children: _jsxs(_components.semantics, { children: [_jsx(_components.mrow, { children: _jsx(_components.mi, { children: "k" }) }), _jsx(_components.annotation, { encoding: 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style: { height: "0.6151em" } }), _jsx(_components.span, { className: "mord mathnormal", children: "t" })] }) })] }), "."] }), "\n"] }), "\n", _jsxs(_components.p, { children: ["If ", _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", children: _jsxs(_components.semantics, { children: [_jsxs(_components.mrow, { children: [_jsx(_components.mo, { stretchy: "false", children: "∣" }), _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "b" }), _jsx(_components.mn, { children: "1" })] }), _jsx(_components.mo, { stretchy: "false", children: "∣" }), _jsx(_components.mo, { children: "<" }), _jsx(_components.mn, { children: "1" })] }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "\\lvert b_1 \\rvert < 1" })] }) }) }), _jsxs(_components.span, { className: "katex-html", "aria-hidden": "true", children: [_jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "1em", verticalAlign: "-0.25em" } }), _jsx(_components.span, { className: "mopen", children: "∣" }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mord mathnormal", children: "b" }), _jsx(_components.span, { className: "msupsub", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsx(_components.span, { className: "vlist", style: { height: "0.3011em" }, children: _jsxs(_components.span, { style: { top: "-2.55em", marginLeft: "0em", marginRight: "0.05em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.7em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsx(_components.span, { className: "mord mtight", children: "1" }) })] }) }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.15em" }, children: _jsx(_components.span, {}) }) })] }) })] }), _jsx(_components.span, { className: "mclose", children: "∣" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2778em" } }), _jsx(_components.span, { className: "mrel", children: "<" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2778em" } })] }), _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.6444em" } }), _jsx(_components.span, { className: "mord", children: "1" })] })] })] }), ", the series is mean-reverting and covariance stationary. The long-run mean (often called the mean-reverting level) is:"] }), "\n", _jsx(_components.span, { className: "katex-display", children: _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", display: "block", children: _jsxs(_components.semantics, { children: [_jsxs(_components.mrow, { children: [_jsx(_components.mi, { children: "μ" }), _jsx(_components.mo, { children: "=" }), _jsxs(_components.mfrac, { children: [_jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "b" }), _jsx(_components.mn, { children: "0" })] }), _jsxs(_components.mrow, { children: [_jsx(_components.mn, { children: "1" }), _jsx(_components.mo, { children: "−" }), _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "b" }), _jsx(_components.mn, { children: "1" })] })] })] })] }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "\\mu = \\frac{b_0}{1 - b_1}" })] }) }) }), _jsxs(_components.span, { className: "katex-html", "aria-hidden": "true", children: [_jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.625em", verticalAlign: "-0.1944em" } }), _jsx(_components.span, { className: "mord mathnormal", children: "μ" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2778em" } }), _jsx(_components.span, { className: "mrel", children: "=" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2778em" } })] }), _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "2.2074em", verticalAlign: "-0.836em" } }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mopen nulldelimiter" }), _jsx(_components.span, { className: "mfrac", children: _jsxs(_components.span, { className: "vlist-t 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className: "vlist", style: { height: "0.3011em" }, children: _jsxs(_components.span, { style: { top: "-2.55em", marginLeft: "0em", marginRight: "0.05em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.7em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsx(_components.span, { className: "mord mtight", children: "1" }) })] }) }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.15em" }, children: _jsx(_components.span, {}) }) })] }) })] })] })] }), _jsxs(_components.span, { style: { top: "-3.23em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "3em" } }), _jsx(_components.span, { className: "frac-line", style: { borderBottomWidth: "0.04em" } })] }), _jsxs(_components.span, { style: { top: "-3.677em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "3em" } }), _jsx(_components.span, { className: "mord", children: _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mord mathnormal", children: "b" }), _jsx(_components.span, { className: "msupsub", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsx(_components.span, { className: "vlist", style: { height: "0.3011em" }, children: _jsxs(_components.span, { style: { top: "-2.55em", marginLeft: "0em", marginRight: "0.05em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.7em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsx(_components.span, { className: "mord mtight", children: "0" }) })] }) }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.15em" }, children: _jsx(_components.span, {}) }) })] }) })] }) })] })] }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.836em" }, children: _jsx(_components.span, {}) }) })] }) }), _jsx(_components.span, { className: "mclose nulldelimiter" })] })] })] })] }) }), "\n", _jsxs(_components.blockquote, { children: ["\n", _jsxs(_components.p, { children: [_jsx(_components.strong, { children: "Key Term: Mean-Reverting Level" }), _jsx(_components.br, {}), "\n", "The long-run equilibrium value to which a stationary AR(1) process tends, calculated as ", _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", children: _jsxs(_components.semantics, { children: [_jsxs(_components.mrow, 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}), _jsx(_components.mo, { stretchy: "false", children: "∣" }), _jsx(_components.mo, { children: "<" }), _jsx(_components.mn, { children: "1" })] }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "\\lvert b_1 \\rvert < 1" })] }) }) }), _jsxs(_components.span, { className: "katex-html", "aria-hidden": "true", children: [_jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "1em", verticalAlign: "-0.25em" } }), _jsx(_components.span, { className: "mopen", children: "∣" }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mord mathnormal", children: "b" }), _jsx(_components.span, { className: "msupsub", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsx(_components.span, { className: "vlist", style: { height: "0.3011em" }, children: _jsxs(_components.span, { style: { 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_jsx(_components.span, { className: "mord", children: "1" })] })] })] }), "."] }), "\n"] }), "\n", _jsxs(_components.p, { children: ["If ", _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", children: _jsxs(_components.semantics, { children: [_jsxs(_components.mrow, { children: [_jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "b" }), _jsx(_components.mn, { children: "1" })] }), _jsx(_components.mo, { children: "=" }), _jsx(_components.mn, { children: "1" })] }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "b_1 = 1" })] }) }) }), _jsxs(_components.span, { className: "katex-html", "aria-hidden": "true", children: [_jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.8444em", verticalAlign: "-0.15em" } }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mord mathnormal", children: "b" }), _jsx(_components.span, { className: "msupsub", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsx(_components.span, { className: "vlist", style: { height: "0.3011em" }, children: _jsxs(_components.span, { style: { top: "-2.55em", marginLeft: "0em", marginRight: "0.05em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.7em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsx(_components.span, { className: "mord mtight", children: "1" }) })] }) }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.15em" }, children: _jsx(_components.span, {}) }) })] }) })] }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2778em" } }), _jsx(_components.span, { className: "mrel", children: "=" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2778em" } })] }), _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.6444em" } }), _jsx(_components.span, { className: "mord", children: "1" })] })] })] }), ", the mean-reverting level is undefined (division by zero), and the process becomes a random walk with a unit root, which is not covariance stationary."] }), "\n", _jsx(_components.h3, { children: "Random Walks and Unit Roots" }), "\n", _jsx(_components.p, { children: "A commonly observed random walk process can be written as:" }), "\n", _jsx(_components.span, { className: "katex-display", children: _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", display: "block", children: _jsxs(_components.semantics, { children: [_jsxs(_components.mrow, { children: [_jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "x" }), _jsx(_components.mi, { children: "t" })] }), _jsx(_components.mo, { children: "=" }), _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "x" }), _jsxs(_components.mrow, { children: [_jsx(_components.mi, { children: "t" }), _jsx(_components.mo, { children: "−" }), _jsx(_components.mn, { children: "1" })] })] }), _jsx(_components.mo, { children: "+" }), _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "ε" }), _jsx(_components.mi, { children: "t" })] })] }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "x_t = x_{t-1} + \\varepsilon_t" })] }) }) }), _jsxs(_components.span, { className: "katex-html", "aria-hidden": "true", children: [_jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.5806em", verticalAlign: "-0.15em" } }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mord mathnormal", children: "x" }), _jsx(_components.span, { className: "msupsub", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsx(_components.span, { className: "vlist", style: { height: "0.2806em" }, children: _jsxs(_components.span, { style: { top: "-2.55em", marginLeft: "0em", marginRight: "0.05em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.7em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsx(_components.span, { className: "mord mathnormal mtight", children: "t" }) })] }) }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.15em" }, children: _jsx(_components.span, {}) }) })] }) })] }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2778em" } }), _jsx(_components.span, { className: "mrel", children: "=" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2778em" } })] }), _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.7917em", verticalAlign: "-0.2083em" } }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mord mathnormal", children: "x" }), _jsx(_components.span, { className: "msupsub", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsx(_components.span, { className: "vlist", style: { height: "0.3011em" }, children: _jsxs(_components.span, { style: { top: "-2.55em", marginLeft: "0em", marginRight: "0.05em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.7em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsxs(_components.span, { className: "mord mtight", children: [_jsx(_components.span, { className: "mord mathnormal mtight", children: "t" }), _jsx(_components.span, { className: "mbin mtight", children: "−" }), _jsx(_components.span, { className: "mord mtight", children: "1" })] }) })] }) }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.2083em" }, children: _jsx(_components.span, {}) }) })] }) })] }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2222em" } }), _jsx(_components.span, { className: "mbin", children: "+" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2222em" } })] }), _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.5806em", verticalAlign: "-0.15em" } }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mord mathnormal", children: "ε" }), _jsx(_components.span, { className: "msupsub", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsx(_components.span, { className: "vlist", style: { height: "0.2806em" }, children: _jsxs(_components.span, { style: { top: "-2.55em", marginLeft: "0em", marginRight: "0.05em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.7em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsx(_components.span, { className: "mord mathnormal mtight", children: "t" }) })] }) }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.15em" }, children: _jsx(_components.span, {}) }) })] }) })] })] })] })] }) }), "\n", _jsxs(_components.p, { children: ["where ", _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", children: _jsxs(_components.semantics, { children: [_jsx(_components.mrow, { children: _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "ε" }), _jsx(_components.mi, { children: "t" })] }) }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "\\varepsilon_t" })] }) }) }), _jsx(_components.span, { className: "katex-html", "aria-hidden": "true", children: _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.5806em", verticalAlign: "-0.15em" } }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mord mathnormal", children: "ε" }), _jsx(_components.span, { className: "msupsub", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsx(_components.span, { className: "vlist", style: { height: "0.2806em" }, children: _jsxs(_components.span, { style: { top: "-2.55em", marginLeft: "0em", marginRight: "0.05em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.7em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsx(_components.span, { className: "mord mathnormal mtight", children: "t" }) })] }) }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.15em" }, children: _jsx(_components.span, {}) }) })] }) })] })] }) })] }), " is white noise. Here, the coefficient on ", _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", children: _jsxs(_components.semantics, { children: [_jsx(_components.mrow, { children: _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "x" }), _jsxs(_components.mrow, { children: [_jsx(_components.mi, { children: "t" }), _jsx(_components.mo, { children: "−" }), _jsx(_components.mn, { children: "1" })] })] }) }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "x_{t-1}" })] }) }) }), _jsx(_components.span, { className: "katex-html", "aria-hidden": "true", children: _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.6389em", verticalAlign: "-0.2083em" } }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mord mathnormal", children: "x" }), _jsx(_components.span, { className: "msupsub", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsx(_components.span, { className: "vlist", style: { height: "0.3011em" }, children: _jsxs(_components.span, { style: { top: "-2.55em", marginLeft: "0em", marginRight: "0.05em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.7em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsxs(_components.span, { className: "mord mtight", children: [_jsx(_components.span, { className: "mord mathnormal mtight", children: "t" }), _jsx(_components.span, { className: "mbin mtight", children: "−" }), _jsx(_components.span, { className: "mord mtight", children: "1" })] }) })] }) }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.2083em" }, children: _jsx(_components.span, {}) }) })] }) })] })] }) })] }), " is 1, indicating a unit root."] }), "\n", _jsxs(_components.blockquote, { children: ["\n", _jsxs(_components.p, { children: [_jsx(_components.strong, { children: "Key Term: Random Walk" }), _jsx(_components.br, {}), "\n", "A process where the best forecast of the next value is the current value plus a purely random shock: ", _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", children: _jsxs(_components.semantics, { children: [_jsxs(_components.mrow, { children: [_jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "x" }), _jsx(_components.mi, { children: "t" })] }), _jsx(_components.mo, { children: "=" }), _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "x" }), _jsxs(_components.mrow, { children: [_jsx(_components.mi, { children: "t" }), _jsx(_components.mo, { children: "−" }), _jsx(_components.mn, { children: "1" })] })] }), _jsx(_components.mo, { children: "+" }), _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "ε" }), _jsx(_components.mi, { children: "t" })] })] }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "x_t = x_{t-1} + \\varepsilon_t" })] }) }) }), _jsxs(_components.span, { className: "katex-html", "aria-hidden": "true", children: [_jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.5806em", verticalAlign: "-0.15em" } }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mord mathnormal", children: "x" }), _jsx(_components.span, { className: "msupsub", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsx(_components.span, { className: "vlist", style: { height: "0.2806em" }, children: _jsxs(_components.span, { style: { top: "-2.55em", marginLeft: "0em", marginRight: "0.05em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.7em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsx(_components.span, { className: "mord mathnormal mtight", children: "t" }) })] }) }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.15em" }, children: _jsx(_components.span, {}) }) })] }) })] }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2778em" } }), _jsx(_components.span, { className: "mrel", children: "=" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2778em" } })] }), _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.7917em", verticalAlign: "-0.2083em" } }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mord mathnormal", children: "x" }), _jsx(_components.span, { className: "msupsub", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsx(_components.span, { className: "vlist", style: { height: "0.3011em" }, children: _jsxs(_components.span, { style: { top: "-2.55em", marginLeft: "0em", marginRight: "0.05em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.7em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsxs(_components.span, { className: "mord mtight", children: [_jsx(_components.span, { className: "mord mathnormal mtight", children: "t" }), _jsx(_components.span, { className: "mbin mtight", children: "−" }), _jsx(_components.span, { className: "mord mtight", children: "1" })] }) })] }) }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.2083em" }, children: _jsx(_components.span, {}) }) })] }) })] }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2222em" } }), _jsx(_components.span, { className: "mbin", children: "+" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2222em" } })] }), _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.5806em", verticalAlign: "-0.15em" } }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mord mathnormal", children: "ε" }), _jsx(_components.span, { className: "msupsub", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsx(_components.span, { className: "vlist", style: { height: "0.2806em" }, children: _jsxs(_components.span, { style: { top: "-2.55em", marginLeft: "0em", marginRight: "0.05em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.7em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsx(_components.span, { className: "mord mathnormal mtight", children: "t" }) })] }) }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.15em" }, children: _jsx(_components.span, {}) }) })] }) })] })] })] })] }), ". It has a unit root, is nonstationary, and does not mean-revert."] }), "\n"] }), "\n", _jsx(_components.p, { children: "Sometimes there is a deterministic drift:" }), "\n", _jsx(_components.span, { className: "katex-display", children: _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", display: "block", children: _jsxs(_components.semantics, { children: [_jsxs(_components.mrow, { children: [_jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "x" }), _jsx(_components.mi, { children: "t" })] }), _jsx(_components.mo, { children: "=" }), _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "b" }), _jsx(_components.mn, { children: "0" })] }), _jsx(_components.mo, { children: "+" }), _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "x" }), _jsxs(_components.mrow, { children: [_jsx(_components.mi, { 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height: "0.15em" }, children: _jsx(_components.span, {}) }) })] }) })] })] })] })] }) }), "\n", _jsxs(_components.blockquote, { children: ["\n", _jsxs(_components.p, { children: [_jsx(_components.strong, { children: "Key Term: Random Walk with Drift" }), _jsx(_components.br, {}), "\n", "A random walk process with a nonzero intercept ", _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", children: _jsxs(_components.semantics, { children: [_jsx(_components.mrow, { children: _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "b" }), _jsx(_components.mn, { children: "0" })] }) }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "b_0" })] }) }) }), _jsx(_components.span, { className: "katex-html", "aria-hidden": "true", children: _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.8444em", verticalAlign: "-0.15em" } }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mord mathnormal", children: "b" }), _jsx(_components.span, { className: "msupsub", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsx(_components.span, { className: "vlist", style: { height: "0.3011em" }, children: _jsxs(_components.span, { style: { top: "-2.55em", marginLeft: "0em", marginRight: "0.05em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.7em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsx(_components.span, { className: "mord mtight", children: "0" }) })] }) }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.15em" }, children: _jsx(_components.span, {}) }) })] }) })] })] }) })] }), ", so the expected change each period is ", _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", children: _jsxs(_components.semantics, { children: [_jsx(_components.mrow, { children: _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "b" }), _jsx(_components.mn, { children: "0" })] }) }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "b_0" })] }) }) }), _jsx(_components.span, { className: "katex-html", "aria-hidden": "true", children: _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.8444em", verticalAlign: "-0.15em" } }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mord mathnormal", children: "b" }), 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The series trends upward or downward on average but remains nonstationary."] }), "\n"] }), "\n", _jsxs(_components.p, { children: ["In both cases (with or without drift), ", _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", children: _jsxs(_components.semantics, { children: [_jsxs(_components.mrow, { children: [_jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "b" }), _jsx(_components.mn, { children: "1" })] }), _jsx(_components.mo, { children: "=" }), _jsx(_components.mn, { children: "1" })] }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "b_1 = 1" })] }) }) }), _jsxs(_components.span, { className: "katex-html", "aria-hidden": "true", children: [_jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.8444em", verticalAlign: "-0.15em" } }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mord mathnormal", children: "b" }), _jsx(_components.span, { className: "msupsub", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsx(_components.span, { className: "vlist", style: { height: "0.3011em" }, children: _jsxs(_components.span, { style: { top: "-2.55em", marginLeft: "0em", marginRight: "0.05em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.7em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsx(_components.span, { className: "mord mtight", children: "1" }) })] }) }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.15em" }, children: _jsx(_components.span, {}) }) })] }) })] }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2778em" } }), _jsx(_components.span, { className: "mrel", children: "=" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2778em" } })] }), _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.6444em" } }), _jsx(_components.span, { className: "mord", children: "1" })] })] })] }), " implies a unit root, and the variance of ", _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", children: _jsxs(_components.semantics, { children: [_jsx(_components.mrow, { children: _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "x" }), _jsx(_components.mi, { children: "t" })] }) }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "x_t" })] }) }) }), _jsx(_components.span, { className: "katex-html", "aria-hidden": "true", children: _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.5806em", verticalAlign: "-0.15em" } }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mord mathnormal", children: "x" }), _jsx(_components.span, { className: "msupsub", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsx(_components.span, { className: "vlist", style: { height: "0.2806em" }, children: _jsxs(_components.span, { style: { top: "-2.55em", marginLeft: "0em", marginRight: "0.05em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.7em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsx(_components.span, { className: "mord mathnormal mtight", children: "t" }) })] }) }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.15em" }, children: _jsx(_components.span, {}) }) })] }) })] })] }) })] }), " grows with ", _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", children: _jsxs(_components.semantics, { children: [_jsx(_components.mrow, { children: _jsx(_components.mi, { children: "t" }) }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "t" })] }) }) }), _jsx(_components.span, { className: "katex-html", "aria-hidden": "true", children: _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.6151em" } }), _jsx(_components.span, { className: "mord mathnormal", children: "t" })] }) })] }), ". Least squares regression on such series in levels can be misleading unless we transform the data or exploit cointegration."] }), "\n", _jsxs(_components.blockquote, { children: ["\n", _jsxs(_components.p, { children: [_jsx(_components.strong, { children: "Key Term: Spurious Regression" }), _jsx(_components.br, {}), "\n", "Incorrect statistical inference where regression of two unrelated nonstationary time series indicates a significant relationship—high ", _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", children: _jsxs(_components.semantics, { children: [_jsx(_components.mrow, { children: _jsxs(_components.msup, { children: [_jsx(_components.mi, { children: "R" }), _jsx(_components.mn, { children: "2" })] }) }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "R^2" })] }) }) }), _jsx(_components.span, { className: "katex-html", "aria-hidden": "true", children: _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.8141em" } }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.00773em" }, children: "R" }), _jsx(_components.span, { className: "msupsub", children: _jsx(_components.span, { className: "vlist-t", children: _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.8141em" }, children: _jsxs(_components.span, { style: { top: "-3.063em", marginRight: "0.05em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.7em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsx(_components.span, { className: "mord mtight", children: "2" }) })] }) }) }) }) })] })] }) })] }), " and t‑statistics—even though the variables are unrelated in economic terms. This arises because both series trend or wander over time."] }), "\n"] }), "\n", _jsx(_components.h2, { children: "Why Stationarity Matters" }), "\n", _jsx(_components.p, { children: "A covariance stationary process has a stable mean and variance, so its statistical properties do not change over time. Most estimation techniques—including hypothesis tests—implicitly assume stationarity. If that assumption is violated:" }), "\n", _jsxs(_components.ul, { children: ["\n", _jsx(_components.li, { children: "Estimated coefficients may appear statistically significant when the variables are not truly related." }), "\n", _jsx(_components.li, { children: "Standard errors and test statistics follow different distributions than assumed." }), "\n", _jsx(_components.li, { children: "Forecasts may be systematically biased or unstable." }), "\n"] }), "\n", _jsxs(_components.p, { children: ["When a time series has a unit root, its statistical properties change over time, resulting in spurious relationships and unreliable regression results. For example, regressing the level of a stock index on the level of an unrelated macro variable (both following random walks) can yield a high ", _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", children: _jsxs(_components.semantics, { children: [_jsx(_components.mrow, { children: _jsxs(_components.msup, { children: [_jsx(_components.mi, { children: "R" }), _jsx(_components.mn, { children: "2" })] }) }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "R^2" })] }) }) }), _jsx(_components.span, { className: "katex-html", "aria-hidden": "true", children: _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.8141em" } }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.00773em" }, children: "R" }), _jsx(_components.span, { className: "msupsub", children: _jsx(_components.span, { className: "vlist-t", children: _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.8141em" }, children: _jsxs(_components.span, { style: { top: "-3.063em", marginRight: "0.05em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.7em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsx(_components.span, { className: "mord mtight", children: "2" }) })] }) }) }) }) })] })] }) })] }), " even though there is no economic link."] }), "\n", _jsx(_components.p, { children: "From an exam standpoint, whenever you see trending or random-walk-like series in levels, you should immediately think about unit-root testing and the risk of spurious regression." }), "\n", _jsx(_components.h2, { children: "Recognizing and Testing for Unit Roots" }), "\n", _jsx(_components.p, { children: "Consider the AR(1) model:" }), "\n", _jsx(_components.span, { className: "katex-display", children: _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", display: "block", children: _jsxs(_components.semantics, { children: [_jsxs(_components.mrow, { children: [_jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "x" }), _jsx(_components.mi, { children: "t" })] }), _jsx(_components.mo, { children: "=" }), _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "b" }), _jsx(_components.mn, { children: "0" })] }), _jsx(_components.mo, { children: "+" }), _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "b" }), _jsx(_components.mn, { children: "1" })] }), _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "x" }), _jsxs(_components.mrow, { children: 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children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.7em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsx(_components.span, { className: "mord mtight", children: "1" }) })] }) }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.15em" }, children: _jsx(_components.span, {}) }) })] }) })] }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mord mathnormal", children: "x" }), _jsx(_components.span, { className: "msupsub", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsx(_components.span, { className: "vlist", style: { height: "0.3011em" }, children: _jsxs(_components.span, { style: { top: "-2.55em", marginLeft: "0em", marginRight: "0.05em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.7em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsxs(_components.span, { className: "mord mtight", children: [_jsx(_components.span, { className: "mord mathnormal mtight", children: "t" }), _jsx(_components.span, { className: "mbin mtight", children: "−" }), _jsx(_components.span, { className: "mord mtight", children: "1" })] }) })] }) }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.2083em" }, children: _jsx(_components.span, {}) }) })] }) })] }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2222em" } }), _jsx(_components.span, { className: "mbin", children: "+" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2222em" } })] }), _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.5806em", verticalAlign: "-0.15em" } }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mord mathnormal", children: "ε" }), _jsx(_components.span, { className: "msupsub", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsx(_components.span, { className: "vlist", style: { height: "0.2806em" }, children: _jsxs(_components.span, { style: { top: "-2.55em", marginLeft: "0em", marginRight: "0.05em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.7em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsx(_components.span, { className: "mord mathnormal mtight", children: "t" }) })] }) }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.15em" }, children: _jsx(_components.span, {}) }) })] }) })] })] })] })] }) }), "\n", _jsxs(_components.ul, { children: ["\n", _jsxs(_components.li, { children: ["If ", _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", children: _jsxs(_components.semantics, { children: [_jsxs(_components.mrow, { children: [_jsx(_components.mo, { stretchy: "false", children: "∣" }), _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "b" }), _jsx(_components.mn, { children: "1" })] }), _jsx(_components.mo, { stretchy: "false", children: "∣" }), _jsx(_components.mo, { children: "<" }), _jsx(_components.mn, { children: "1" })] }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "\\lvert b_1 \\rvert < 1" })] }) }) }), _jsxs(_components.span, { className: "katex-html", "aria-hidden": "true", children: [_jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "1em", verticalAlign: "-0.25em" } }), _jsx(_components.span, { className: "mopen", children: "∣" }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mord mathnormal", children: "b" }), _jsx(_components.span, { className: "msupsub", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsx(_components.span, { className: "vlist", style: { height: "0.3011em" }, children: _jsxs(_components.span, { style: { top: "-2.55em", marginLeft: "0em", marginRight: "0.05em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.7em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsx(_components.span, { className: "mord mtight", children: "1" }) })] }) }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.15em" }, children: _jsx(_components.span, {}) }) })] }) })] }), _jsx(_components.span, { className: "mclose", children: "∣" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2778em" } }), _jsx(_components.span, { className: "mrel", children: "<" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2778em" } })] }), _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.6444em" } }), _jsx(_components.span, { className: "mord", children: "1" })] })] })] }), ", the process is stationary and mean-reverting."] }), "\n", _jsxs(_components.li, { children: ["If ", _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", children: _jsxs(_components.semantics, { children: [_jsxs(_components.mrow, { children: [_jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "b" }), _jsx(_components.mn, { children: "1" })] }), _jsx(_components.mo, { children: "=" }), _jsx(_components.mn, { children: "1" })] }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "b_1 = 1" })] }) }) }), _jsxs(_components.span, { className: "katex-html", "aria-hidden": "true", children: [_jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.8444em", verticalAlign: "-0.15em" } }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mord mathnormal", children: "b" }), _jsx(_components.span, { className: "msupsub", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsx(_components.span, { className: "vlist", style: { height: "0.3011em" }, children: _jsxs(_components.span, { style: { top: "-2.55em", marginLeft: "0em", marginRight: "0.05em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.7em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsx(_components.span, { className: "mord mtight", children: "1" }) })] }) }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.15em" }, children: _jsx(_components.span, {}) }) })] }) })] }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2778em" } }), _jsx(_components.span, { className: "mrel", children: "=" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2778em" } })] }), _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.6444em" } }), _jsx(_components.span, { className: "mord", children: "1" })] })] })] }), ", the process is a random walk with a unit root."] }), "\n", _jsxs(_components.li, { children: ["If ", _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", children: _jsxs(_components.semantics, { children: [_jsx(_components.mrow, { children: _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "b" }), _jsx(_components.mn, { children: "1" })] }) }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "b_1" })] }) }) }), _jsx(_components.span, { className: "katex-html", "aria-hidden": "true", children: _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.8444em", verticalAlign: "-0.15em" } }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mord mathnormal", children: "b" }), _jsx(_components.span, { className: "msupsub", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsx(_components.span, { className: "vlist", style: { height: "0.3011em" }, children: _jsxs(_components.span, { style: { top: "-2.55em", marginLeft: "0em", marginRight: "0.05em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.7em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsx(_components.span, { className: "mord mtight", children: "1" }) })] }) }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.15em" }, children: _jsx(_components.span, {}) }) })] }) })] })] }) })] }), " is close to 1, the series is highly persistent, and unit-root behavior is plausible."] }), "\n"] }), "\n", _jsxs(_components.p, { children: ["In practice, we do not know ", _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", children: _jsxs(_components.semantics, { children: [_jsx(_components.mrow, { children: _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "b" }), _jsx(_components.mn, { children: "1" })] }) }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "b_1" })] }) }) }), _jsx(_components.span, { className: "katex-html", "aria-hidden": "true", children: _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.8444em", verticalAlign: "-0.15em" } }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mord mathnormal", children: "b" }), _jsx(_components.span, { className: "msupsub", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsx(_components.span, { className: "vlist", style: { height: "0.3011em" }, children: _jsxs(_components.span, { style: { top: "-2.55em", marginLeft: "0em", marginRight: "0.05em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.7em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsx(_components.span, { className: "mord mtight", children: "1" }) })] }) }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.15em" }, children: _jsx(_components.span, {}) }) })] }) })] })] }) })] }), ", so we estimate it and test for a unit root."] }), "\n", _jsx(_components.h3, { children: "Testing for a Unit Root: Dickey–Fuller Test" }), "\n", _jsx(_components.p, { children: "The Dickey–Fuller (DF) test is the standard approach for diagnosing a unit root in an AR(1) setting. Start from:" }), "\n", _jsx(_components.span, { className: "katex-display", children: _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", display: "block", children: _jsxs(_components.semantics, { children: [_jsxs(_components.mrow, { children: [_jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "x" }), _jsx(_components.mi, { children: "t" })] }), _jsx(_components.mo, { children: "=" }), _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "b" }), _jsx(_components.mn, { children: "0" })] }), _jsx(_components.mo, { children: "+" }), _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "b" }), _jsx(_components.mn, { children: "1" })] }), _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "x" }), _jsxs(_components.mrow, { children: [_jsx(_components.mi, { children: "t" }), 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_jsx(_components.span, { className: "mord mathnormal mtight", children: "t" }) })] }) }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.15em" }, children: _jsx(_components.span, {}) }) })] }) })] }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2778em" } }), _jsx(_components.span, { className: "mrel", children: "=" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2778em" } })] }), _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.6667em", verticalAlign: "-0.0833em" } }), _jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.0037em" }, children: "α" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2222em" } }), _jsx(_components.span, { className: "mbin", children: "+" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2222em" } })] }), _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.9028em", verticalAlign: "-0.2083em" } }), _jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.05278em" }, children: "β" }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mord mathnormal", children: "x" }), _jsx(_components.span, { className: "msupsub", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsx(_components.span, { className: "vlist", style: { height: "0.3011em" }, children: _jsxs(_components.span, { style: { top: "-2.55em", marginLeft: "0em", marginRight: "0.05em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.7em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsxs(_components.span, { className: "mord mtight", children: [_jsx(_components.span, { className: "mord mathnormal mtight", children: "t" }), _jsx(_components.span, { className: "mbin mtight", children: "−" }), _jsx(_components.span, { className: "mord mtight", children: "1" })] }) })] }) }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.2083em" }, children: _jsx(_components.span, {}) }) })] }) })] }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2222em" } }), _jsx(_components.span, { className: "mbin", children: "+" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2222em" } })] }), _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.5806em", verticalAlign: "-0.15em" } }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mord mathnormal", children: "ε" }), _jsx(_components.span, { className: "msupsub", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsx(_components.span, { className: "vlist", style: { height: "0.2806em" }, children: _jsxs(_components.span, { style: { top: "-2.55em", marginLeft: "0em", marginRight: "0.05em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.7em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsx(_components.span, { className: "mord mathnormal mtight", children: "t" }) })] }) }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.15em" }, children: _jsx(_components.span, {}) }) })] }) })] })] })] })] }) }), "\n", _jsx(_components.p, { children: "The null and alternative hypotheses are:" }), "\n", _jsxs(_components.ul, { children: ["\n", _jsxs(_components.li, { children: [_jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", children: _jsxs(_components.semantics, { children: [_jsx(_components.mrow, { children: _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "H" }), _jsx(_components.mn, { children: "0" })] }) }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "H_0" })] }) }) }), _jsx(_components.span, { className: "katex-html", "aria-hidden": "true", children: _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.8333em", verticalAlign: "-0.15em" } }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.08125em" }, children: "H" }), _jsx(_components.span, { className: "msupsub", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsx(_components.span, { className: "vlist", style: { height: "0.3011em" }, children: _jsxs(_components.span, { style: { top: "-2.55em", marginLeft: "-0.0813em", marginRight: "0.05em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.7em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsx(_components.span, { className: "mord mtight", children: "0" }) })] }) }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.15em" }, children: _jsx(_components.span, {}) }) })] }) })] })] }) })] }), ": ", _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", children: _jsxs(_components.semantics, { children: [_jsxs(_components.mrow, { children: [_jsx(_components.mi, { children: "β" }), _jsx(_components.mo, { children: "=" }), _jsx(_components.mn, { children: "0" })] }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "\\beta = 0" })] }) }) }), _jsxs(_components.span, { className: "katex-html", "aria-hidden": "true", children: [_jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.8889em", verticalAlign: "-0.1944em" } }), _jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.05278em" }, children: "β" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2778em" } }), _jsx(_components.span, { className: "mrel", children: "=" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2778em" } })] }), _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.6444em" } }), _jsx(_components.span, { className: "mord", children: "0" })] })] })] }), " (equivalently ", _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", children: _jsxs(_components.semantics, { children: [_jsxs(_components.mrow, { children: [_jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "b" }), _jsx(_components.mn, { children: "1" })] }), _jsx(_components.mo, { children: "=" }), _jsx(_components.mn, { children: "1" })] }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "b_1 = 1" })] }) }) }), _jsxs(_components.span, { className: "katex-html", "aria-hidden": "true", children: [_jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.8444em", verticalAlign: "-0.15em" } }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mord mathnormal", children: "b" }), _jsx(_components.span, { className: "msupsub", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsx(_components.span, { className: "vlist", style: { height: "0.3011em" }, children: _jsxs(_components.span, { style: { top: "-2.55em", marginLeft: "0em", marginRight: "0.05em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.7em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsx(_components.span, { className: "mord mtight", children: "1" }) })] }) }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.15em" }, children: _jsx(_components.span, {}) }) })] }) })] }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2778em" } }), _jsx(_components.span, { className: "mrel", children: "=" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2778em" } })] }), _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.6444em" } }), _jsx(_components.span, { className: "mord", children: "1" })] })] })] }), ") → series has a unit root (nonstationary)."] }), "\n", _jsxs(_components.li, { children: [_jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", children: _jsxs(_components.semantics, { children: [_jsx(_components.mrow, { children: _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "H" }), _jsx(_components.mn, { children: "1" })] }) }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "H_1" })] }) }) }), _jsx(_components.span, { className: "katex-html", "aria-hidden": "true", children: _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.8333em", verticalAlign: "-0.15em" } }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.08125em" }, children: "H" }), _jsx(_components.span, { className: "msupsub", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsx(_components.span, { className: "vlist", style: { height: "0.3011em" }, children: _jsxs(_components.span, { style: { top: "-2.55em", marginLeft: "-0.0813em", marginRight: "0.05em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.7em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsx(_components.span, { className: "mord mtight", children: "1" }) })] }) }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.15em" }, children: _jsx(_components.span, {}) }) })] }) })] })] }) })] }), ": ", _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", children: _jsxs(_components.semantics, { children: [_jsxs(_components.mrow, { children: [_jsx(_components.mi, { children: "β" }), _jsx(_components.mo, { children: "<" }), _jsx(_components.mn, { children: "0" })] }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "\\beta < 0" })] }) }) }), _jsxs(_components.span, { className: "katex-html", "aria-hidden": "true", children: [_jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.8889em", verticalAlign: "-0.1944em" } }), _jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.05278em" }, children: "β" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2778em" } }), _jsx(_components.span, { className: "mrel", children: "<" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2778em" } })] }), _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.6444em" } }), _jsx(_components.span, { className: "mord", children: "0" })] })] })] }), " (equivalently ", _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", children: _jsxs(_components.semantics, { children: [_jsxs(_components.mrow, { children: [_jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "b" }), _jsx(_components.mn, { children: "1" })] }), _jsx(_components.mo, { children: "<" }), _jsx(_components.mn, { children: "1" })] }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "b_1 < 1" })] }) }) }), _jsxs(_components.span, { className: "katex-html", "aria-hidden": "true", children: [_jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.8444em", verticalAlign: "-0.15em" } }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mord mathnormal", children: "b" }), _jsx(_components.span, { className: "msupsub", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsx(_components.span, { className: "vlist", style: { height: "0.3011em" }, children: _jsxs(_components.span, { style: { top: "-2.55em", marginLeft: "0em", marginRight: "0.05em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.7em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsx(_components.span, { className: "mord mtight", children: "1" }) })] }) }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.15em" }, children: _jsx(_components.span, {}) }) })] }) })] }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2778em" } }), _jsx(_components.span, { className: "mrel", children: "<" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2778em" } })] }), _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.6444em" } }), _jsx(_components.span, { className: "mord", children: "1" })] })] })] }), ") → series is stationary."] }), "\n"] }), "\n", _jsx(_components.p, { children: "The testing steps are:" }), "\n", _jsxs(_components.ul, { children: ["\n", _jsxs(_components.li, { children: ["Estimate the regression:", "\n", _jsx(_components.span, { className: "katex-display", children: _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", display: "block", children: _jsxs(_components.semantics, { children: [_jsxs(_components.mrow, { children: [_jsx(_components.mi, { mathvariant: "normal", children: "Δ" }), _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "x" }), _jsx(_components.mi, { children: "t" })] }), _jsx(_components.mo, { children: "=" }), _jsx(_components.mi, { children: "α" }), _jsx(_components.mo, { children: "+" }), _jsx(_components.mi, { children: "β" }), _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "x" }), _jsxs(_components.mrow, { children: [_jsx(_components.mi, { children: "t" }), _jsx(_components.mo, { children: "−" }), _jsx(_components.mn, { children: "1" })] })] }), _jsx(_components.mo, { children: "+" }), _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "ε" }), _jsx(_components.mi, { children: "t" })] })] }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "\\Delta x_t = \\alpha + \\beta x_{t-1} + \\varepsilon_t" })] }) }) }), _jsxs(_components.span, { className: "katex-html", "aria-hidden": "true", children: [_jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.8333em", verticalAlign: "-0.15em" } }), _jsx(_components.span, { className: "mord", children: "Δ" }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mord mathnormal", children: "x" }), _jsx(_components.span, { className: "msupsub", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsx(_components.span, { className: "vlist", style: { height: "0.2806em" }, children: _jsxs(_components.span, { style: { top: "-2.55em", marginLeft: "0em", marginRight: "0.05em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.7em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsx(_components.span, { className: "mord mathnormal mtight", children: "t" }) })] }) }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.15em" }, children: _jsx(_components.span, {}) }) })] }) })] }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2778em" } }), _jsx(_components.span, { className: "mrel", children: "=" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2778em" } })] }), _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.6667em", verticalAlign: "-0.0833em" } }), _jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.0037em" }, children: "α" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2222em" } }), _jsx(_components.span, { className: "mbin", children: "+" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2222em" } })] }), _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.9028em", verticalAlign: "-0.2083em" } }), _jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.05278em" }, children: "β" }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mord mathnormal", children: "x" }), _jsx(_components.span, { className: "msupsub", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsx(_components.span, { className: "vlist", style: { height: "0.3011em" }, children: _jsxs(_components.span, { style: { top: "-2.55em", marginLeft: "0em", marginRight: "0.05em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.7em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsxs(_components.span, { className: "mord mtight", children: [_jsx(_components.span, { className: "mord mathnormal mtight", children: "t" }), _jsx(_components.span, { className: "mbin mtight", children: "−" }), _jsx(_components.span, { className: "mord mtight", children: "1" })] }) })] }) }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.2083em" }, children: _jsx(_components.span, {}) }) })] }) })] }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2222em" } }), _jsx(_components.span, { className: "mbin", children: "+" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2222em" } })] }), _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.5806em", verticalAlign: "-0.15em" } }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mord mathnormal", children: "ε" }), _jsx(_components.span, { className: "msupsub", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsx(_components.span, { className: "vlist", style: { height: "0.2806em" }, children: _jsxs(_components.span, { style: { top: "-2.55em", marginLeft: "0em", marginRight: "0.05em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.7em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsx(_components.span, { className: "mord mathnormal mtight", children: "t" }) })] }) }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.15em" }, children: _jsx(_components.span, {}) }) })] }) })] })] })] })] }) }), "\n"] }), "\n", _jsxs(_components.li, { children: ["Compute the t‑statistic on ", _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", children: _jsxs(_components.semantics, { children: [_jsx(_components.mrow, { children: _jsxs(_components.mover, { accent: "true", children: [_jsx(_components.mi, { children: "β" }), _jsx(_components.mo, { children: "^" })] }) }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "\\hat{\\beta}" })] }) }) }), _jsx(_components.span, { className: "katex-html", "aria-hidden": "true", children: _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "1.1523em", verticalAlign: "-0.1944em" } }), _jsx(_components.span, { className: "mord accent", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsxs(_components.span, { className: "vlist", style: { height: "0.9579em" }, children: [_jsxs(_components.span, { style: { top: "-3em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "3em" } }), _jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.05278em" }, children: "β" })] }), _jsxs(_components.span, { style: { top: "-3.2634em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "3em" } }), _jsx(_components.span, { className: "accent-body", style: { left: "-0.1667em" }, children: _jsx(_components.span, { className: "mord", children: "^" }) })] })] }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.1944em" }, children: _jsx(_components.span, {}) }) })] }) })] }) })] }), "."] }), "\n", _jsx(_components.li, { children: "Compare the t‑statistic to Dickey–Fuller critical values (not the usual t‑distribution critical values)." }), "\n"] }), "\n", _jsxs(_components.p, { children: ["If the test statistic is more negative than the DF critical value, reject ", _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", children: _jsxs(_components.semantics, { children: [_jsx(_components.mrow, { children: _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "H" }), _jsx(_components.mn, { children: "0" })] }) }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "H_0" })] }) }) }), _jsx(_components.span, { className: "katex-html", "aria-hidden": "true", children: _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.8333em", verticalAlign: "-0.15em" } }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.08125em" }, children: "H" }), _jsx(_components.span, { className: "msupsub", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsx(_components.span, { className: "vlist", style: { height: "0.3011em" }, children: _jsxs(_components.span, { style: { top: "-2.55em", marginLeft: "-0.0813em", marginRight: "0.05em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.7em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsx(_components.span, { className: "mord mtight", children: "0" }) })] }) }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.15em" }, children: _jsx(_components.span, {}) }) })] }) })] })] }) })] }), " and conclude the series is covariance stationary. If you cannot reject ", _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", children: _jsxs(_components.semantics, { children: [_jsx(_components.mrow, { children: _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "H" }), _jsx(_components.mn, { children: "0" })] }) }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "H_0" })] }) }) }), _jsx(_components.span, { className: "katex-html", "aria-hidden": "true", children: _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.8333em", verticalAlign: "-0.15em" } }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.08125em" }, children: "H" }), _jsx(_components.span, { className: "msupsub", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsx(_components.span, { className: "vlist", style: { height: "0.3011em" }, children: _jsxs(_components.span, { style: { top: "-2.55em", marginLeft: "-0.0813em", marginRight: "0.05em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.7em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsx(_components.span, { className: "mord mtight", children: "0" }) })] }) }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.15em" }, children: _jsx(_components.span, {}) }) })] }) })] })] }) })] }), ", treat the series as having a unit root (nonstationary)."] }), "\n", _jsxs(_components.blockquote, { children: ["\n", _jsxs(_components.p, { children: [_jsx(_components.strong, { children: "Key Term: Dickey–Fuller Test" }), _jsx(_components.br, {}), "\n", "A unit-root test based on regressing the first difference of a variable on its lagged level and testing whether the coefficient on the lagged level equals zero (implying a unit root). It uses special critical values because the null is a unit root, not stationarity."] }), "\n"] }), "\n", _jsxs(_components.p, { children: ["In practice, analysts often use the Augmented Dickey–Fuller (ADF) test, which adds lagged differences of ", _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", children: _jsxs(_components.semantics, { children: [_jsx(_components.mrow, { children: _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "x" }), _jsx(_components.mi, { children: "t" })] }) }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "x_t" })] }) }) }), _jsx(_components.span, { className: "katex-html", "aria-hidden": "true", children: _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.5806em", verticalAlign: "-0.15em" } }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mord mathnormal", children: "x" }), _jsx(_components.span, { className: "msupsub", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsx(_components.span, { className: "vlist", style: { height: "0.2806em" }, children: _jsxs(_components.span, { style: { top: "-2.55em", marginLeft: "0em", marginRight: "0.05em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.7em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsx(_components.span, { className: "mord mathnormal mtight", children: "t" }) })] }) }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.15em" }, children: _jsx(_components.span, {}) }) })] }) })] })] }) })] }), " to the right-hand side to absorb serial correlation in ", _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", children: _jsxs(_components.semantics, { children: [_jsx(_components.mrow, { children: _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "ε" }), _jsx(_components.mi, { children: "t" })] }) }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "\\varepsilon_t" })] }) }) }), _jsx(_components.span, { className: "katex-html", "aria-hidden": "true", children: _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.5806em", verticalAlign: "-0.15em" } }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mord mathnormal", children: "ε" }), _jsx(_components.span, { className: "msupsub", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsx(_components.span, { className: "vlist", style: { height: "0.2806em" }, children: _jsxs(_components.span, { style: { top: "-2.55em", marginLeft: "0em", marginRight: "0.05em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.7em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsx(_components.span, { className: "mord mathnormal mtight", children: "t" }) })] }) }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.15em" }, children: _jsx(_components.span, {}) }) })] }) })] })] }) })] }), ". The intuition and exam logic are the same: test whether the series has a unit root."] }), "\n", _jsxs(_components.blockquote, { children: ["\n", _jsxs(_components.p, { children: [_jsx(_components.strong, { children: "Key Term: Order of Integration" }), _jsx(_components.br, {}), "\n", "The number of differences required to transform a series into a stationary process. A series that becomes stationary after first differencing is integrated of order one, denoted I(1). A stationary series in levels is I(0)."] }), "\n"] }), "\n", _jsx(_components.h3, { children: _jsx(_components.strong, { children: "Worked Example 1.1" }) }), "\n", _jsx(_components.p, { children: "A macroeconomist analyzes quarterly real GDP in levels using the Dickey–Fuller regression and finds that the DF test statistic is less negative than the 5% critical value. When she applies the DF test to the first differences of GDP, she strongly rejects the null of a unit root." }), "\n", _jsxs(_components.blockquote, { children: ["\n", _jsxs(_components.p, { children: [_jsx(_components.strong, { children: "Answer:" }), _jsx(_components.br, {}), " The non-significant DF statistic in levels means the null of a unit root cannot be rejected; GDP in levels behaves as an I(1) series. The significant DF statistic for ", _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", children: _jsxs(_components.semantics, { children: [_jsxs(_components.mrow, { children: [_jsx(_components.mi, { mathvariant: "normal", children: "Δ" }), _jsx(_components.mi, { children: "G" }), _jsx(_components.mi, { children: "D" }), _jsx(_components.mi, { children: "P" })] }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "\\Delta GDP" })] }) }) }), _jsx(_components.span, { className: "katex-html", "aria-hidden": "true", children: _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.6833em" } }), _jsx(_components.span, { className: "mord", children: "Δ" }), _jsx(_components.span, { className: "mord mathnormal", children: "G" }), _jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.02778em" }, children: "D" }), _jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.13889em" }, children: "P" })] }) })] }), " implies the differenced series is stationary (I(0)). She should model GDP using first differences (growth rates) in AR or regression models, not the raw level series, unless she is explicitly working with cointegration."] }), "\n"] }), "\n", _jsx(_components.h2, { children: "First Differencing to Achieve Stationarity" }), "\n", _jsx(_components.p, { children: "First differencing transforms a nonstationary series with a unit root into a stationary series by computing period-to-period changes:" }), "\n", _jsx(_components.span, { className: "katex-display", children: _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", display: "block", children: _jsxs(_components.semantics, { children: [_jsxs(_components.mrow, { children: [_jsx(_components.mi, { mathvariant: "normal", children: "Δ" }), _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "x" }), _jsx(_components.mi, { children: "t" })] }), _jsx(_components.mo, { children: "=" }), _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "x" }), _jsx(_components.mi, { children: "t" })] }), _jsx(_components.mo, { children: "−" }), _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "x" }), _jsxs(_components.mrow, { children: [_jsx(_components.mi, { children: "t" }), _jsx(_components.mo, { children: "−" }), _jsx(_components.mn, { children: "1" })] })] })] }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "\\Delta x_t = x_t - x_{t-1}" })] }) }) }), _jsxs(_components.span, { className: "katex-html", "aria-hidden": "true", children: [_jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.8333em", verticalAlign: "-0.15em" } }), _jsx(_components.span, { className: "mord", children: "Δ" }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mord mathnormal", children: 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className: "mrel", children: "=" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2778em" } })] }), _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.7333em", verticalAlign: "-0.15em" } }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mord mathnormal", children: "x" }), _jsx(_components.span, { className: "msupsub", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsx(_components.span, { className: "vlist", style: { height: "0.2806em" }, children: _jsxs(_components.span, { style: { top: "-2.55em", marginLeft: "0em", marginRight: "0.05em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.7em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsx(_components.span, { className: "mord mathnormal mtight", children: "t" }) })] }) }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.15em" }, children: _jsx(_components.span, {}) }) })] }) })] }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2222em" } }), _jsx(_components.span, { className: "mbin", children: "−" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2222em" } })] }), _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.6389em", verticalAlign: "-0.2083em" } }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mord mathnormal", children: "x" }), _jsx(_components.span, { className: "msupsub", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsx(_components.span, { className: "vlist", style: { height: "0.3011em" }, children: _jsxs(_components.span, { style: { top: "-2.55em", marginLeft: "0em", marginRight: "0.05em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.7em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsxs(_components.span, { className: "mord mtight", children: [_jsx(_components.span, { className: "mord mathnormal mtight", children: "t" }), _jsx(_components.span, { className: "mbin mtight", children: "−" }), _jsx(_components.span, { className: "mord mtight", children: "1" })] }) })] }) }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.2083em" }, children: _jsx(_components.span, {}) }) })] }) })] })] })] })] }) }), "\n", _jsxs(_components.p, { children: ["If ", _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", children: _jsxs(_components.semantics, { children: [_jsx(_components.mrow, { children: _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "x" }), _jsx(_components.mi, { children: "t" })] }) }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "x_t" })] }) }) }), _jsx(_components.span, { className: "katex-html", "aria-hidden": "true", children: _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.5806em", verticalAlign: "-0.15em" } }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mord mathnormal", children: "x" }), _jsx(_components.span, { className: "msupsub", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsx(_components.span, { className: "vlist", style: { height: "0.2806em" }, children: _jsxs(_components.span, { style: { top: "-2.55em", marginLeft: "0em", marginRight: "0.05em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.7em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsx(_components.span, { className: "mord mathnormal mtight", children: "t" }) })] }) }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.15em" }, children: _jsx(_components.span, {}) }) })] }) })] })] }) })] }), " follows a random walk:"] }), "\n", _jsx(_components.span, { className: "katex-display", children: _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", display: "block", children: _jsxs(_components.semantics, { children: [_jsxs(_components.mrow, { children: [_jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "x" }), _jsx(_components.mi, { children: "t" })] }), _jsx(_components.mo, { children: "=" }), _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "x" }), _jsxs(_components.mrow, { children: [_jsx(_components.mi, { children: "t" }), _jsx(_components.mo, { children: "−" }), _jsx(_components.mn, { children: "1" })] })] }), _jsx(_components.mo, { children: "+" }), _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "ε" }), _jsx(_components.mi, { children: "t" })] })] }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "x_t = x_{t-1} + \\varepsilon_t" })] }) }) }), _jsxs(_components.span, { className: "katex-html", "aria-hidden": "true", children: [_jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.5806em", verticalAlign: "-0.15em" } }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mord mathnormal", children: "x" }), _jsx(_components.span, { className: "msupsub", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsx(_components.span, { className: "vlist", style: { height: "0.2806em" }, children: _jsxs(_components.span, { style: { top: "-2.55em", marginLeft: "0em", marginRight: "0.05em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.7em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsx(_components.span, { className: "mord mathnormal mtight", children: "t" }) })] }) }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.15em" }, children: _jsx(_components.span, {}) }) })] }) })] }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2778em" } }), _jsx(_components.span, { className: "mrel", children: "=" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2778em" } })] }), _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.7917em", verticalAlign: "-0.2083em" } }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mord mathnormal", children: "x" }), _jsx(_components.span, { className: "msupsub", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsx(_components.span, { className: "vlist", style: { height: "0.3011em" }, children: _jsxs(_components.span, { style: { top: "-2.55em", marginLeft: 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_jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.5806em", verticalAlign: "-0.15em" } }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mord mathnormal", children: "ε" }), _jsx(_components.span, { className: "msupsub", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsx(_components.span, { className: "vlist", style: { height: "0.2806em" }, children: _jsxs(_components.span, { style: { top: "-2.55em", marginLeft: "0em", marginRight: "0.05em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.7em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsx(_components.span, { className: "mord mathnormal mtight", children: "t" }) })] }) }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.15em" }, children: _jsx(_components.span, {}) }) })] }) })] })] })] })] }) }), "\n", _jsx(_components.p, { children: "then:" }), "\n", _jsx(_components.span, { className: "katex-display", children: _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", display: "block", children: _jsxs(_components.semantics, { children: [_jsxs(_components.mrow, { children: [_jsx(_components.mi, { mathvariant: "normal", children: "Δ" }), _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "x" }), _jsx(_components.mi, { children: "t" })] }), _jsx(_components.mo, { children: "=" }), _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "ε" }), _jsx(_components.mi, { children: "t" })] })] }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "\\Delta x_t = \\varepsilon_t" })] }) }) }), _jsxs(_components.span, { className: "katex-html", "aria-hidden": "true", children: [_jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.8333em", verticalAlign: "-0.15em" } }), _jsx(_components.span, { className: "mord", children: "Δ" }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mord mathnormal", children: "x" }), _jsx(_components.span, { className: "msupsub", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsx(_components.span, { className: "vlist", style: { height: "0.2806em" }, children: _jsxs(_components.span, { style: { top: "-2.55em", marginLeft: "0em", marginRight: "0.05em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.7em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsx(_components.span, { className: "mord mathnormal mtight", children: "t" }) })] }) }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.15em" }, children: _jsx(_components.span, {}) }) })] }) })] }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2778em" } }), _jsx(_components.span, { className: "mrel", children: "=" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2778em" } })] }), _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.5806em", verticalAlign: "-0.15em" } }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mord mathnormal", children: "ε" }), _jsx(_components.span, { className: "msupsub", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsx(_components.span, { className: "vlist", style: { height: "0.2806em" }, children: _jsxs(_components.span, { style: { top: "-2.55em", marginLeft: "0em", marginRight: "0.05em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.7em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsx(_components.span, { className: "mord mathnormal mtight", children: "t" }) })] }) }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.15em" }, children: _jsx(_components.span, {}) }) })] }) })] })] })] })] }) }), "\n", _jsx(_components.p, { children: "which is white noise and covariance stationary." }), "\n", _jsxs(_components.blockquote, { children: ["\n", _jsxs(_components.p, { children: [_jsx(_components.strong, { children: "Key Term: First Difference" }), _jsx(_components.br, {}), "\n", "The change between consecutive observations in a time series, ", _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", children: _jsxs(_components.semantics, { children: [_jsxs(_components.mrow, { children: [_jsx(_components.mi, { mathvariant: "normal", children: "Δ" }), _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "x" }), _jsx(_components.mi, { children: "t" })] }), _jsx(_components.mo, { children: "=" }), _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "x" }), _jsx(_components.mi, { children: "t" })] }), _jsx(_components.mo, { children: "−" }), _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "x" }), _jsxs(_components.mrow, { children: [_jsx(_components.mi, { children: "t" }), _jsx(_components.mo, { children: "−" }), _jsx(_components.mn, { children: "1" })] })] })] }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "\\Delta x_t = x_t - x_{t-1}" })] }) }) }), _jsxs(_components.span, { className: "katex-html", "aria-hidden": "true", children: [_jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.8333em", verticalAlign: "-0.15em" } }), _jsx(_components.span, { className: "mord", children: "Δ" }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mord mathnormal", children: "x" }), _jsx(_components.span, { className: "msupsub", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsx(_components.span, { className: "vlist", style: { height: "0.2806em" }, children: _jsxs(_components.span, { style: { top: "-2.55em", marginLeft: "0em", marginRight: "0.05em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.7em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsx(_components.span, { className: "mord mathnormal mtight", children: "t" }) })] }) }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.15em" }, children: _jsx(_components.span, {}) }) })] }) })] }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2778em" } }), _jsx(_components.span, { className: "mrel", children: "=" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2778em" } })] }), _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.7333em", verticalAlign: "-0.15em" } }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mord mathnormal", children: "x" }), _jsx(_components.span, { className: "msupsub", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsx(_components.span, { className: "vlist", style: { height: "0.2806em" }, children: _jsxs(_components.span, { style: { top: "-2.55em", marginLeft: "0em", marginRight: "0.05em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.7em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsx(_components.span, { className: "mord mathnormal mtight", children: "t" }) })] }) }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.15em" }, children: _jsx(_components.span, {}) }) })] }) })] }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2222em" } }), _jsx(_components.span, { className: "mbin", children: "−" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2222em" } })] }), _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.6389em", verticalAlign: "-0.2083em" } }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mord mathnormal", children: "x" }), _jsx(_components.span, { className: "msupsub", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsx(_components.span, { className: "vlist", style: { height: "0.3011em" }, children: _jsxs(_components.span, { style: { top: "-2.55em", marginLeft: "0em", marginRight: "0.05em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.7em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsxs(_components.span, { className: "mord mtight", children: [_jsx(_components.span, { className: "mord mathnormal mtight", children: "t" }), _jsx(_components.span, { className: "mbin mtight", children: "−" }), _jsx(_components.span, { className: "mord mtight", children: "1" })] }) })] }) }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.2083em" }, children: _jsx(_components.span, {}) }) })] }) })] })] })] })] }), ", often used to remove unit roots and induce stationarity so that standard AR models and regressions can be applied."] }), "\n"] }), "\n", _jsx(_components.p, { children: "In the exam, once you conclude a series has a unit root:" }), "\n", _jsxs(_components.ul, { children: ["\n", _jsx(_components.li, { children: "Transform it by taking first differences (for I(1) series)." }), "\n", _jsx(_components.li, { children: "Model the differenced series using AR, MA, or regression techniques." }), "\n", _jsxs(_components.li, { children: ["Interpret coefficients as effects on changes, not on levels. For example, a regression of ", _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", children: _jsxs(_components.semantics, { children: [_jsxs(_components.mrow, { children: [_jsx(_components.mi, { mathvariant: "normal", children: "Δ" }), _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "y" }), _jsx(_components.mi, { children: "t" })] })] }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "\\Delta y_t" })] }) }) }), _jsx(_components.span, { className: "katex-html", "aria-hidden": "true", children: _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.8778em", verticalAlign: "-0.1944em" } }), _jsx(_components.span, { className: "mord", children: "Δ" }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: 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{ className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", children: _jsxs(_components.semantics, { children: [_jsxs(_components.mrow, { children: [_jsx(_components.mi, { mathvariant: "normal", children: "Δ" }), _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "x" }), _jsx(_components.mi, { children: "t" })] })] }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "\\Delta x_t" })] }) }) }), _jsx(_components.span, { className: "katex-html", "aria-hidden": "true", children: _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.8333em", verticalAlign: "-0.15em" } }), _jsx(_components.span, { className: "mord", children: "Δ" }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mord mathnormal", children: "x" }), _jsx(_components.span, { className: "msupsub", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsx(_components.span, { className: "vlist", style: { height: "0.2806em" }, children: _jsxs(_components.span, { style: { top: "-2.55em", marginLeft: "0em", marginRight: "0.05em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.7em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsx(_components.span, { className: "mord mathnormal mtight", children: "t" }) })] }) }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.15em" }, children: _jsx(_components.span, {}) }) })] }) })] })] }) })] }), " measures the short-run relationship between changes in ", _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", children: _jsxs(_components.semantics, { children: [_jsx(_components.mrow, { children: _jsx(_components.mi, { children: "x" }) }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "x" })] }) }) }), _jsx(_components.span, { className: "katex-html", "aria-hidden": "true", children: _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.4306em" } }), _jsx(_components.span, { className: "mord mathnormal", children: "x" })] }) })] }), " and changes in ", _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", children: _jsxs(_components.semantics, { children: [_jsx(_components.mrow, { children: _jsx(_components.mi, { children: "y" }) }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "y" })] }) }) }), _jsx(_components.span, { className: "katex-html", "aria-hidden": "true", children: _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.625em", verticalAlign: "-0.1944em" } }), _jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.03588em" }, children: "y" })] }) })] }), "."] }), "\n"] }), "\n", _jsx(_components.p, { children: "Be careful not to overdifference. Differencing an already stationary series can remove meaningful long-run information and make interpretation harder. That is why unit-root testing is an essential first step." }), "\n", _jsx(_components.h2, { children: "Cointegration: Long-Run Relationships Between Nonstationary Series" }), "\n", _jsx(_components.p, { children: "Sometimes, two or more economic variables are individually nonstationary but move together in such a way that they do not drift arbitrarily far apart. For example, stock prices and dividends, consumption and income, or spot and futures prices may share a stable long-run equilibrium relationship." }), "\n", _jsxs(_components.blockquote, { children: ["\n", _jsxs(_components.p, { children: [_jsx(_components.strong, { children: "Key Term: Cointegration" }), _jsx(_components.br, {}), "\n", "A property where two or more I(1) time series are linked by a linear combination that is I(0) (stationary). This indicates a stable long-run equilibrium relationship among the series."] }), "\n"] }), "\n", _jsxs(_components.p, { children: ["Formally, suppose ", _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", children: _jsxs(_components.semantics, { children: [_jsx(_components.mrow, { children: _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "y" }), _jsx(_components.mi, { children: "t" })] }) }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "y_t" })] }) }) }), _jsx(_components.span, { className: "katex-html", "aria-hidden": "true", children: _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.625em", verticalAlign: "-0.1944em" } }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.03588em" }, children: "y" }), _jsx(_components.span, { className: "msupsub", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsx(_components.span, { className: "vlist", style: { height: "0.2806em" }, children: _jsxs(_components.span, { style: { top: "-2.55em", marginLeft: "-0.0359em", marginRight: "0.05em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.7em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsx(_components.span, { className: "mord mathnormal mtight", children: "t" }) })] }) }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.15em" }, children: _jsx(_components.span, {}) }) })] }) })] })] }) })] }), " and ", _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", children: _jsxs(_components.semantics, { children: [_jsx(_components.mrow, { children: _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "x" }), _jsx(_components.mi, { children: "t" })] }) }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "x_t" })] }) }) }), _jsx(_components.span, { className: "katex-html", "aria-hidden": "true", children: _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.5806em", verticalAlign: "-0.15em" } }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mord mathnormal", children: "x" }), _jsx(_components.span, { className: "msupsub", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsx(_components.span, { className: "vlist", style: { height: "0.2806em" }, children: _jsxs(_components.span, { style: { top: "-2.55em", marginLeft: "0em", marginRight: "0.05em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.7em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsx(_components.span, { className: "mord mathnormal mtight", children: "t" }) })] }) }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.15em" }, children: _jsx(_components.span, {}) }) })] }) })] })] }) })] }), " are both I(1), but there exists a coefficient vector ", _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", children: _jsxs(_components.semantics, { children: [_jsxs(_components.mrow, { children: [_jsx(_components.mo, { stretchy: "false", children: "(" }), _jsx(_components.mn, { children: "1" }), _jsx(_components.mo, { separator: "true", children: "," }), _jsx(_components.mo, { children: "−" }), _jsx(_components.mi, { children: "β" }), _jsx(_components.mo, { stretchy: "false", children: ")" })] }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "(1, -\\beta)" })] }) }) }), _jsx(_components.span, { className: "katex-html", "aria-hidden": "true", children: _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "1em", verticalAlign: "-0.25em" } }), _jsx(_components.span, { className: "mopen", children: "(" }), _jsx(_components.span, { className: "mord", children: "1" }), _jsx(_components.span, { className: "mpunct", children: "," }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.1667em" } }), _jsx(_components.span, { className: "mord", children: "−" }), _jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.05278em" }, children: "β" }), _jsx(_components.span, { className: "mclose", children: ")" })] }) })] }), " such that:"] }), "\n", _jsx(_components.span, { className: "katex-display", children: _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", display: "block", children: _jsxs(_components.semantics, { children: [_jsxs(_components.mrow, { children: [_jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "e" }), _jsx(_components.mi, { children: "t" })] }), _jsx(_components.mo, { children: "=" }), _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "y" }), _jsx(_components.mi, { children: "t" })] }), _jsx(_components.mo, { children: "−" }), _jsx(_components.mi, { children: "α" }), _jsx(_components.mo, { children: "−" }), _jsx(_components.mi, { children: "β" }), _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "x" }), _jsx(_components.mi, { children: "t" })] })] }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "e_t = y_t - \\alpha - \\beta x_t" })] }) }) }), _jsxs(_components.span, { className: "katex-html", "aria-hidden": "true", children: [_jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.5806em", verticalAlign: "-0.15em" } }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mord mathnormal", children: "e" }), _jsx(_components.span, { className: "msupsub", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsx(_components.span, { className: "vlist", style: { height: "0.2806em" }, children: _jsxs(_components.span, { style: { top: "-2.55em", marginLeft: "0em", marginRight: "0.05em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.7em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsx(_components.span, { className: "mord mathnormal mtight", children: "t" }) })] }) }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.15em" }, children: _jsx(_components.span, {}) }) })] }) })] }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2778em" } }), _jsx(_components.span, { className: "mrel", children: "=" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2778em" } })] }), _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.7778em", verticalAlign: "-0.1944em" } }), 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children: _jsx(_components.span, {}) }) })] }) })] }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2222em" } }), _jsx(_components.span, { className: "mbin", children: "−" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2222em" } })] }), _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.6667em", verticalAlign: "-0.0833em" } }), _jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.0037em" }, children: "α" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2222em" } }), _jsx(_components.span, { className: "mbin", children: "−" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2222em" } })] }), _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.8889em", verticalAlign: "-0.1944em" } }), _jsx(_components.span, { className: 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style: { height: "0.15em" }, children: _jsx(_components.span, {}) }) })] }) })] })] })] })] }) }), "\n", _jsxs(_components.p, { children: ["is I(0). Then ", _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", children: _jsxs(_components.semantics, { children: [_jsx(_components.mrow, { children: _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "y" }), _jsx(_components.mi, { children: "t" })] }) }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "y_t" })] }) }) }), _jsx(_components.span, { className: "katex-html", "aria-hidden": "true", children: _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.625em", verticalAlign: "-0.1944em" } }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.03588em" }, children: "y" }), _jsx(_components.span, { className: "msupsub", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsx(_components.span, { className: "vlist", style: { height: "0.2806em" }, children: _jsxs(_components.span, { style: { top: "-2.55em", marginLeft: "-0.0359em", marginRight: "0.05em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.7em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsx(_components.span, { className: "mord mathnormal mtight", children: "t" }) })] }) }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.15em" }, children: _jsx(_components.span, {}) }) })] }) })] })] }) })] }), " and ", _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: 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encoding: "application/x-tex", children: "\\beta" })] }) }) }), _jsx(_components.span, { className: "katex-html", "aria-hidden": "true", children: _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.8889em", verticalAlign: "-0.1944em" } }), _jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.05278em" }, children: "β" })] }) })] }), " is part of the cointegrating vector, and ", _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", children: _jsxs(_components.semantics, { children: [_jsx(_components.mrow, { children: _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "e" }), _jsx(_components.mi, { children: "t" })] }) }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "e_t" })] }) }) }), _jsx(_components.span, { className: "katex-html", "aria-hidden": "true", children: _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.5806em", verticalAlign: "-0.15em" } }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mord mathnormal", children: "e" }), _jsx(_components.span, { className: "msupsub", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsx(_components.span, { className: "vlist", style: { height: "0.2806em" }, children: _jsxs(_components.span, { style: { top: "-2.55em", marginLeft: "0em", marginRight: "0.05em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.7em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsx(_components.span, { className: "mord mathnormal mtight", children: "t" }) })] }) }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.15em" }, children: _jsx(_components.span, {}) }) })] }) })] })] }) })] }), " captures deviations from long-run equilibrium."] }), "\n", _jsxs(_components.blockquote, { children: ["\n", _jsxs(_components.p, { children: [_jsx(_components.strong, { children: "Key Term: Cointegrating Vector" }), _jsx(_components.br, {}), "\n", "The set of coefficients that defines the stationary linear combination of cointegrated series. In a simple two-variable case, ", _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", children: _jsxs(_components.semantics, { children: [_jsxs(_components.mrow, { children: [_jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "y" }), _jsx(_components.mi, { children: "t" })] }), _jsx(_components.mo, { children: "−" }), _jsx(_components.mi, { children: "α" }), _jsx(_components.mo, { children: "−" }), _jsx(_components.mi, { children: "β" }), _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "x" }), _jsx(_components.mi, { children: "t" })] })] }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "y_t - \\alpha - \\beta x_t" })] }) }) }), _jsxs(_components.span, { className: "katex-html", "aria-hidden": "true", children: [_jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.7778em", verticalAlign: "-0.1944em" } }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.03588em" }, children: "y" }), _jsx(_components.span, { className: "msupsub", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsx(_components.span, { className: "vlist", style: { height: "0.2806em" }, children: _jsxs(_components.span, { style: { top: "-2.55em", marginLeft: "-0.0359em", marginRight: "0.05em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.7em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsx(_components.span, { className: "mord mathnormal mtight", children: "t" }) })] }) }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.15em" }, children: _jsx(_components.span, {}) }) })] }) })] }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2222em" } }), _jsx(_components.span, { className: "mbin", children: "−" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2222em" } })] }), _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.6667em", verticalAlign: "-0.0833em" } }), _jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.0037em" }, children: "α" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2222em" } }), _jsx(_components.span, { className: "mbin", children: "−" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2222em" } })] }), _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.8889em", verticalAlign: "-0.1944em" } }), _jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.05278em" }, children: "β" }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mord mathnormal", children: "x" }), _jsx(_components.span, { className: "msupsub", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsx(_components.span, { className: "vlist", style: { height: "0.2806em" }, children: _jsxs(_components.span, { style: { top: "-2.55em", marginLeft: "0em", marginRight: "0.05em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.7em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsx(_components.span, { className: "mord mathnormal mtight", children: "t" }) })] }) }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.15em" }, children: _jsx(_components.span, {}) }) })] }) })] })] })] })] }), " is stationary, and ", _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", children: _jsxs(_components.semantics, { children: [_jsxs(_components.mrow, { children: [_jsx(_components.mo, { stretchy: "false", children: "(" }), _jsx(_components.mn, { children: "1" }), _jsx(_components.mo, { separator: "true", children: "," }), _jsx(_components.mo, { children: "−" }), _jsx(_components.mi, { children: "β" }), _jsx(_components.mo, { stretchy: "false", children: ")" })] }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "(1, -\\beta)" })] }) }) }), _jsx(_components.span, { className: "katex-html", "aria-hidden": "true", children: _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "1em", verticalAlign: "-0.25em" } }), _jsx(_components.span, { className: "mopen", children: "(" }), _jsx(_components.span, { className: "mord", children: "1" }), _jsx(_components.span, { className: "mpunct", children: "," }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.1667em" } }), _jsx(_components.span, { className: "mord", children: "−" }), _jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.05278em" }, children: "β" }), _jsx(_components.span, { className: "mclose", children: ")" })] }) })] }), " is the cointegrating vector."] }), "\n"] }), "\n", _jsx(_components.p, { children: "If cointegration is present:" }), "\n", _jsxs(_components.ul, { children: ["\n", _jsx(_components.li, { children: "Regressions between the level variables can be meaningful and represent long-run relationships." }), "\n", _jsx(_components.li, { children: "You should not simply difference both variables and ignore the long-run equilibrium; instead, use an error-correction model to capture both short-run dynamics and adjustment back to equilibrium." }), "\n"] }), "\n", _jsx(_components.p, { children: "If the variables are nonstationary but not cointegrated, any regression in levels is spurious, and you should model relationships in first differences." }), "\n", _jsx(_components.h2, { children: "Testing for Cointegration: Engle–Granger Procedure" }), "\n", _jsx(_components.p, { children: "For the Level 2 exam, the key cointegration test is the Engle–Granger two-step procedure." }), "\n", _jsxs(_components.blockquote, { children: ["\n", _jsxs(_components.p, { children: [_jsx(_components.strong, { children: "Key Term: Engle–Granger Test" }), _jsx(_components.br, {}), "\n", "A two-step method for testing cointegration: estimate a long-run regression in levels among nonstationary variables, then apply a unit-root test (with special critical values) to the residuals. Stationary residuals imply cointegration."] }), "\n"] }), "\n", _jsx(_components.p, { children: "The steps are:" }), "\n", _jsxs(_components.ul, { children: ["\n", _jsxs(_components.li, { children: ["Test each series (e.g., ", _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", children: _jsxs(_components.semantics, { children: [_jsx(_components.mrow, { children: _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "y" }), _jsx(_components.mi, { children: "t" })] }) }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "y_t" })] }) }) }), _jsx(_components.span, { className: "katex-html", "aria-hidden": "true", children: _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.625em", verticalAlign: "-0.1944em" } }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.03588em" }, children: "y" }), _jsx(_components.span, { className: "msupsub", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsx(_components.span, { className: "vlist", style: { height: "0.2806em" }, children: _jsxs(_components.span, { style: { top: "-2.55em", marginLeft: "-0.0359em", marginRight: "0.05em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.7em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsx(_components.span, { className: "mord mathnormal mtight", children: "t" }) })] }) }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.15em" }, children: _jsx(_components.span, {}) }) })] }) })] })] }) })] }), " and ", _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", children: _jsxs(_components.semantics, { children: [_jsx(_components.mrow, { children: _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "x" }), _jsx(_components.mi, { children: "t" })] }) }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "x_t" })] }) }) }), _jsx(_components.span, { className: "katex-html", "aria-hidden": "true", children: _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.5806em", verticalAlign: "-0.15em" } }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mord mathnormal", children: "x" }), _jsx(_components.span, { className: "msupsub", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsx(_components.span, { className: "vlist", style: { height: "0.2806em" }, children: _jsxs(_components.span, { style: { top: "-2.55em", marginLeft: "0em", marginRight: "0.05em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.7em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsx(_components.span, { className: "mord mathnormal mtight", children: "t" }) })] }) }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.15em" }, children: _jsx(_components.span, {}) }) })] }) })] })] }) })] }), ") for unit roots using the DF/ADF test. Proceed only if both are I(1)."] }), "\n", _jsxs(_components.li, { children: ["Estimate the long-run (cointegrating) regression in levels:", "\n", _jsx(_components.span, { className: "katex-display", children: _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", display: "block", children: _jsxs(_components.semantics, { children: [_jsxs(_components.mrow, { children: [_jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "y" }), _jsx(_components.mi, { children: "t" })] }), _jsx(_components.mo, { children: "=" }), _jsx(_components.mi, { children: "α" }), _jsx(_components.mo, { children: "+" }), _jsx(_components.mi, { children: "β" }), _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "x" }), _jsx(_components.mi, { children: "t" })] }), _jsx(_components.mo, { children: "+" }), _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "e" }), _jsx(_components.mi, { children: "t" })] })] }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "y_t = \\alpha + \\beta x_t + e_t" })] }) }) }), _jsxs(_components.span, { className: "katex-html", "aria-hidden": "true", children: [_jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.625em", verticalAlign: "-0.1944em" } }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.03588em" }, children: "y" }), _jsx(_components.span, { className: "msupsub", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsx(_components.span, { className: "vlist", style: { height: "0.2806em" }, children: _jsxs(_components.span, { style: { top: "-2.55em", marginLeft: "-0.0359em", marginRight: "0.05em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.7em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsx(_components.span, { className: "mord mathnormal mtight", children: "t" }) })] }) }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.15em" }, children: _jsx(_components.span, {}) }) })] }) })] }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2778em" } }), _jsx(_components.span, { className: "mrel", children: "=" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2778em" } })] }), _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.6667em", verticalAlign: "-0.0833em" } }), _jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.0037em" }, children: "α" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2222em" } }), _jsx(_components.span, { className: "mbin", children: "+" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2222em" } })] }), _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.8889em", verticalAlign: "-0.1944em" } }), _jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.05278em" }, children: "β" }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mord mathnormal", children: "x" }), _jsx(_components.span, { className: "msupsub", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsx(_components.span, { className: "vlist", style: { height: "0.2806em" }, children: _jsxs(_components.span, { style: { top: "-2.55em", marginLeft: "0em", marginRight: "0.05em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.7em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsx(_components.span, { className: "mord mathnormal mtight", children: "t" }) })] }) }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.15em" }, children: _jsx(_components.span, {}) }) })] }) })] }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2222em" } }), _jsx(_components.span, { className: "mbin", children: "+" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2222em" } })] }), _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.5806em", verticalAlign: "-0.15em" } }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mord mathnormal", children: "e" }), _jsx(_components.span, { className: "msupsub", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsx(_components.span, { className: "vlist", style: { height: "0.2806em" }, children: _jsxs(_components.span, { style: { top: "-2.55em", marginLeft: "0em", marginRight: "0.05em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.7em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsx(_components.span, { className: "mord mathnormal mtight", children: "t" }) })] }) }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.15em" }, children: _jsx(_components.span, {}) }) })] }) })] })] })] })] }) }), "\n"] }), "\n", _jsxs(_components.li, { children: ["Save the residuals ", _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", children: _jsxs(_components.semantics, { children: [_jsx(_components.mrow, { children: _jsxs(_components.msub, { children: [_jsxs(_components.mover, { accent: "true", children: [_jsx(_components.mi, { children: "e" }), _jsx(_components.mo, { children: "^" })] }), _jsx(_components.mi, { children: "t" })] }) }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "\\hat{e}_t" })] }) }) }), _jsx(_components.span, { className: "katex-html", "aria-hidden": "true", children: _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.8444em", verticalAlign: "-0.15em" } }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mord accent", children: _jsx(_components.span, { className: "vlist-t", children: _jsx(_components.span, { className: "vlist-r", children: _jsxs(_components.span, { className: "vlist", style: { height: "0.6944em" }, children: [_jsxs(_components.span, { style: { top: "-3em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "3em" } }), _jsx(_components.span, { className: "mord mathnormal", children: "e" })] }), _jsxs(_components.span, { style: { top: "-3em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "3em" } }), _jsx(_components.span, { className: "accent-body", style: { left: "-0.1944em" }, children: _jsx(_components.span, { className: "mord", children: "^" }) })] })] }) }) }) }), _jsx(_components.span, { className: "msupsub", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsx(_components.span, { className: "vlist", style: { height: "0.2806em" }, children: _jsxs(_components.span, { style: { top: "-2.55em", marginLeft: "0em", marginRight: "0.05em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.7em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsx(_components.span, { className: "mord mathnormal mtight", children: "t" }) })] }) }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.15em" }, children: _jsx(_components.span, {}) }) })] }) })] })] }) })] }), " and test them for a unit root using a DF-type test. Importantly, the critical values are different from standard DF critical values and are typically provided in exam tables."] }), "\n"] }), "\n", _jsx(_components.p, { children: "Interpretation:" }), "\n", _jsxs(_components.ul, { children: ["\n", _jsxs(_components.li, { children: ["If the residuals are stationary (reject unit root), ", _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", children: _jsxs(_components.semantics, { children: [_jsx(_components.mrow, { children: _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "y" }), _jsx(_components.mi, { children: "t" })] }) }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "y_t" })] }) }) }), _jsx(_components.span, { className: "katex-html", "aria-hidden": "true", children: _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.625em", verticalAlign: "-0.1944em" } }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.03588em" }, children: "y" }), _jsx(_components.span, { className: "msupsub", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsx(_components.span, { className: "vlist", style: { height: "0.2806em" }, children: _jsxs(_components.span, { style: { top: "-2.55em", marginLeft: "-0.0359em", marginRight: "0.05em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.7em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsx(_components.span, { className: "mord mathnormal mtight", children: "t" }) })] }) }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.15em" }, children: _jsx(_components.span, {}) }) })] }) })] })] }) })] }), " and ", _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", children: _jsxs(_components.semantics, { children: [_jsx(_components.mrow, { children: _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "x" }), _jsx(_components.mi, { children: "t" })] }) }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "x_t" })] }) }) }), _jsx(_components.span, { className: "katex-html", "aria-hidden": "true", children: _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.5806em", verticalAlign: "-0.15em" } }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mord mathnormal", children: "x" }), _jsx(_components.span, { className: "msupsub", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsx(_components.span, { className: "vlist", style: { height: "0.2806em" }, children: _jsxs(_components.span, { style: { top: "-2.55em", marginLeft: "0em", marginRight: "0.05em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.7em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsx(_components.span, { className: "mord mathnormal mtight", children: "t" }) })] }) }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.15em" }, children: _jsx(_components.span, {}) }) })] }) })] })] }) })] }), " are cointegrated; the regression in levels is not spurious and can be used to define the long-run relationship."] }), "\n", _jsx(_components.li, { children: "If the residuals have a unit root (cannot reject), the variables are not cointegrated; regressions in levels are spurious, and you should work with differences." }), "\n"] }), "\n", _jsx(_components.h3, { children: _jsx(_components.strong, { children: "Worked Example 1.2" }) }), "\n", _jsx(_components.p, { children: "You regress log consumption on log income using quarterly macro data:" }), "\n", _jsx(_components.span, { className: "katex-display", children: _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", display: "block", children: _jsxs(_components.semantics, { children: [_jsxs(_components.mrow, { children: [_jsx(_components.mi, { children: "ln" }), _jsx(_components.mo, { children: "⁡" }), _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "C" }), _jsx(_components.mi, { children: "t" })] }), _jsx(_components.mo, { children: "=" }), _jsx(_components.mi, { children: "α" }), _jsx(_components.mo, { children: "+" }), _jsx(_components.mi, { children: "β" }), _jsx(_components.mi, { children: "ln" }), _jsx(_components.mo, { children: "⁡" }), _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "Y" }), _jsx(_components.mi, { children: "t" })] }), _jsx(_components.mo, { children: "+" }), _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "e" }), _jsx(_components.mi, { children: "t" })] })] }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "\\ln C_t = \\alpha + \\beta \\ln Y_t + e_t" })] }) }) }), _jsxs(_components.span, { className: "katex-html", "aria-hidden": "true", children: [_jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.8444em", verticalAlign: "-0.15em" } }), _jsx(_components.span, { className: 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className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.15em" }, children: _jsx(_components.span, {}) }) })] }) })] }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2778em" } }), _jsx(_components.span, { className: "mrel", children: "=" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2778em" } })] }), _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.6667em", verticalAlign: "-0.0833em" } }), _jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.0037em" }, children: "α" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2222em" } }), _jsx(_components.span, { className: "mbin", children: "+" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2222em" } })] }), _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.8889em", verticalAlign: "-0.1944em" } }), _jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.05278em" }, children: "β" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.1667em" } }), _jsx(_components.span, { className: "mop", children: "ln" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.1667em" } }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.22222em" }, children: "Y" }), _jsx(_components.span, { className: "msupsub", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsx(_components.span, { className: "vlist", style: { height: "0.2806em" }, children: _jsxs(_components.span, { style: { top: "-2.55em", marginLeft: "-0.2222em", marginRight: "0.05em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.7em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsx(_components.span, { className: "mord mathnormal mtight", children: "t" }) })] }) }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.15em" }, children: _jsx(_components.span, {}) }) })] }) })] }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2222em" } }), _jsx(_components.span, { className: "mbin", children: "+" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2222em" } })] }), _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.5806em", verticalAlign: "-0.15em" } }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mord mathnormal", children: "e" }), _jsx(_components.span, { className: "msupsub", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsx(_components.span, { className: "vlist", style: { height: "0.2806em" }, children: _jsxs(_components.span, { style: { top: "-2.55em", marginLeft: "0em", marginRight: "0.05em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.7em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsx(_components.span, { className: "mord mathnormal mtight", children: "t" }) })] }) }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.15em" }, children: _jsx(_components.span, {}) }) })] }) })] })] })] })] }) }), "\n", _jsxs(_components.p, { children: ["DF tests suggest both ", _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", children: _jsxs(_components.semantics, { children: [_jsxs(_components.mrow, { children: [_jsx(_components.mi, { children: "ln" }), _jsx(_components.mo, { children: "⁡" }), _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "C" }), _jsx(_components.mi, { children: "t" })] })] }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "\\ln C_t" })] }) }) }), _jsx(_components.span, { className: "katex-html", "aria-hidden": "true", children: _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.8444em", verticalAlign: "-0.15em" } }), _jsx(_components.span, { className: "mop", children: "ln" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.1667em" } }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.07153em" }, children: "C" }), _jsx(_components.span, { className: "msupsub", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsx(_components.span, { className: "vlist", style: { height: "0.2806em" }, children: _jsxs(_components.span, { style: { top: "-2.55em", marginLeft: "-0.0715em", marginRight: "0.05em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.7em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsx(_components.span, { className: "mord mathnormal mtight", children: "t" }) })] }) }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.15em" }, children: _jsx(_components.span, {}) }) })] }) })] })] }) })] }), " and ", _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", children: _jsxs(_components.semantics, { children: [_jsxs(_components.mrow, { children: [_jsx(_components.mi, { children: "ln" }), _jsx(_components.mo, { children: "⁡" }), _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "Y" }), _jsx(_components.mi, { children: "t" })] })] }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "\\ln Y_t" })] }) }) }), _jsx(_components.span, { className: "katex-html", "aria-hidden": "true", children: _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.8444em", verticalAlign: "-0.15em" } }), _jsx(_components.span, { className: "mop", children: "ln" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.1667em" } }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.22222em" }, children: "Y" }), _jsx(_components.span, { className: "msupsub", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsx(_components.span, { className: "vlist", style: { height: "0.2806em" }, children: _jsxs(_components.span, { style: { top: "-2.55em", marginLeft: "-0.2222em", marginRight: "0.05em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.7em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsx(_components.span, { className: "mord mathnormal mtight", children: "t" }) })] }) }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.15em" }, children: _jsx(_components.span, {}) }) })] }) })] })] }) })] }), " are I(1). The DF test on the residuals ", _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", children: _jsxs(_components.semantics, { children: [_jsx(_components.mrow, { children: _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "e" }), _jsx(_components.mi, { children: "t" })] }) }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "e_t" })] }) }) }), _jsx(_components.span, { className: "katex-html", "aria-hidden": "true", children: _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.5806em", verticalAlign: "-0.15em" } }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mord mathnormal", children: "e" }), _jsx(_components.span, { className: "msupsub", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsx(_components.span, { className: "vlist", style: { height: "0.2806em" }, children: _jsxs(_components.span, { style: { top: "-2.55em", marginLeft: "0em", marginRight: "0.05em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.7em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsx(_components.span, { className: "mord mathnormal mtight", children: "t" }) })] }) }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.15em" }, children: _jsx(_components.span, {}) }) })] }) })] })] }) })] }), " rejects the null of a unit root at the 5% level using Engle–Granger critical values."] }), "\n", _jsxs(_components.blockquote, { children: ["\n", _jsxs(_components.p, { children: [_jsx(_components.strong, { children: "Answer:" }), _jsx(_components.br, {}), " The residuals’ stationarity indicates that ", _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", children: _jsxs(_components.semantics, { children: [_jsxs(_components.mrow, { children: [_jsx(_components.mi, { children: "ln" }), _jsx(_components.mo, { children: "⁡" }), _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "C" }), _jsx(_components.mi, { children: "t" })] })] }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "\\ln C_t" })] }) }) }), _jsx(_components.span, { className: "katex-html", "aria-hidden": "true", children: _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.8444em", verticalAlign: "-0.15em" } }), _jsx(_components.span, { className: "mop", children: "ln" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.1667em" } }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.07153em" }, children: "C" }), _jsx(_components.span, { className: "msupsub", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsx(_components.span, { className: "vlist", style: { height: "0.2806em" }, children: _jsxs(_components.span, { style: { top: "-2.55em", marginLeft: "-0.0715em", marginRight: "0.05em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.7em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsx(_components.span, { className: "mord mathnormal mtight", children: "t" }) })] }) }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.15em" }, children: _jsx(_components.span, {}) }) })] }) })] })] }) })] }), " and ", _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", children: _jsxs(_components.semantics, { children: [_jsxs(_components.mrow, { children: [_jsx(_components.mi, { children: "ln" }), _jsx(_components.mo, { children: "⁡" }), _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "Y" }), _jsx(_components.mi, { children: "t" })] })] }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "\\ln Y_t" })] }) }) }), _jsx(_components.span, { className: "katex-html", "aria-hidden": "true", children: _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.8444em", verticalAlign: "-0.15em" } }), _jsx(_components.span, { className: "mop", children: "ln" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.1667em" } }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.22222em" }, children: "Y" }), _jsx(_components.span, { className: "msupsub", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsx(_components.span, { className: "vlist", style: { height: "0.2806em" }, children: _jsxs(_components.span, { style: { top: "-2.55em", marginLeft: "-0.2222em", marginRight: "0.05em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.7em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsx(_components.span, { className: "mord mathnormal mtight", children: "t" }) })] }) }), _jsx(_components.span, { className: 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Their regression in levels reflects a valid long-term economic relationship between consumption and income. You should interpret ", _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", children: _jsxs(_components.semantics, { children: [_jsx(_components.mrow, { children: _jsx(_components.mi, { children: "β" }) }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "\\beta" })] }) }) }), _jsx(_components.span, { className: "katex-html", "aria-hidden": "true", children: _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.8889em", verticalAlign: "-0.1944em" } }), _jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.05278em" }, children: "β" })] }) })] }), " as the long-run elasticity of consumption with respect to income, and model short-term dynamics using an error-correction model that combines ", _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", children: _jsxs(_components.semantics, { children: [_jsxs(_components.mrow, { children: [_jsx(_components.mi, { mathvariant: "normal", children: "Δ" }), _jsx(_components.mi, { children: "ln" }), _jsx(_components.mo, { children: "⁡" }), _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "C" }), _jsx(_components.mi, { children: "t" })] })] }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "\\Delta \\ln C_t" })] }) }) }), _jsx(_components.span, { className: "katex-html", "aria-hidden": "true", children: _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.8444em", verticalAlign: "-0.15em" } }), _jsx(_components.span, { className: "mord", children: "Δ" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.1667em" } }), _jsx(_components.span, { className: "mop", children: "ln" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.1667em" } }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.07153em" }, children: "C" }), _jsx(_components.span, { className: "msupsub", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsx(_components.span, { className: "vlist", style: { height: "0.2806em" }, children: _jsxs(_components.span, { style: { top: "-2.55em", marginLeft: "-0.0715em", marginRight: "0.05em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.7em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsx(_components.span, { className: "mord mathnormal mtight", children: "t" }) })] }) }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.15em" }, children: _jsx(_components.span, {}) }) })] }) })] })] }) })] }), ", ", _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", children: _jsxs(_components.semantics, { children: [_jsxs(_components.mrow, { children: [_jsx(_components.mi, { mathvariant: "normal", children: "Δ" }), _jsx(_components.mi, { children: "ln" }), _jsx(_components.mo, { children: "⁡" }), _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "Y" }), _jsx(_components.mi, { children: "t" })] })] }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "\\Delta \\ln Y_t" })] }) }) }), _jsx(_components.span, { className: "katex-html", "aria-hidden": "true", children: _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.8444em", verticalAlign: "-0.15em" } }), _jsx(_components.span, { className: "mord", children: "Δ" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.1667em" } }), _jsx(_components.span, { className: "mop", children: "ln" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.1667em" } }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.22222em" }, children: "Y" }), _jsx(_components.span, { className: "msupsub", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsx(_components.span, { className: "vlist", style: { height: "0.2806em" }, children: _jsxs(_components.span, { style: { top: "-2.55em", marginLeft: "-0.2222em", marginRight: "0.05em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.7em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsx(_components.span, { className: "mord mathnormal mtight", children: "t" }) })] }) }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.15em" }, children: _jsx(_components.span, {}) }) })] }) })] })] }) })] }), ", and the lagged residual ", _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", children: _jsxs(_components.semantics, { children: [_jsx(_components.mrow, { children: _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "e" }), _jsxs(_components.mrow, { children: [_jsx(_components.mi, { children: "t" }), _jsx(_components.mo, { children: "−" }), _jsx(_components.mn, { children: "1" })] })] }) }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "e_{t-1}" })] }) }) }), _jsx(_components.span, { className: "katex-html", "aria-hidden": "true", children: _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.6389em", verticalAlign: "-0.2083em" } }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mord mathnormal", children: "e" }), _jsx(_components.span, { className: "msupsub", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsx(_components.span, { className: "vlist", style: { height: "0.3011em" }, children: _jsxs(_components.span, { style: { top: "-2.55em", marginLeft: "0em", marginRight: "0.05em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.7em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsxs(_components.span, { className: "mord mtight", children: [_jsx(_components.span, { className: "mord mathnormal mtight", children: "t" }), _jsx(_components.span, { className: "mbin mtight", children: "−" }), _jsx(_components.span, { className: "mord mtight", children: "1" })] }) })] }) }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.2083em" }, children: _jsx(_components.span, {}) }) })] }) })] })] }) })] }), "."] }), "\n"] }), "\n", _jsx(_components.h2, { children: "Error-Correction Models (ECMs): Linking Short- and Long-Term Behavior" }), "\n", _jsx(_components.p, { children: "Cointegrated series may deviate from equilibrium in the short term because of shocks, frictions, or adjustment delays. Error-correction models (ECMs) explicitly model:" }), "\n", _jsxs(_components.ul, { children: ["\n", _jsx(_components.li, { children: "Short-run changes in the variables (typically first differences), and" }), "\n", _jsx(_components.li, { children: "The gradual correction of deviations from long-run equilibrium." }), "\n"] }), "\n", _jsxs(_components.blockquote, { children: ["\n", _jsxs(_components.p, { children: [_jsx(_components.strong, { children: "Key Term: Error-Correction Model (ECM)" }), _jsx(_components.br, {}), "\n", "A regression model for cointegrated series that includes both short-run changes (e.g., first differences) and an error-correction term (lagged deviation from the cointegrating relationship), allowing the system to adjust gradually back to long-run equilibrium."] }), "\n"] }), "\n", _jsx(_components.p, { children: "Starting from the cointegrating relationship:" }), "\n", _jsx(_components.span, { className: "katex-display", children: _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", display: "block", children: _jsxs(_components.semantics, { children: [_jsxs(_components.mrow, { children: [_jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "y" }), _jsx(_components.mi, { children: "t" })] }), _jsx(_components.mo, { children: "=" }), _jsx(_components.mi, { children: "α" }), _jsx(_components.mo, { children: "+" }), _jsx(_components.mi, { children: "β" }), _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "x" }), _jsx(_components.mi, { children: "t" })] }), _jsx(_components.mo, { children: "+" }), _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "e" }), _jsx(_components.mi, { children: "t" })] })] }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "y_t = \\alpha + \\beta x_t + e_t" })] }) }) }), _jsxs(_components.span, { className: "katex-html", "aria-hidden": "true", children: [_jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.625em", verticalAlign: "-0.1944em" } }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.03588em" }, children: "y" }), _jsx(_components.span, { className: "msupsub", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsx(_components.span, { className: "vlist", style: { height: "0.2806em" }, children: _jsxs(_components.span, { style: { top: "-2.55em", marginLeft: "-0.0359em", marginRight: "0.05em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.7em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsx(_components.span, { className: "mord mathnormal mtight", children: "t" }) })] }) }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.15em" }, children: _jsx(_components.span, {}) }) })] }) })] }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2778em" } }), _jsx(_components.span, { className: "mrel", children: "=" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2778em" } })] }), _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.6667em", verticalAlign: "-0.0833em" } }), _jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.0037em" }, children: "α" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2222em" } }), _jsx(_components.span, { className: "mbin", children: "+" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2222em" } })] }), _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.8889em", verticalAlign: "-0.1944em" } }), _jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.05278em" }, children: "β" }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mord mathnormal", children: "x" }), _jsx(_components.span, { className: "msupsub", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsx(_components.span, { className: "vlist", style: { height: "0.2806em" }, children: _jsxs(_components.span, { style: { top: "-2.55em", marginLeft: "0em", marginRight: "0.05em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.7em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsx(_components.span, { className: "mord mathnormal mtight", children: "t" }) })] }) }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.15em" }, children: _jsx(_components.span, {}) }) })] }) })] }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2222em" } }), _jsx(_components.span, { className: "mbin", children: "+" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2222em" } })] }), _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.5806em", verticalAlign: "-0.15em" } }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mord mathnormal", children: "e" }), _jsx(_components.span, { className: "msupsub", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsx(_components.span, { className: "vlist", style: { height: "0.2806em" }, children: _jsxs(_components.span, { style: { top: "-2.55em", marginLeft: "0em", marginRight: "0.05em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.7em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsx(_components.span, { className: "mord mathnormal mtight", children: "t" }) })] }) }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.15em" }, children: _jsx(_components.span, {}) }) })] }) })] })] })] })] }) }), "\n", _jsx(_components.p, { children: "the error-correction form is:" }), "\n", _jsx(_components.span, { className: "katex-display", children: _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: 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[_jsx(_components.mi, { children: "e" }), _jsxs(_components.mrow, { children: [_jsx(_components.mi, { children: "t" }), _jsx(_components.mo, { children: "−" }), _jsx(_components.mn, { children: "1" })] })] }), _jsx(_components.mo, { children: "+" }), _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "ε" }), _jsx(_components.mi, { children: "t" })] })] }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "\\Delta y_t = \\gamma_0 + \\gamma_1 \\Delta x_t + \\lambda e_{t-1} + \\varepsilon_t" })] }) }) }), _jsxs(_components.span, { className: "katex-html", "aria-hidden": "true", children: [_jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.8778em", verticalAlign: "-0.1944em" } }), _jsx(_components.span, { className: "mord", children: "Δ" }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mord mathnormal", style: { marginRight: 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"\n", _jsx(_components.p, { children: "where:" }), "\n", _jsxs(_components.ul, { children: ["\n", _jsxs(_components.li, { children: [_jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", children: _jsxs(_components.semantics, { children: [_jsxs(_components.mrow, { children: [_jsx(_components.mi, { mathvariant: "normal", children: "Δ" }), _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "y" }), _jsx(_components.mi, { children: "t" })] })] }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "\\Delta y_t" })] }) }) }), _jsx(_components.span, { className: "katex-html", "aria-hidden": "true", children: _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.8778em", verticalAlign: "-0.1944em" } }), _jsx(_components.span, { className: "mord", children: "Δ" }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.03588em" }, children: "y" }), _jsx(_components.span, { className: "msupsub", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsx(_components.span, { className: "vlist", style: { height: "0.2806em" }, children: _jsxs(_components.span, { style: { top: "-2.55em", marginLeft: "-0.0359em", marginRight: "0.05em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.7em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsx(_components.span, { className: "mord mathnormal mtight", children: "t" }) })] }) }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.15em" }, children: _jsx(_components.span, {}) }) })] }) })] })] }) })] }), " and ", _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", children: _jsxs(_components.semantics, { children: [_jsxs(_components.mrow, { children: [_jsx(_components.mi, { mathvariant: "normal", children: "Δ" }), _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "x" }), _jsx(_components.mi, { children: "t" })] })] }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "\\Delta x_t" })] }) }) }), _jsx(_components.span, { className: "katex-html", "aria-hidden": "true", children: _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.8333em", verticalAlign: "-0.15em" } }), _jsx(_components.span, { className: "mord", children: "Δ" }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mord mathnormal", children: "x" }), _jsx(_components.span, { className: "msupsub", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsx(_components.span, { className: "vlist", style: { height: "0.2806em" }, children: _jsxs(_components.span, { style: { top: "-2.55em", marginLeft: "0em", marginRight: "0.05em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.7em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsx(_components.span, { className: "mord mathnormal mtight", children: "t" }) })] }) }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.15em" }, children: _jsx(_components.span, {}) }) })] }) })] })] }) })] }), " capture short-run changes."] }), "\n", _jsxs(_components.li, { children: [_jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", children: _jsxs(_components.semantics, { children: [_jsx(_components.mrow, { children: _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "e" }), _jsxs(_components.mrow, { children: [_jsx(_components.mi, { children: "t" }), _jsx(_components.mo, { children: "−" }), _jsx(_components.mn, { children: "1" })] })] }) }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "e_{t-1}" })] }) }) }), _jsx(_components.span, { className: "katex-html", "aria-hidden": "true", children: _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.6389em", verticalAlign: "-0.2083em" } }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mord mathnormal", children: "e" }), _jsx(_components.span, { className: "msupsub", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsx(_components.span, { className: "vlist", style: { height: "0.3011em" }, children: _jsxs(_components.span, { style: { top: "-2.55em", marginLeft: "0em", marginRight: "0.05em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.7em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsxs(_components.span, { className: "mord mtight", children: [_jsx(_components.span, { className: "mord mathnormal mtight", children: "t" }), _jsx(_components.span, { className: "mbin mtight", children: "−" }), _jsx(_components.span, { className: "mord mtight", children: "1" })] }) })] }) }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.2083em" }, children: _jsx(_components.span, {}) }) })] }) })] })] }) })] }), " is the lagged residual from the long-run cointegrating equation."] }), "\n", _jsxs(_components.li, { children: [_jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", children: _jsxs(_components.semantics, { children: [_jsx(_components.mrow, { children: _jsx(_components.mi, { children: "λ" }) }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "\\lambda" })] }) }) }), _jsx(_components.span, { className: "katex-html", "aria-hidden": "true", children: _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.6944em" } }), _jsx(_components.span, { className: "mord mathnormal", children: "λ" })] }) })] }), " is the error-correction (speed-of-adjustment) coefficient."] }), "\n"] }), "\n", _jsxs(_components.blockquote, { children: ["\n", _jsxs(_components.p, { children: [_jsx(_components.strong, { children: "Key Term: Error-Correction Term" }), _jsx(_components.br, {}), "\n", "The lagged residual from the cointegrating regression (e.g., ", _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", children: _jsxs(_components.semantics, { children: [_jsx(_components.mrow, { children: _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "e" }), _jsxs(_components.mrow, { children: [_jsx(_components.mi, { children: "t" }), _jsx(_components.mo, { children: "−" }), _jsx(_components.mn, { children: "1" })] })] }) }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "e_{t-1}" })] }) }) }), _jsx(_components.span, { className: "katex-html", "aria-hidden": "true", children: _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.6389em", verticalAlign: "-0.2083em" } }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mord mathnormal", children: "e" }), _jsx(_components.span, { className: "msupsub", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsx(_components.span, { className: "vlist", style: { height: "0.3011em" }, children: _jsxs(_components.span, { style: { top: "-2.55em", marginLeft: "0em", marginRight: "0.05em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.7em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsxs(_components.span, { className: "mord mtight", children: [_jsx(_components.span, { className: "mord mathnormal mtight", children: "t" }), _jsx(_components.span, { className: "mbin mtight", children: "−" }), _jsx(_components.span, { className: "mord mtight", children: "1" })] }) })] }) }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.2083em" }, children: _jsx(_components.span, {}) }) })] }) })] })] }) })] }), "). It measures last period’s deviation from long-run equilibrium and drives the adjustment in the dependent variable back toward equilibrium."] }), "\n", _jsxs(_components.p, { children: [_jsx(_components.strong, { children: "Key Term: Speed of Adjustment" }), _jsx(_components.br, {}), "\n", "The coefficient on the error-correction term (e.g., ", _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", children: _jsxs(_components.semantics, { children: [_jsx(_components.mrow, { children: _jsx(_components.mi, { children: "λ" }) }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "\\lambda" })] }) }) }), _jsx(_components.span, { className: "katex-html", "aria-hidden": "true", children: _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.6944em" } }), _jsx(_components.span, { className: "mord mathnormal", children: "λ" })] }) })] }), "). It indicates the fraction of last period’s disequilibrium that is corrected in the current period; typically negative and between −1 and 0 in a stable ECM."] }), "\n"] }), "\n", _jsxs(_components.p, { children: ["Interpretation of ", _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", children: _jsxs(_components.semantics, { children: [_jsx(_components.mrow, { children: _jsx(_components.mi, { children: "λ" }) }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "\\lambda" })] }) }) }), _jsx(_components.span, { className: "katex-html", "aria-hidden": "true", children: _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.6944em" } }), _jsx(_components.span, { className: "mord mathnormal", children: "λ" })] }) })] }), ":"] }), "\n", _jsxs(_components.ul, { children: ["\n", _jsxs(_components.li, { children: ["If ", _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", children: _jsxs(_components.semantics, { children: [_jsxs(_components.mrow, { children: [_jsx(_components.mi, { children: "λ" }), _jsx(_components.mo, { children: "=" }), _jsx(_components.mn, { children: "0" })] }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "\\lambda = 0" })] }) }) }), _jsxs(_components.span, { className: "katex-html", "aria-hidden": "true", children: [_jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.6944em" } }), _jsx(_components.span, { className: "mord mathnormal", children: "λ" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2778em" } }), _jsx(_components.span, { className: "mrel", children: "=" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2778em" } })] }), _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.6444em" } }), _jsx(_components.span, { className: "mord", children: "0" })] })] })] }), ", there is no adjustment toward the long-run relationship; only short-run dynamics matter."] }), "\n", _jsxs(_components.li, { children: ["If ", _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", children: _jsxs(_components.semantics, { children: [_jsxs(_components.mrow, { children: [_jsx(_components.mo, { children: "−" }), _jsx(_components.mn, { children: "1" }), _jsx(_components.mo, { children: "<" }), _jsx(_components.mi, { children: "λ" }), _jsx(_components.mo, { children: "<" }), _jsx(_components.mn, { children: "0" })] }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "-1 < \\lambda < 0" })] }) }) }), _jsxs(_components.span, { className: "katex-html", "aria-hidden": "true", children: [_jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.7278em", verticalAlign: "-0.0833em" } }), _jsx(_components.span, { className: "mord", children: "−" }), _jsx(_components.span, { className: "mord", children: "1" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2778em" } }), _jsx(_components.span, { className: "mrel", children: "<" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2778em" } })] }), _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.7335em", verticalAlign: "-0.0391em" } }), _jsx(_components.span, { className: "mord mathnormal", children: "λ" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2778em" } }), _jsx(_components.span, { className: "mrel", children: "<" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2778em" } })] }), _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.6444em" } }), _jsx(_components.span, { className: "mord", children: "0" })] })] })] }), ", deviations from equilibrium are partially corrected each period. For example, ", _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", children: _jsxs(_components.semantics, { children: [_jsxs(_components.mrow, { children: [_jsx(_components.mi, { children: "λ" }), _jsx(_components.mo, { children: "=" }), _jsx(_components.mo, { children: "−" }), _jsx(_components.mn, { children: "0.3" })] }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "\\lambda = -0.3" })] }) }) }), _jsxs(_components.span, { className: "katex-html", "aria-hidden": "true", children: [_jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.6944em" } }), _jsx(_components.span, { className: "mord mathnormal", children: "λ" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2778em" } }), _jsx(_components.span, { className: "mrel", children: "=" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2778em" } })] }), _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.7278em", verticalAlign: "-0.0833em" } }), _jsx(_components.span, { className: "mord", children: "−" }), _jsx(_components.span, { className: "mord", children: "0.3" })] })] })] }), " means about 30% of the gap is closed per period."] }), "\n", _jsxs(_components.li, { children: ["If ", _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", children: _jsxs(_components.semantics, { children: [_jsxs(_components.mrow, { children: [_jsx(_components.mi, { children: "λ" }), _jsx(_components.mo, { children: "≤" }), _jsx(_components.mo, { children: "−" }), _jsx(_components.mn, { children: "1" })] }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "\\lambda \\leq -1" })] }) }) }), _jsxs(_components.span, { className: "katex-html", "aria-hidden": "true", children: [_jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.8304em", verticalAlign: "-0.136em" } }), _jsx(_components.span, { className: "mord mathnormal", children: "λ" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2778em" } }), _jsx(_components.span, { className: "mrel", children: "≤" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2778em" } })] }), _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.7278em", verticalAlign: "-0.0833em" } }), _jsx(_components.span, { className: "mord", children: "−" }), _jsx(_components.span, { className: "mord", children: "1" })] })] })] }), " or ", _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", children: _jsxs(_components.semantics, { children: [_jsxs(_components.mrow, { children: [_jsx(_components.mi, { children: "λ" }), _jsx(_components.mo, { children: ">" }), _jsx(_components.mn, { children: "0" })] }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "\\lambda > 0" })] }) }) }), _jsxs(_components.span, { className: "katex-html", "aria-hidden": "true", children: [_jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.7335em", verticalAlign: "-0.0391em" } }), _jsx(_components.span, { className: "mord mathnormal", children: "λ" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2778em" } }), _jsx(_components.span, { className: "mrel", children: ">" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2778em" } })] }), _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.6444em" } }), _jsx(_components.span, { className: "mord", children: "0" })] })] })] }), ", the system may be unstable or overshooting, which would be unusual in well-behaved economic applications."] }), "\n"] }), "\n", _jsx(_components.h3, { children: _jsx(_components.strong, { children: "Worked Example 1.3" }) }), "\n", _jsxs(_components.p, { children: ["An analyst models the relationship between money supply (", _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", children: _jsxs(_components.semantics, { children: [_jsx(_components.mrow, { children: _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "M" }), _jsx(_components.mi, { children: "t" })] }) }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "M_t" })] }) }) }), _jsx(_components.span, { className: "katex-html", "aria-hidden": "true", children: _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.8333em", verticalAlign: "-0.15em" } }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.10903em" }, children: "M" }), _jsx(_components.span, { className: "msupsub", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsx(_components.span, { className: "vlist", style: { height: "0.2806em" }, children: _jsxs(_components.span, { style: { top: "-2.55em", marginLeft: "-0.109em", marginRight: "0.05em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.7em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsx(_components.span, { className: "mord mathnormal mtight", children: "t" }) })] }) }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.15em" }, children: _jsx(_components.span, {}) }) })] }) })] })] }) })] }), ") and inflation (", _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", children: _jsxs(_components.semantics, { children: [_jsx(_components.mrow, { children: _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "π" }), _jsx(_components.mi, { children: "t" })] }) }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "\\pi_t" })] }) }) }), _jsx(_components.span, { className: "katex-html", "aria-hidden": "true", children: _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.5806em", verticalAlign: "-0.15em" } }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.03588em" }, children: "π" }), _jsx(_components.span, { className: "msupsub", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsx(_components.span, { className: "vlist", style: { height: "0.2806em" }, children: _jsxs(_components.span, { style: { top: "-2.55em", marginLeft: "-0.0359em", marginRight: "0.05em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.7em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsx(_components.span, { className: "mord mathnormal mtight", children: "t" }) })] }) }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.15em" }, children: _jsx(_components.span, {}) }) })] }) })] })] }) })] }), ") using an error-correction model (after establishing cointegration between the level series). The ECM for inflation is:"] }), "\n", _jsx(_components.span, { className: "katex-display", children: _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", display: "block", children: _jsxs(_components.semantics, { children: [_jsxs(_components.mrow, { children: [_jsx(_components.mi, { mathvariant: "normal", children: "Δ" }), _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "π" }), _jsx(_components.mi, { children: "t" })] }), _jsx(_components.mo, { children: "=" }), _jsx(_components.mn, { children: "0.2" }), _jsx(_components.mo, { children: "+" }), _jsx(_components.mn, { children: "0.4" }), _jsx(_components.mi, { mathvariant: "normal", children: "Δ" }), _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "M" }), _jsx(_components.mi, { children: "t" })] }), _jsx(_components.mo, { children: "−" }), _jsx(_components.mn, { children: "0.25" }), _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "e" }), _jsxs(_components.mrow, { children: [_jsx(_components.mi, { children: "t" }), _jsx(_components.mo, { children: "−" }), _jsx(_components.mn, { children: "1" })] })] }), _jsx(_components.mo, { children: "+" }), _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "ε" }), _jsx(_components.mi, { children: "t" })] })] }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "\\Delta \\pi_t = 0.2 + 0.4 \\Delta M_t - 0.25 e_{t-1} + \\varepsilon_t" })] }) }) }), _jsxs(_components.span, { className: "katex-html", "aria-hidden": "true", children: [_jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.8333em", verticalAlign: "-0.15em" } }), _jsx(_components.span, { className: "mord", children: "Δ" }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.03588em" }, children: "π" }), _jsx(_components.span, { className: "msupsub", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsx(_components.span, { className: "vlist", style: { height: "0.2806em" }, children: _jsxs(_components.span, { style: { top: "-2.55em", marginLeft: "-0.0359em", marginRight: "0.05em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.7em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsx(_components.span, { className: "mord mathnormal mtight", children: "t" }) })] }) }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.15em" }, children: _jsx(_components.span, {}) }) })] }) })] }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2778em" } }), _jsx(_components.span, { className: "mrel", children: "=" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2778em" } })] }), _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.7278em", verticalAlign: "-0.0833em" } }), _jsx(_components.span, { className: "mord", children: "0.2" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2222em" } }), _jsx(_components.span, { className: "mbin", children: "+" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2222em" } })] }), _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.8333em", verticalAlign: "-0.15em" } }), _jsx(_components.span, { className: "mord", children: "0.4Δ" }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.10903em" }, children: "M" }), _jsx(_components.span, { className: "msupsub", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsx(_components.span, { className: "vlist", style: { height: "0.2806em" }, children: _jsxs(_components.span, { style: { top: "-2.55em", marginLeft: "-0.109em", marginRight: "0.05em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.7em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsx(_components.span, { className: "mord mathnormal mtight", children: "t" }) })] }) }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.15em" }, children: _jsx(_components.span, {}) }) })] }) })] }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2222em" } }), _jsx(_components.span, { className: "mbin", children: "−" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2222em" } })] }), _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.8528em", verticalAlign: "-0.2083em" } }), _jsx(_components.span, { className: "mord", children: "0.25" }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mord mathnormal", children: "e" }), _jsx(_components.span, { className: "msupsub", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsx(_components.span, { className: "vlist", style: { height: "0.3011em" }, children: _jsxs(_components.span, { style: { top: "-2.55em", marginLeft: "0em", marginRight: "0.05em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.7em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsxs(_components.span, { className: "mord mtight", children: [_jsx(_components.span, { className: "mord mathnormal mtight", children: "t" }), _jsx(_components.span, { className: "mbin mtight", children: "−" }), _jsx(_components.span, { className: "mord mtight", children: "1" })] }) })] }) }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.2083em" }, children: _jsx(_components.span, {}) }) })] }) })] }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2222em" } }), _jsx(_components.span, { className: "mbin", children: "+" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2222em" } })] }), _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.5806em", verticalAlign: "-0.15em" } }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mord mathnormal", children: "ε" }), _jsx(_components.span, { className: "msupsub", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsx(_components.span, { className: "vlist", style: { height: "0.2806em" }, children: _jsxs(_components.span, { style: { top: "-2.55em", marginLeft: "0em", marginRight: "0.05em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.7em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsx(_components.span, { className: "mord mathnormal mtight", children: "t" }) })] }) }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.15em" }, children: _jsx(_components.span, {}) }) })] }) })] })] })] })] }) }), "\n", _jsxs(_components.p, { children: ["where ", _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", children: _jsxs(_components.semantics, { children: [_jsx(_components.mrow, { children: _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "e" }), _jsxs(_components.mrow, { children: [_jsx(_components.mi, { children: "t" }), _jsx(_components.mo, { children: "−" }), _jsx(_components.mn, { children: "1" })] })] }) }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "e_{t-1}" })] }) }) }), _jsx(_components.span, { className: "katex-html", "aria-hidden": "true", children: _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.6389em", verticalAlign: "-0.2083em" } }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mord mathnormal", children: "e" }), _jsx(_components.span, { className: "msupsub", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsx(_components.span, { className: "vlist", style: { height: "0.3011em" }, children: _jsxs(_components.span, { style: { top: "-2.55em", marginLeft: "0em", marginRight: "0.05em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.7em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsxs(_components.span, { className: "mord mtight", children: [_jsx(_components.span, { className: "mord mathnormal mtight", children: "t" }), _jsx(_components.span, { className: "mbin mtight", children: "−" }), _jsx(_components.span, { className: "mord mtight", children: "1" })] }) })] }) }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.2083em" }, children: _jsx(_components.span, {}) }) })] }) })] })] }) })] }), " is last period’s residual from the long-run cointegrating regression of ", _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", children: _jsxs(_components.semantics, { children: [_jsx(_components.mrow, { children: _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "π" }), _jsx(_components.mi, { children: "t" })] }) }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "\\pi_t" })] }) }) }), _jsx(_components.span, { className: "katex-html", "aria-hidden": "true", children: _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.5806em", verticalAlign: "-0.15em" } }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.03588em" }, children: "π" }), _jsx(_components.span, { className: "msupsub", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsx(_components.span, { className: "vlist", style: { height: "0.2806em" }, children: _jsxs(_components.span, { style: { top: "-2.55em", marginLeft: "-0.0359em", marginRight: "0.05em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.7em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsx(_components.span, { className: "mord mathnormal mtight", children: "t" }) })] }) }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.15em" }, children: _jsx(_components.span, {}) }) })] }) })] })] }) })] }), " on ", _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", children: _jsxs(_components.semantics, { children: [_jsx(_components.mrow, { children: _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "M" }), _jsx(_components.mi, { children: "t" })] }) }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "M_t" })] }) }) }), _jsx(_components.span, { className: "katex-html", "aria-hidden": "true", children: _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.8333em", verticalAlign: "-0.15em" } }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.10903em" }, children: "M" }), _jsx(_components.span, { className: "msupsub", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsx(_components.span, { className: "vlist", style: { height: "0.2806em" }, children: _jsxs(_components.span, { style: { top: "-2.55em", marginLeft: "-0.109em", marginRight: "0.05em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.7em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsx(_components.span, { className: "mord mathnormal mtight", children: "t" }) })] }) }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.15em" }, children: _jsx(_components.span, {}) }) })] }) })] })] }) })] }), ". The coefficient on ", _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", children: _jsxs(_components.semantics, { children: [_jsx(_components.mrow, { children: _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "e" }), _jsxs(_components.mrow, { children: [_jsx(_components.mi, { children: "t" }), _jsx(_components.mo, { children: "−" }), _jsx(_components.mn, { children: "1" })] })] }) }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "e_{t-1}" })] }) }) }), _jsx(_components.span, { className: "katex-html", "aria-hidden": "true", children: _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.6389em", verticalAlign: "-0.2083em" } }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mord mathnormal", children: "e" }), _jsx(_components.span, { className: "msupsub", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsx(_components.span, { className: "vlist", style: { height: "0.3011em" }, children: _jsxs(_components.span, { style: { top: "-2.55em", marginLeft: "0em", marginRight: "0.05em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.7em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsxs(_components.span, { className: "mord mtight", children: [_jsx(_components.span, { className: "mord mathnormal mtight", children: "t" }), _jsx(_components.span, { className: "mbin mtight", children: "−" }), _jsx(_components.span, { className: "mord mtight", children: "1" })] }) })] }) }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.2083em" }, children: _jsx(_components.span, {}) }) })] }) })] })] }) })] }), " is statistically significant and negative."] }), "\n", _jsxs(_components.blockquote, { children: ["\n", _jsxs(_components.p, { children: [_jsx(_components.strong, { children: "Answer:" }), _jsx(_components.br, {}), " The significant negative coefficient on ", _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", children: _jsxs(_components.semantics, { children: [_jsx(_components.mrow, { children: _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "e" }), _jsxs(_components.mrow, { children: [_jsx(_components.mi, { children: "t" }), _jsx(_components.mo, { children: "−" }), _jsx(_components.mn, { children: "1" })] })] }) }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "e_{t-1}" })] }) }) }), _jsx(_components.span, { className: "katex-html", "aria-hidden": "true", children: _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.6389em", verticalAlign: "-0.2083em" } }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mord mathnormal", children: "e" }), _jsx(_components.span, { className: "msupsub", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsx(_components.span, { className: "vlist", style: { height: "0.3011em" }, children: _jsxs(_components.span, { style: { top: "-2.55em", marginLeft: "0em", marginRight: "0.05em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.7em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsxs(_components.span, { className: "mord mtight", children: [_jsx(_components.span, { className: "mord mathnormal mtight", children: "t" }), _jsx(_components.span, { className: "mbin mtight", children: "−" }), _jsx(_components.span, { className: "mord mtight", children: "1" })] }) })] }) }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.2083em" }, children: _jsx(_components.span, {}) }) })] }) })] })] }) })] }), " means that when inflation is above the long-run level implied by the money supply (positive ", _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", children: _jsxs(_components.semantics, { children: [_jsx(_components.mrow, { children: _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "e" }), _jsxs(_components.mrow, { children: [_jsx(_components.mi, { children: "t" }), _jsx(_components.mo, { children: "−" }), _jsx(_components.mn, { children: "1" })] })] }) }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "e_{t-1}" })] }) }) }), _jsx(_components.span, { className: "katex-html", "aria-hidden": "true", children: _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.6389em", verticalAlign: "-0.2083em" } }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mord mathnormal", children: "e" }), _jsx(_components.span, { className: "msupsub", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsx(_components.span, { className: "vlist", style: { height: "0.3011em" }, children: _jsxs(_components.span, { style: { top: "-2.55em", marginLeft: "0em", marginRight: "0.05em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.7em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsxs(_components.span, { className: "mord mtight", children: [_jsx(_components.span, { className: "mord mathnormal mtight", children: "t" }), _jsx(_components.span, { className: "mbin mtight", children: "−" }), _jsx(_components.span, { className: "mord mtight", children: "1" })] }) })] }) }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.2083em" }, children: _jsx(_components.span, {}) }) })] }) })] })] }) })] }), "), the change in inflation ", _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", children: _jsxs(_components.semantics, { children: [_jsxs(_components.mrow, { children: [_jsx(_components.mi, { mathvariant: "normal", children: "Δ" }), _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "π" }), _jsx(_components.mi, { children: "t" })] })] }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "\\Delta \\pi_t" })] }) }) }), _jsx(_components.span, { className: "katex-html", "aria-hidden": "true", children: _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.8333em", verticalAlign: "-0.15em" } }), _jsx(_components.span, { className: "mord", children: "Δ" }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.03588em" }, children: "π" }), _jsx(_components.span, { className: "msupsub", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsx(_components.span, { className: "vlist", style: { height: "0.2806em" }, children: _jsxs(_components.span, { style: { top: "-2.55em", marginLeft: "-0.0359em", marginRight: "0.05em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.7em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsx(_components.span, { className: "mord mathnormal mtight", children: "t" }) })] }) }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.15em" }, children: _jsx(_components.span, {}) }) })] }) })] })] }) })] }), " tends to be lower in the next period, pulling inflation back down toward equilibrium. Specifically, with ", _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", children: _jsxs(_components.semantics, { children: [_jsxs(_components.mrow, { children: [_jsx(_components.mi, { children: "λ" }), _jsx(_components.mo, { children: "=" }), _jsx(_components.mo, { children: "−" }), _jsx(_components.mn, { children: "0.25" })] }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "\\lambda = -0.25" })] }) }) }), _jsxs(_components.span, { className: "katex-html", "aria-hidden": "true", children: [_jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.6944em" } }), _jsx(_components.span, { className: "mord mathnormal", children: "λ" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2778em" } }), _jsx(_components.span, { className: "mrel", children: "=" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2778em" } })] }), _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.7278em", verticalAlign: "-0.0833em" } }), _jsx(_components.span, { className: "mord", children: "−" }), _jsx(_components.span, { className: "mord", children: "0.25" })] })] })] }), ", about 25% of any deviation from the long-run relationship is corrected in each period. The 0.4 coefficient on ", _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", children: _jsxs(_components.semantics, { children: [_jsxs(_components.mrow, { children: [_jsx(_components.mi, { mathvariant: "normal", children: "Δ" }), _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "M" }), _jsx(_components.mi, { children: "t" })] })] }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "\\Delta M_t" })] }) }) }), _jsx(_components.span, { className: "katex-html", "aria-hidden": "true", children: _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.8333em", verticalAlign: "-0.15em" } }), _jsx(_components.span, { className: "mord", children: "Δ" }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.10903em" }, children: "M" }), _jsx(_components.span, { className: "msupsub", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsx(_components.span, { className: "vlist", style: { height: "0.2806em" }, children: _jsxs(_components.span, { style: { top: "-2.55em", marginLeft: "-0.109em", marginRight: "0.05em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.7em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsx(_components.span, { className: "mord mathnormal mtight", children: "t" }) })] }) }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.15em" }, children: _jsx(_components.span, {}) }) })] }) })] })] }) })] }), " captures the short-run impact of changes in money supply on changes in inflation."] }), "\n"] }), "\n", _jsx(_components.h3, { children: "Exam Warning on ECM Interpretation" }), "\n", _jsx(_components.p, { children: "In exam questions, pay close attention to:" }), "\n", _jsxs(_components.ul, { children: ["\n", _jsxs(_components.li, { children: ["The sign of the error-correction term’s coefficient (should be negative for a stable adjustment of ", _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", children: _jsxs(_components.semantics, { children: [_jsx(_components.mrow, { children: _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "y" }), _jsx(_components.mi, { children: "t" })] }) }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "y_t" })] }) }) }), _jsx(_components.span, { className: "katex-html", "aria-hidden": "true", children: _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.625em", verticalAlign: "-0.1944em" } }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.03588em" }, children: "y" }), _jsx(_components.span, { className: "msupsub", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsx(_components.span, { className: "vlist", style: { height: "0.2806em" }, children: _jsxs(_components.span, { style: { top: "-2.55em", marginLeft: "-0.0359em", marginRight: "0.05em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.7em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsx(_components.span, { className: "mord mathnormal mtight", children: "t" }) })] }) }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.15em" }, children: _jsx(_components.span, {}) }) })] }) })] })] }) })] }), " back toward equilibrium when ", _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", children: _jsxs(_components.semantics, { children: [_jsx(_components.mrow, { children: _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "e" }), _jsxs(_components.mrow, { children: [_jsx(_components.mi, { children: "t" }), _jsx(_components.mo, { children: "−" }), _jsx(_components.mn, { children: "1" })] })] }) }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "e_{t-1}" })] }) }) }), _jsx(_components.span, { className: "katex-html", "aria-hidden": "true", children: _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.6389em", verticalAlign: "-0.2083em" } }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mord mathnormal", children: "e" }), _jsx(_components.span, { className: "msupsub", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsx(_components.span, { className: "vlist", style: { height: "0.3011em" }, children: _jsxs(_components.span, { style: { top: "-2.55em", marginLeft: "0em", marginRight: "0.05em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.7em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsxs(_components.span, { className: "mord mtight", children: [_jsx(_components.span, { className: "mord mathnormal mtight", children: "t" }), _jsx(_components.span, { className: "mbin mtight", children: "−" }), _jsx(_components.span, { className: "mord mtight", children: "1" })] }) })] }) }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.2083em" }, children: _jsx(_components.span, {}) }) })] }) })] })] }) })] }), " is positive)."] }), "\n", _jsxs(_components.li, { children: ["Whether the ECM is written for ", _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", children: _jsxs(_components.semantics, { children: [_jsx(_components.mrow, { children: _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "y" }), _jsx(_components.mi, { children: "t" })] }) }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "y_t" })] }) }) }), _jsx(_components.span, { className: "katex-html", "aria-hidden": "true", children: _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.625em", verticalAlign: "-0.1944em" } }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.03588em" }, children: "y" }), _jsx(_components.span, { className: "msupsub", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsx(_components.span, { className: "vlist", style: { height: "0.2806em" }, children: _jsxs(_components.span, { style: { top: "-2.55em", marginLeft: "-0.0359em", marginRight: "0.05em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.7em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsx(_components.span, { className: "mord mathnormal mtight", children: "t" }) })] }) }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.15em" }, children: _jsx(_components.span, {}) }) })] }) })] })] }) })] }), " or ", _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", children: _jsxs(_components.semantics, { children: [_jsx(_components.mrow, { children: _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "x" }), _jsx(_components.mi, { children: "t" })] }) }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "x_t" })] }) }) }), _jsx(_components.span, { className: "katex-html", "aria-hidden": "true", children: _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.5806em", verticalAlign: "-0.15em" } }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mord mathnormal", children: "x" }), _jsx(_components.span, { className: "msupsub", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsx(_components.span, { className: "vlist", style: { height: "0.2806em" }, children: _jsxs(_components.span, { style: { top: "-2.55em", marginLeft: "0em", marginRight: "0.05em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.7em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsx(_components.span, { className: "mord mathnormal mtight", children: "t" }) })] }) }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.15em" }, children: _jsx(_components.span, {}) }) })] }) })] })] }) })] }), "; the adjustment speed can differ depending on which variable is the dependent one."] }), "\n", _jsxs(_components.li, { children: ["The distinction between short-run coefficients on differenced variables and the long-run cointegration coefficient ", _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", children: _jsxs(_components.semantics, { children: [_jsx(_components.mrow, { children: _jsx(_components.mi, { children: "β" }) }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "\\beta" })] }) }) }), _jsx(_components.span, { className: "katex-html", "aria-hidden": "true", children: _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.8889em", verticalAlign: "-0.1944em" } }), _jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.05278em" }, children: "β" })] }) })] }), "."] }), "\n"] }), "\n", _jsx(_components.h2, { children: "Exam Warning: Unit-Root and Cointegration Tests" }), "\n", _jsxs(_components.blockquote, { children: ["\n", _jsx(_components.p, { children: "Do not use standard t‑ or normal critical values when applying Dickey–Fuller or Engle–Granger tests. Use the special critical values provided for unit-root and cointegration tests. Failing to do so can lead to incorrect conclusions about stationarity and cointegration." }), "\n"] }), "\n", _jsx(_components.p, { children: "Further, avoid regressing nonstationary series in levels without first:" }), "\n", _jsxs(_components.ul, { children: ["\n", _jsx(_components.li, { children: "Testing each series for unit roots, and" }), "\n", _jsx(_components.li, { children: "Either transforming them (e.g., first differencing) or verifying cointegration." }), "\n"] }), "\n", _jsxs(_components.p, { children: ["Otherwise, the regression may be spurious even if the ", _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", children: _jsxs(_components.semantics, { children: [_jsx(_components.mrow, { children: _jsxs(_components.msup, { children: [_jsx(_components.mi, { children: "R" }), _jsx(_components.mn, { children: "2" })] }) }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "R^2" })] }) }) }), _jsx(_components.span, { className: "katex-html", "aria-hidden": "true", children: _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.8141em" } }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.00773em" }, children: "R" }), _jsx(_components.span, { className: "msupsub", children: _jsx(_components.span, { className: "vlist-t", children: _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.8141em" }, children: _jsxs(_components.span, { style: { top: "-3.063em", marginRight: "0.05em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.7em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsx(_components.span, { className: "mord mtight", children: "2" }) })] }) }) }) }) })] })] }) })] }), " is high and t‑statistics appear significant."] }), "\n", _jsx(_components.h2, { children: "Nonstationarity, Cointegration, and Regression Analysis" }), "\n", _jsx(_components.p, { children: "When using time series in regressions, think in terms of the order of integration and cointegration status:" }), "\n", _jsxs(_components.ul, { children: ["\n", _jsxs(_components.li, { children: ["\n", _jsx(_components.p, { children: _jsx(_components.strong, { children: "Case 1: All variables are I(0) (stationary in levels)." }) }), "\n", _jsxs(_components.ul, { children: ["\n", _jsx(_components.li, { children: "Regressions in levels are valid." }), "\n", _jsx(_components.li, { children: "Standard inference (t‑ and F‑tests) is appropriate." }), "\n", _jsx(_components.li, { children: "No differencing or cointegration considerations are needed." }), "\n"] }), "\n"] }), "\n", _jsxs(_components.li, { children: ["\n", _jsx(_components.p, { children: _jsx(_components.strong, { children: "Case 2: Variables are I(1) but not cointegrated." }) }), "\n", _jsxs(_components.ul, { children: ["\n", _jsx(_components.li, { children: "Regressions in levels are spurious." }), "\n", _jsxs(_components.li, { children: ["Regressions should use first differences (or other transformations that yield stationarity), e.g., ", _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", children: _jsxs(_components.semantics, { children: [_jsxs(_components.mrow, { children: [_jsx(_components.mi, { mathvariant: "normal", children: "Δ" }), _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "y" }), _jsx(_components.mi, { children: "t" })] })] }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "\\Delta y_t" })] }) }) }), _jsx(_components.span, { className: "katex-html", "aria-hidden": "true", children: _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.8778em", verticalAlign: "-0.1944em" } }), _jsx(_components.span, { className: "mord", children: "Δ" }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.03588em" }, children: "y" }), _jsx(_components.span, { className: "msupsub", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsx(_components.span, { className: "vlist", style: { height: "0.2806em" }, children: _jsxs(_components.span, { style: { top: "-2.55em", marginLeft: "-0.0359em", marginRight: "0.05em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.7em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsx(_components.span, { className: "mord mathnormal mtight", children: "t" }) })] }) }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.15em" }, children: _jsx(_components.span, {}) }) })] }) })] })] }) })] }), " on ", _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", children: _jsxs(_components.semantics, { children: [_jsxs(_components.mrow, { children: [_jsx(_components.mi, { mathvariant: "normal", children: "Δ" }), _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "x" }), _jsx(_components.mi, { children: "t" })] })] }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "\\Delta x_t" })] }) }) }), _jsx(_components.span, { className: "katex-html", "aria-hidden": "true", children: _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.8333em", verticalAlign: "-0.15em" } }), _jsx(_components.span, { className: "mord", children: "Δ" }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mord mathnormal", children: "x" }), _jsx(_components.span, { className: "msupsub", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsx(_components.span, { className: "vlist", style: { height: "0.2806em" }, children: _jsxs(_components.span, { style: { top: "-2.55em", marginLeft: "0em", marginRight: "0.05em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.7em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsx(_components.span, { className: "mord mathnormal mtight", children: "t" }) })] }) }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.15em" }, children: _jsx(_components.span, {}) }) })] }) })] })] }) })] }), "."] }), "\n", _jsx(_components.li, { children: "No error-correction term is used, because there is no long-run equilibrium linking the levels." }), "\n"] }), "\n"] }), "\n", _jsxs(_components.li, { children: ["\n", _jsx(_components.p, { children: _jsx(_components.strong, { children: "Case 3: Variables are I(1) and cointegrated." }) }), "\n", _jsxs(_components.ul, { children: ["\n", _jsx(_components.li, { children: "The regression in levels represents a valid long-run equilibrium relationship." }), "\n", _jsx(_components.li, { children: "Short-run dynamics should be modeled using an ECM, combining differenced variables and the error-correction term." }), "\n", _jsx(_components.li, { children: "Ignoring cointegration and working only with differences discards information about the long-run relationship." }), "\n"] }), "\n"] }), "\n"] }), "\n", _jsx(_components.p, { children: "In exam scenarios, once you identify that two nonstationary series are cointegrated, the preferred modeling approach is an ECM rather than a pure differenced regression." }), "\n", _jsx(_components.h2, { children: _jsx(_components.strong, { children: "Key Point Checklist" }) }), "\n", _jsx(_components.p, { children: _jsx(_components.em, { children: "This article has covered the following key knowledge points:" }) }), "\n", _jsxs(_components.ul, { children: ["\n", _jsx(_components.li, { children: "The distinction between covariance-stationary (I(0)) and unit-root (I(1)) time-series processes" }), "\n", _jsx(_components.li, { children: "Why random walks (with or without drift) are nonstationary and produce spurious regression results" }), "\n", _jsx(_components.li, { children: "The structure of an AR(1) model and the role of the lag coefficient in determining mean reversion" }), "\n", _jsx(_components.li, { children: "The concept of a unit root and its implications for time-series modeling and forecasting" }), "\n", _jsx(_components.li, { children: "The Dickey–Fuller unit-root test: regression specification, hypotheses, and use of special critical values" }), "\n", _jsx(_components.li, { children: "The rationale for and application of first differencing to transform I(1) series into stationary series" }), "\n", _jsx(_components.li, { children: "The concept of order of integration and the notation I(0), I(1)" }), "\n", _jsx(_components.li, { children: "The definition of cointegration and its interpretation as a long-run equilibrium relationship between nonstationary series" }), "\n", _jsx(_components.li, { children: "The Engle–Granger two-step cointegration test using residuals from a long-run regression" }), "\n", _jsx(_components.li, { children: "The structure of an error-correction model, including short-run differenced terms and the error-correction term" }), "\n", _jsx(_components.li, { children: "Interpretation of the speed-of-adjustment coefficient in ECMs and its implications for stability" }), "\n", _jsx(_components.li, { children: "The decision rules for when regressions in levels are valid, when they are spurious, and when ECMs are appropriate" }), "\n", _jsx(_components.li, { children: "Common exam pitfalls: ignoring unit roots, misusing standard critical values, and misinterpreting ECM coefficients" }), "\n"] }), "\n", _jsx(_components.h2, { children: _jsx(_components.strong, { children: "Key Terms and Concepts" }) }), "\n", _jsxs(_components.ul, { children: ["\n", _jsx(_components.li, { children: "Unit Root" }), "\n", _jsx(_components.li, { children: "Covariance Stationary" }), "\n", _jsx(_components.li, { children: "Mean-Reverting Level" }), "\n", _jsx(_components.li, { children: "Random Walk" }), "\n", _jsx(_components.li, { children: "Random Walk with Drift" }), "\n", _jsx(_components.li, { children: "Spurious Regression" }), "\n", _jsx(_components.li, { children: "Dickey–Fuller Test" }), "\n", _jsx(_components.li, { children: "Order of Integration" }), "\n", _jsx(_components.li, { children: "First Difference" }), "\n", _jsx(_components.li, { children: "Cointegration" }), "\n", _jsx(_components.li, { children: "Cointegrating Vector" }), "\n", _jsx(_components.li, { children: "Engle–Granger Test" }), "\n", _jsx(_components.li, { children: "Error-Correction Model (ECM)" }), "\n", _jsx(_components.li, { children: "Error-Correction Term" }), "\n", _jsx(_components.li, { children: "Speed of Adjustment" }), "\n"] })] }); } function MDXContent(props = {}) { const {wrapper: MDXLayout} = { ..._provideComponents(), ...props.components }; return MDXLayout ? _jsx(MDXLayout, { ...props, children: _jsx(_createMdxContent, { ...props }) }) : _createMdxContent(props); } return { default: MDXContent };

Time-series analysis - Unit roots cointegration and error-correction models