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After reading, you will be able to:" }), "\n", _jsxs(_components.ul, { children: ["\n", _jsx(_components.li, { children: "Distinguish covariance-stationary from non-stationary time series using moment conditions and intuition" }), "\n", _jsx(_components.li, { children: "Specify, interpret, and forecast with AR, MA, and ARMA models using mean reversion and lag structure" }), "\n", _jsx(_components.li, { children: "Recognize unit roots and random walks, explain why they create modeling problems, and describe how ARIMA differencing and unit-root tests address them" }), "\n"] }), "\n", _jsx(_components.h2, { children: _jsx(_components.strong, { children: "GARP FRM Part 1 Syllabus" }) }), "\n", _jsx(_components.p, { children: "For the GARP FRM Part 1 exam, you are expected to understand stationary and non-stationary time-series behavior with a focus on the following syllabus points:" }), "\n", _jsxs(_components.ul, { children: ["\n", _jsx(_components.li, { children: "Covariance stationarity, autocovariance/autocorrelation, and white noise as building blocks for time-series models" }), "\n", _jsx(_components.li, { children: "Autoregressive (AR), moving average (MA), and ARMA specification, identification (ACF/PACF), and diagnostic checking (Box-Pierce and Ljung-Box)" }), "\n", _jsx(_components.li, { children: "Unit roots, random walks, and how differencing (ARIMA) is used to transform non-stationary series for modeling and forecasting" }), "\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.ol, { children: ["\n", _jsxs(_components.li, { children: ["\n", _jsxs(_components.p, { children: ["For an AR(1) process ", _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: "d" }), _jsx(_components.mo, { children: "+" }), _jsx(_components.mi, { children: "ϕ" }), _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "y" }), _jsxs(_components.mrow, { children: [_jsx(_components.mi, { children: "t" }), 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Calculate its unconditional mean."] }), "\n"] }), "\n", _jsxs(_components.li, { children: ["\n", _jsx(_components.p, { children: "A sample ACF shows a single statistically significant spike at lag 1 and is near zero afterward, while the PACF decays gradually. Which model class is most consistent with this pattern: AR, MA, or ARMA?" }), "\n"] }), "\n", _jsxs(_components.li, { children: ["\n", _jsx(_components.p, { children: "True or False: If a time series has a unit root, shocks to the series tend to be temporary and the series quickly returns to its long-run mean. Explain briefly." }), "\n"] }), "\n"] }), "\n", _jsx(_components.h2, { children: _jsx(_components.strong, { children: "What Do You Know Already?" }) }), "\n", _jsxs(_components.ul, { children: ["\n", _jsx(_components.li, { children: "Can you explain (without memorizing) why a random walk is non-stationary and why its variance grows with time?" }), "\n", _jsx(_components.li, { children: "Can you look at an ACF/PACF sketch and make a reasonable first guess of AR vs MA vs ARMA?" }), "\n", _jsx(_components.li, { children: "Can you write the ARIMA idea in one sentence: what does the “I” (integrated) component do?" }), "\n"] }), "\n", _jsx(_components.p, { children: "Use these prompts to gauge your starting point; then focus your revision where your answers were least confident." }), "\n", _jsx(_components.h2, { children: _jsx(_components.strong, { children: "Introduction" }) }), "\n", _jsx(_components.p, { children: "Time-series models are used in finance whenever the ordering of data matters: interest rates, yield curve factors, credit spreads, implied volatility indices, and macro variables are all observed sequentially and often show persistence. For risk managers, this persistence affects forecasting, scenario design, stress testing, and model-based measures such as Value-at-Risk (VaR) that depend on distributional assumptions over a forecast horizon." }), "\n", _jsxs(_components.p, { children: ["The FRM Part 1 focus is on modeling the conditional mean of a time series using linear models: autoregressive (AR), moving average (MA), and combined ARMA models. These tools rely heavily on the concept of ", _jsx(_components.strong, { children: "covariance stationarity" }), ", because stationarity justifies using historical averages and historical dependence patterns (autocorrelations) as stable inputs for estimation and forecasting."] }), "\n", _jsxs(_components.p, { children: ["Non-stationary behavior—especially ", _jsx(_components.strong, { children: "unit roots" }), " and ", _jsx(_components.strong, { children: "random walks" }), "—creates a different set of challenges. Many price levels and macroeconomic levels behave like this, so risk managers often transform data (for example, using returns or differences) and then model the transformed stationary series using ARMA-style methods."] }), "\n", _jsxs(_components.blockquote, { children: ["\n", _jsxs(_components.p, { children: [_jsx(_components.strong, { children: "Key Term: Time series (stochastic process)" }), _jsx(_components.br, {}), "\n", "A time series is an ordered sequence of random variables ", _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: "Y" }), _jsx(_components.mi, { children: "t" })] }), _jsx(_components.mo, { stretchy: "false", children: "}" })] }), _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: "1em", verticalAlign: "-0.25em" } }), _jsx(_components.span, { className: "mopen", children: "{" }), _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: "mclose", children: "}" })] }) })] }), " indexed by time ", _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" })] }) })] }), ", where the time ordering matters for dependence and forecasting."] }), "\n"] }), "\n", _jsx(_components.h2, { children: _jsx(_components.strong, { children: "Covariance stationarity and dependence patterns" }) }), "\n", _jsxs(_components.p, { children: ["Many econometric procedures assume stability: that the data’s distribution does not “drift” in a way that makes yesterday’s behavior unrelated to today’s. In time-series modeling, the most common stability concept is ", _jsx(_components.strong, { children: "covariance stationarity" }), " (also called weak stationarity)."] }), "\n", _jsxs(_components.p, { children: ["A 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.mo, { stretchy: "false", children: "{" }), _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "Y" }), _jsx(_components.mi, { children: "t" })] }), _jsx(_components.mo, { stretchy: "false", children: "}" })] }), _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: 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_jsx(_components.mo, { children: "=" }), _jsx(_components.mi, { children: "μ" })] }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "E[Y_t] = \\mu" })] }) }) }), _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: "mord mathnormal", style: { marginRight: "0.05764em" }, children: "E" }), _jsx(_components.span, { className: "mopen", children: "[" }), _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", 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[_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", children: "h" })] }) })] }) }), _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, {}) }) })] }) })] })] }) })] }), " depends only on the 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: "h" }) }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "h" })] }) }) }), _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: "h" })] }) })] }), ", not on the calendar time ", _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" })] }) })] })] }), "\n"] }), "\n", _jsxs(_components.p, { children: ["The 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: "h" }) }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "h" })] }) }) }), _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: "h" })] }) })] }), " autocovariance 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: [_jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "γ" }), _jsx(_components.mi, { children: "h" })] }), _jsx(_components.mo, { children: "=" }), _jsx(_components.mtext, { children: "Cov" }), _jsx(_components.mo, { stretchy: "false", children: "(" }), _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "Y" }), _jsx(_components.mi, { children: "t" })] }), _jsx(_components.mo, { separator: "true", children: "," }), _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "Y" }), _jsxs(_components.mrow, { children: [_jsx(_components.mi, { children: "t" }), _jsx(_components.mo, { children: "−" }), _jsx(_components.mi, { children: "h" })] })] }), _jsx(_components.mo, { stretchy: "false", children: ")" }), _jsx(_components.mo, { children: "=" }), _jsx(_components.mi, { children: "E" }), _jsx(_components.mo, { stretchy: "false", children: "[" }), _jsx(_components.mo, { stretchy: "false", children: "(" }), _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "Y" }), _jsx(_components.mi, { children: "t" })] }), _jsx(_components.mo, { children: "−" }), _jsx(_components.mi, { children: "μ" }), _jsx(_components.mo, { stretchy: "false", children: ")" }), _jsx(_components.mo, { stretchy: "false", children: "(" }), _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "Y" }), _jsxs(_components.mrow, { children: [_jsx(_components.mi, { children: "t" }), _jsx(_components.mo, { children: "−" }), _jsx(_components.mi, { children: "h" })] })] }), _jsx(_components.mo, { children: "−" }), _jsx(_components.mi, { children: "μ" }), _jsx(_components.mo, { stretchy: "false", children: ")" }), _jsx(_components.mo, { stretchy: "false", children: "]" })] }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "\\gamma_h = \\text{Cov}(Y_t, Y_{t-h}) = E[(Y_t-\\mu)(Y_{t-h}-\\mu)]" })] }) }) }), _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: "0.05556em" }, children: "γ" }), _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: 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className: "mord text", children: _jsx(_components.span, { className: "mord", children: "Cov" }) }), _jsx(_components.span, { className: "mopen", children: "(" }), _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: "mpunct", children: "," }), _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: "0.3361em" }, 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: _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", children: "h" })] }) })] }) }), _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: ")" }), _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: "1em", verticalAlign: "-0.25em" } }), _jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.05764em" }, children: "E" }), _jsx(_components.span, { className: "mopen", children: "[(" }), _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: "1em", verticalAlign: "-0.25em" } }), _jsx(_components.span, { className: "mord mathnormal", children: "μ" }), _jsx(_components.span, { className: "mclose", children: ")" }), _jsx(_components.span, { className: "mopen", children: "(" }), _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: "0.3361em" }, 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: _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", children: "h" })] }) })] }) }), _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: "1em", verticalAlign: "-0.25em" } }), _jsx(_components.span, { className: "mord mathnormal", children: "μ" }), _jsx(_components.span, { className: "mclose", children: ")]" })] })] })] }) }), "\n", _jsx(_components.p, { children: "The corresponding autocorrelation 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: [_jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "ρ" }), _jsx(_components.mi, { children: "h" })] }), _jsx(_components.mo, { children: "=" }), _jsxs(_components.mfrac, { children: [_jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "γ" }), _jsx(_components.mi, { children: "h" })] }), _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "γ" }), _jsx(_components.mn, { children: "0" })] })] })] }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "\\rho_h = \\frac{\\gamma_h}{\\gamma_0}" })] }) }) }), _jsxs(_components.span, { className: "katex-html", "aria-hidden": "true", children: [_jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: 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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: "1.988em", verticalAlign: "-0.8804em" } }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mopen nulldelimiter" }), _jsx(_components.span, { className: "mfrac", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsxs(_components.span, { className: "vlist", style: { height: "1.1076em" }, children: [_jsxs(_components.span, { style: { top: "-2.314em" }, 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", style: { marginRight: "0.05556em" }, children: "γ" }), _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: "-0.0556em", 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, { 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", style: { marginRight: "0.05556em" }, children: "γ" }), _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: "-0.0556em", 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: "h" }) })] }) }), _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: "0.8804em" }, children: _jsx(_components.span, {}) }) })] }) }), _jsx(_components.span, { className: "mclose nulldelimiter" })] })] })] })] }) }), "\n", _jsxs(_components.p, { children: ["These functions summarize persistence. 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: "ρ" }), _jsx(_components.mi, { children: "h" })] }) }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "\\rho_h" })] }) }) }), _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", children: "ρ" }), _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: _jsx(_components.span, { className: "mord mathnormal mtight", children: "h" }) })] }) }), _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, {}) }) })] }) })] })] }) })] }), " stays large for many lags, shocks echo far into the future; if it dies out quickly, the series has short memory."] }), "\n", _jsxs(_components.blockquote, { children: ["\n", _jsxs(_components.p, { children: [_jsx(_components.strong, { children: "Key Term: Covariance stationarity" }), _jsx(_components.br, {}), "\n", "A time series is covariance-stationary if its mean and variance are time-invariant and its autocovariances depend only on lag, not on the time index."] }), "\n"] }), "\n", _jsx(_components.h3, { children: "White noise as the baseline" }), "\n", _jsxs(_components.p, { children: ["A central reference case is ", _jsx(_components.strong, { children: "white noise" }), ", which has no linear predictability."] }), "\n", _jsxs(_components.p, { children: ["A white noise process ", _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: "ε" 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className: "mord", children: "0" })] })] })] }), " for all ", _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: "h" }), _jsx(_components.mo, { mathvariant: "normal", children: "≠" }), _jsx(_components.mn, { children: "0" })] }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "h\\neq 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", children: "h" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2778em" } }), 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{ height: "0.2083em" }, children: _jsx(_components.span, {}) }) })] }) })] })] }) })] }), " after controlling for intermediate lags ", _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" }), _jsxs(_components.mrow, { children: [_jsx(_components.mi, { children: "t" }), _jsx(_components.mo, { children: "−" }), _jsx(_components.mn, { children: "1" })] })] }), _jsx(_components.mo, { separator: "true", children: "," }), _jsx(_components.mo, { children: "…" }), _jsx(_components.mo, { separator: "true", children: "," }), _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "Y" }), _jsxs(_components.mrow, { children: [_jsx(_components.mi, { children: "t" }), _jsx(_components.mo, { 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children: [_jsx(_components.span, { className: "mord mathnormal mtight", children: "t" }), _jsx(_components.span, { className: "mbin mtight", children: "−" }), _jsx(_components.span, { className: "mord mathnormal mtight", children: "h" }), _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", _jsxs(_components.blockquote, { children: ["\n", _jsxs(_components.p, { children: [_jsx(_components.strong, { children: "Key Term: ACF and PACF" }), _jsx(_components.br, {}), "\n", "The ACF measures correlation by lag; the PACF measures correlation at 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: "h" }) }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "h" })] }) }) }), _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: "h" })] }) })] }), " after controlling for shorter lags, and is especially useful for selecting AR order."] }), "\n"] }), "\n", _jsx(_components.p, { children: "As a rule of thumb used in model identification:" }), "\n", _jsxs(_components.ul, { children: ["\n", _jsxs(_components.li, { children: ["AR(", _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: "p" }) }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "p" })] }) }) }), _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", children: "p" })] }) })] }), "): PACF cuts off after 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: "p" }) }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "p" })] }) }) }), _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", children: "p" })] }) })] }), ", ACF decays"] }), "\n", _jsxs(_components.li, { children: ["MA(", _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: "q" }) }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "q" })] }) }) }), _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: "q" })] }) })] }), "): ACF cuts off after 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: "q" }) }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "q" })] }) }) }), _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: "q" })] }) })] }), ", PACF decays"] }), "\n", _jsxs(_components.li, { children: ["ARMA(", _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: "p" }), _jsx(_components.mo, { separator: "true", children: "," }), _jsx(_components.mi, { children: "q" })] }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "p,q" })] }) }) }), _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", children: "p" }), _jsx(_components.span, { className: "mpunct", children: "," }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.1667em" } }), _jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.03588em" }, children: "q" })] }) })] }), "): both ACF and PACF decay"] }), "\n"] }), "\n", _jsx(_components.p, { children: "“Cuts off” means becomes statistically indistinguishable from zero beyond a small number of lags." }), "\n", _jsx(_components.h2, { children: _jsx(_components.strong, { children: "Autoregressive models and mean reversion" }) }), "\n", _jsx(_components.p, { children: "An autoregressive model relates today’s value to its own past. The simplest version is 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: "y" }), _jsx(_components.mi, { children: "t" })] }), _jsx(_components.mo, { children: "=" }), _jsx(_components.mi, { children: "d" }), _jsx(_components.mo, { children: "+" }), _jsx(_components.mi, { children: "ϕ" }), _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "y" }), _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: "y_t = d + \\phi y_{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: "0.625em", 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", 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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", _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: _jsx(_components.mi, { children: "d" }) }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "d" })] }) }) }), _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: "d" })] }) })] }), " is an 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: _jsx(_components.mi, { children: "ϕ" }) }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "\\phi" })] }) }) }), _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", children: "ϕ" })] }) })] }), " is the autoregressive parameter, 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: "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."] }), "\n", _jsx(_components.h3, { children: "Stationarity and mean reversion in AR(1)" }), "\n", _jsx(_components.p, { children: "An AR(1) is covariance-stationary when:" }), "\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: "∣" }), _jsx(_components.mi, { children: "ϕ" }), _jsx(_components.mi, { mathvariant: "normal", children: "∣" }), _jsx(_components.mo, { children: "<" }), _jsx(_components.mn, { children: "1" })] }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "|\\phi| < 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: "mord", children: "∣" }), _jsx(_components.span, { className: "mord mathnormal", children: "ϕ" }), _jsx(_components.span, { className: "mord", 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" })] })] })] }) }), "\n", _jsx(_components.p, { children: "When this holds, the process is mean-reverting: deviations from its long-run mean shrink over time." }), "\n", _jsx(_components.p, { children: "The unconditional mean 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: [_jsx(_components.mi, { children: "d" }), _jsxs(_components.mrow, { children: [_jsx(_components.mn, { children: "1" }), _jsx(_components.mo, { children: "−" }), _jsx(_components.mi, { children: "ϕ" })] })] })] }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "\\mu = \\frac{d}{1-\\phi}" })] }) }) }), _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: "2.2519em", verticalAlign: "-0.8804em" } }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mopen nulldelimiter" }), _jsx(_components.span, { className: "mfrac", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsxs(_components.span, { className: "vlist", style: { height: "1.3714em" }, children: [_jsxs(_components.span, { style: { top: "-2.314em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "3em" } }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mord", children: "1" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2222em" } }), _jsx(_components.span, { className: "mbin", children: "−" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2222em" } }), _jsx(_components.span, { className: "mord mathnormal", children: "ϕ" })] })] }), _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: _jsx(_components.span, { className: "mord mathnormal", children: "d" }) })] })] }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.8804em" }, children: _jsx(_components.span, {}) }) })] }) }), _jsx(_components.span, { className: "mclose nulldelimiter" })] })] })] })] }) }), "\n", _jsx(_components.p, { children: "The unconditional variance 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.mtext, { children: "Var" }), _jsx(_components.mo, { stretchy: "false", children: "(" }), _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "y" }), _jsx(_components.mi, { children: "t" })] }), _jsx(_components.mo, { stretchy: "false", children: ")" }), _jsx(_components.mo, { children: "=" }), _jsxs(_components.mfrac, { children: [_jsxs(_components.msubsup, { children: [_jsx(_components.mi, { children: "σ" }), _jsx(_components.mi, { children: "ε" }), _jsx(_components.mn, { children: "2" })] }), _jsxs(_components.mrow, { children: [_jsx(_components.mn, { children: "1" }), _jsx(_components.mo, { children: "−" }), _jsxs(_components.msup, { children: [_jsx(_components.mi, { children: "ϕ" }), _jsx(_components.mn, { children: "2" })] })] })] })] }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "\\text{Var}(y_t) = \\frac{\\sigma_\\varepsilon^2}{1-\\phi^2}" })] }) }) }), _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: "mord text", children: _jsx(_components.span, { className: "mord", children: "Var" }) }), _jsx(_components.span, { className: "mopen", children: "(" }), _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: "mclose", children: ")" }), _jsx(_components.span, { className: "mspace", style: { marginRight: 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{ 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: "mord", children: [_jsx(_components.span, { className: "mord mathnormal", children: "ϕ" }), _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: "0.7401em" }, children: _jsxs(_components.span, { style: { top: "-2.989em", 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" }) })] }) }) }) }) })] })] })] }), _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", style: { marginRight: "0.03588em" }, children: "σ" }), _jsx(_components.span, { className: "msupsub", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsxs(_components.span, { className: "vlist", style: { height: "0.8141em" }, children: [_jsxs(_components.span, { style: { top: "-2.453em", 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: "ε" }) })] }), _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: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.247em" }, 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: "0.8804em" }, children: _jsx(_components.span, {}) }) })] }) }), _jsx(_components.span, { className: "mclose nulldelimiter" })] })] })] })] }) }), "\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: "ϕ" }) }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "\\phi" })] }) }) }), _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", children: "ϕ" })] }) })] }), ":"] }), "\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: _jsx(_components.mi, { children: "ϕ" }) }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "\\phi" })] }) }) }), _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", children: "ϕ" })] }) })] }), " near 0: very weak persistence (quick reversion)"] }), "\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: "ϕ" }) }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "\\phi" })] }) }) }), _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", children: "ϕ" })] }) })] }), " near 1 (but less than 1): strong persistence (slow reversion)"] }), "\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: "ϕ" }) }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "\\phi" })] }) }) }), _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", children: "ϕ" })] }) })] }), " negative: oscillatory behavior around the mean (sign flips)"] }), "\n"] }), "\n", _jsx(_components.h3, { children: "AR(p) generalization" }), "\n", _jsxs(_components.p, { children: ["An AR(", _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: "p" }) }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "p" })] }) }) }), _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", children: "p" })] }) })] }), ") includes multiple lags:"] }), "\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: "d" }), _jsx(_components.mo, { children: "+" }), _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "ϕ" }), _jsx(_components.mn, { children: "1" })] }), _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "y" }), _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: "ϕ" }), _jsx(_components.mn, { children: "2" })] }), _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "y" }), _jsxs(_components.mrow, { children: [_jsx(_components.mi, { children: "t" }), _jsx(_components.mo, { children: "−" }), _jsx(_components.mn, { children: "2" })] })] }), _jsx(_components.mo, { children: "+" }), _jsx(_components.mo, { children: "⋯" }), _jsx(_components.mo, { children: "+" }), _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "ϕ" }), _jsx(_components.mi, { children: "p" })] }), _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "y" }), _jsxs(_components.mrow, { children: [_jsx(_components.mi, { children: "t" }), _jsx(_components.mo, { children: "−" }), _jsx(_components.mi, { children: "p" })] })] }), _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: "y_t = d + \\phi_1 y_{t-1} + \\phi_2 y_{t-2} + \\cdots + \\phi_p y_{t-p} + \\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: "0.625em", verticalAlign: "-0.1944em" } }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mord 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concept.)"] }), "\n", _jsx(_components.h3, { children: "Worked Example 1.1" }), "\n", _jsx(_components.p, { children: "An analyst models a spread with an 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: "y" }), _jsx(_components.mi, { children: "t" })] }), _jsx(_components.mo, { children: "=" }), _jsx(_components.mn, { children: "0.20" }), _jsx(_components.mo, { children: "+" }), _jsx(_components.mn, { children: "0.80" }), _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "y" }), _jsxs(_components.mrow, { children: [_jsx(_components.mi, { children: "t" }), _jsx(_components.mo, 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children: "2" }) })] })] }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.247em" }, 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: "0.25" })] })] })] }) }), "\n", _jsxs(_components.p, { children: ["At time ", _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" })] }) })] }), ", the observed value 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: [_jsxs(_components.mrow, { children: [_jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "y" }), _jsx(_components.mi, { children: "t" })] }), _jsx(_components.mo, { children: "=" }), _jsx(_components.mn, { children: "1.50" })] }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "y_t = 1.50" })] }) }) }), _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: "0.6444em" } }), _jsx(_components.span, { className: "mord", children: "1.50" })] })] })] }), "."] }), "\n", _jsxs(_components.ol, { children: ["\n", _jsx(_components.li, { children: "Is the process covariance-stationary?" }), "\n", _jsx(_components.li, { children: "Compute the unconditional mean and variance." }), "\n", _jsxs(_components.li, { children: ["Compute the 1-step, 2-step, and 3-step ahead point forecasts ", _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: "y" }), _jsxs(_components.mrow, { children: [_jsx(_components.mi, { children: "t" }), _jsx(_components.mo, { children: "+" }), _jsx(_components.mi, { children: "h" })] })] }), _jsx(_components.mo, { children: "∣" }), _jsxs(_components.msub, { children: [_jsx(_components.mi, { mathvariant: "script", children: "F" }), _jsx(_components.mi, { children: "t" })] }), _jsx(_components.mo, { stretchy: "false", children: "]" })] }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "E[y_{t+h}\\mid \\mathcal{F}_t]" })] }) }) }), _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: "mord mathnormal", style: { marginRight: "0.05764em" }, children: "E" }), _jsx(_components.span, { className: "mopen", children: "[" }), _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: 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}), _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: "1em", verticalAlign: "-0.25em" } }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mord mathcal", style: { marginRight: "0.09931em" }, children: "F" }), _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: "-0.0993em", marginRight: "0.05em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.7em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 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"application/x-tex", children: "h\\to\\infty" })] }) }) }), _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: "h" }), _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: "0.4306em" } }), _jsx(_components.span, { className: "mord", children: "∞" })] })] })] }), "?"] }), "\n"] }), "\n", _jsxs(_components.blockquote, { children: ["\n", _jsxs(_components.p, { children: [_jsx(_components.strong, { children: "Answer:" }), _jsx(_components.br, {}), "\n", _jsx(_components.strong, { children: "1) Stationarity check" }), _jsx(_components.br, {}), "\n", "For AR(1), covariance stationarity requires ", _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: "∣" }), _jsx(_components.mi, { children: "ϕ" }), _jsx(_components.mi, { mathvariant: "normal", children: "∣" }), _jsx(_components.mo, { children: "<" }), _jsx(_components.mn, { children: "1" })] }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "|\\phi|<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: "mord", children: "∣" }), _jsx(_components.span, { className: "mord mathnormal", children: "ϕ" }), _jsx(_components.span, { className: "mord", 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" })] })] })] }), ". Here, ", _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: "∣" }), _jsx(_components.mn, { children: "0.80" }), _jsx(_components.mi, { mathvariant: "normal", children: "∣" }), _jsx(_components.mo, { children: "<" }), _jsx(_components.mn, { children: "1" })] }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "|0.80|<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: "mord", children: "∣0.80∣" }), _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" })] })] })] }), ", so the process is covariance-stationary."] }), "\n", _jsx(_components.p, { children: _jsx(_components.strong, { children: "2) Unconditional mean and variance" }) }), "\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: [_jsx(_components.mi, { children: "d" }), _jsxs(_components.mrow, { children: [_jsx(_components.mn, { children: "1" }), _jsx(_components.mo, { children: "−" }), _jsx(_components.mi, { children: "ϕ" })] })] }), _jsx(_components.mo, { children: "=" }), _jsxs(_components.mfrac, { children: [_jsx(_components.mn, { children: "0.20" }), _jsxs(_components.mrow, { children: [_jsx(_components.mn, { children: "1" }), _jsx(_components.mo, { children: "−" }), _jsx(_components.mn, { children: "0.80" })] })] }), _jsx(_components.mo, { children: "=" }), _jsxs(_components.mfrac, { children: [_jsx(_components.mn, { children: "0.20" }), _jsx(_components.mn, { children: "0.20" })] }), _jsx(_components.mo, { children: "=" }), _jsx(_components.mn, { children: "1.00" })] }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "\\mu=\\frac{d}{1-\\phi}=\\frac{0.20}{1-0.80}=\\frac{0.20}{0.20}=1.00" })] }) }) }), _jsxs(_components.span, 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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: "h" }) })] }) }) }) }) })] }), _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" })] })] })] }), " 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, { children: [_jsx(_components.mi, { children: "h" }), _jsx(_components.mo, { children: "→" }), _jsx(_components.mi, { mathvariant: "normal", children: "∞" })] }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "h\\to\\infty" })] }) }) }), _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: "h" }), _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: "0.4306em" } }), _jsx(_components.span, { className: "mord", children: "∞" })] })] })] }), ", so forecasts converge to ", _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: "μ" }), _jsx(_components.mo, { children: "=" }), _jsx(_components.mn, { children: "1.00" })] }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "\\mu=1.00" })] }) }) }), _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: "0.6444em" } }), _jsx(_components.span, { className: "mord", children: "1.00" })] })] })] }), "."] }), "\n"] }), "\n", _jsx(_components.h2, { children: _jsx(_components.strong, { children: "Moving average models and shock transmission" }) }), "\n", _jsx(_components.p, { children: "A moving average model represents the series as a function of current and past shocks (rather than past values of the series). An MA(1) 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: [_jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "y" }), _jsx(_components.mi, { children: "t" })] }), _jsx(_components.mo, { children: "=" }), _jsx(_components.mi, { children: "μ" }), _jsx(_components.mo, { children: "+" }), _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "ε" }), _jsx(_components.mi, { children: "t" })] }), _jsx(_components.mo, { children: "+" }), _jsx(_components.mi, { children: "θ" }), _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "ε" }), _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: "y_t = \\mu + \\varepsilon_t + \\theta \\varepsilon_{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: "0.625em", 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: "0.7778em", verticalAlign: "-0.1944em" } }), _jsx(_components.span, { className: "mord mathnormal", children: "μ" }), _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: "0.7333em", 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, {}) }) })] }) })] }), _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: "0.02778em" }, children: "θ" }), _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: "0.3011em" }, 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: ["More generally, MA(", _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: "q" }) }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "q" })] }) }) }), _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: "q" })] }) })] }), ") 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: [_jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "y" }), _jsx(_components.mi, { children: "t" })] }), _jsx(_components.mo, { children: "=" }), _jsx(_components.mi, { children: "μ" }), _jsx(_components.mo, { children: "+" }), _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "ε" }), _jsx(_components.mi, { children: "t" })] }), _jsx(_components.mo, { children: "+" }), _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "θ" }), _jsx(_components.mn, { children: "1" })] }), _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "ε" }), _jsxs(_components.mrow, { children: [_jsx(_components.mi, { children: "t" }), _jsx(_components.mo, { children: "−" }), _jsx(_components.mn, { children: "1" })] })] }), _jsx(_components.mo, { children: "+" }), _jsx(_components.mo, { children: "⋯" }), _jsx(_components.mo, { children: "+" }), _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "θ" }), _jsx(_components.mi, { children: "q" })] }), _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "ε" }), _jsxs(_components.mrow, { children: [_jsx(_components.mi, { children: "t" }), _jsx(_components.mo, { children: "−" }), _jsx(_components.mi, { children: "q" })] })] })] }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "y_t = \\mu + \\varepsilon_t + \\theta_1 \\varepsilon_{t-1} + \\cdots + \\theta_q \\varepsilon_{t-q}" })] }) }) }), _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, { 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[_jsx(_components.span, { className: "strut", style: { height: "0.6667em", verticalAlign: "-0.0833em" } }), _jsx(_components.span, { className: "minner", children: "⋯" }), _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: "0.9805em", verticalAlign: "-0.2861em" } }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.02778em" }, children: "θ" }), _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: "0.1514em" }, children: _jsxs(_components.span, { style: { top: "-2.55em", marginLeft: "-0.0278em", 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", style: { marginRight: "0.03588em" }, children: "q" }) })] }) }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.2861em" }, children: _jsx(_components.span, {}) }) })] }) })] }), _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: _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: "0.03588em" }, children: "q" })] }) })] }) }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.2861em" }, children: _jsx(_components.span, {}) }) })] }) })] })] })] })] }) }), "\n", _jsxs(_components.p, { children: ["Interpretation: shocks affect the series for a finite number of periods. For example, with MA(1), a shock at time ", _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" })] }) })] }), " affects ", _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, {}) }) })] }) })] })] }) })] }), " directly and affects ", _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" }), _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: "y_{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", 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: "0.3011em" }, 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: _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, {}) }) })] }) })] })] }) })] }), " through 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: [_jsxs(_components.mrow, { children: [_jsx(_components.mi, { children: "θ" }), _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "ε" }), _jsx(_components.mi, { children: "t" })] })] }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "\\theta \\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: "0.8444em", verticalAlign: "-0.15em" } }), _jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.02778em" }, children: "θ" }), _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, {}) }) })] }) })] })] }) })] }), " term, but has no further direct effect beyond one lag."] }), "\n", _jsx(_components.h3, { children: "Stationarity vs invertibility for MA" }), "\n", _jsxs(_components.p, { children: ["A finite-order MA(", _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: "q" }) }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "q" })] }) }) }), _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: "q" })] }) })] }), ") is covariance-stationary under standard assumptions because it is a finite linear combination of white noise terms (finite variance, time-invariant second moments)."] }), "\n", _jsxs(_components.p, { children: ["However, MA models have a separate technical property called ", _jsx(_components.strong, { children: "invertibility" }), ", which ensures a unique and stable mapping between the observed series and the unobserved shocks."] }), "\n", _jsx(_components.p, { children: "For MA(1), invertibility requires:" }), "\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: "∣" }), _jsx(_components.mi, { children: "θ" }), _jsx(_components.mi, { mathvariant: "normal", children: "∣" }), _jsx(_components.mo, { children: "<" }), _jsx(_components.mn, { children: "1" })] }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "|\\theta| < 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: "mord", children: "∣" }), _jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.02778em" }, children: "θ" }), _jsx(_components.span, { className: "mord", 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" })] })] })] }) }), "\n", _jsxs(_components.blockquote, { children: ["\n", _jsxs(_components.p, { children: [_jsx(_components.strong, { children: "Key Term: Invertibility" }), _jsx(_components.br, {}), "\n", "Invertibility is a condition on MA parameters that ensures the shocks can be represented as a stable function of current and past observations, supporting identification and estimation."] }), "\n"] }), "\n", _jsx(_components.h3, { children: "ACF and PACF pattern for MA" }), "\n", _jsxs(_components.p, { children: ["For MA(", _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: "q" }) }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "q" })] }) }) }), _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: "q" })] }) })] }), "), the ACF cuts off after 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: "q" }) }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "q" })] }) }) }), _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: "q" })] }) })] }), " (theoretical autocorrelation is zero beyond ", _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: "q" }) }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "q" })] }) }) }), _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: "q" })] }) })] }), "), while the PACF typically decays."] }), "\n", _jsx(_components.h3, { children: "Worked Example 2.1" }), "\n", _jsx(_components.p, { children: "A monthly series has the following sample behavior:" }), "\n", _jsxs(_components.ul, { children: ["\n", _jsx(_components.li, { children: "ACF: statistically significant at lags 1 and 2, near zero for lags 3, 4, 5, ..." }), "\n", _jsx(_components.li, { children: "PACF: declines gradually rather than cutting off sharply" }), "\n"] }), "\n", _jsx(_components.p, { children: "Which model class is a reasonable first guess: AR, MA, or ARMA? If MA, what order?" }), "\n", _jsxs(_components.blockquote, { children: ["\n", _jsxs(_components.p, { children: [_jsx(_components.strong, { children: "Answer:" }), _jsx(_components.br, {}), "\n", "The hallmark of an MA(", _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: "q" }) }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "q" })] }) }) }), _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: "q" })] }) })] }), ") is that the ", _jsx(_components.strong, { children: "ACF cuts off" }), " after 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: "q" }) }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "q" })] }) }) }), _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: "q" })] }) })] }), " while the ", _jsx(_components.strong, { children: "PACF decays" }), ".", _jsx(_components.br, {}), "\n", "Here the ACF is significant at lags 1 and 2 and near zero afterward, so an MA(2) is a reasonable first guess."] }), "\n"] }), "\n", _jsx(_components.h2, { children: _jsx(_components.strong, { children: "ARMA models and specification checking" }) }), "\n", _jsx(_components.p, { children: "An ARMA model combines AR and MA components:" }), "\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: "d" }), _jsx(_components.mo, { children: "+" }), _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "ϕ" }), _jsx(_components.mn, { children: "1" })] }), _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "y" }), _jsxs(_components.mrow, { children: [_jsx(_components.mi, { children: "t" }), _jsx(_components.mo, { children: "−" }), _jsx(_components.mn, { children: "1" })] })] }), _jsx(_components.mo, { children: "+" }), _jsx(_components.mo, { children: "⋯" }), _jsx(_components.mo, { children: "+" }), _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "ϕ" }), _jsx(_components.mi, { children: "p" })] }), _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "y" }), _jsxs(_components.mrow, { children: [_jsx(_components.mi, { children: "t" }), _jsx(_components.mo, { children: "−" }), _jsx(_components.mi, { children: "p" })] })] }), _jsx(_components.mo, { children: "+" }), _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "ε" }), _jsx(_components.mi, { children: "t" })] }), _jsx(_components.mo, { children: "+" }), _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "θ" }), _jsx(_components.mn, { children: "1" })] }), _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "ε" }), _jsxs(_components.mrow, { children: [_jsx(_components.mi, { children: "t" }), _jsx(_components.mo, { children: "−" }), _jsx(_components.mn, { children: "1" })] })] }), _jsx(_components.mo, { children: "+" }), _jsx(_components.mo, { children: "⋯" }), _jsx(_components.mo, { children: "+" }), _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "θ" }), _jsx(_components.mi, { children: "q" })] }), _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "ε" }), _jsxs(_components.mrow, { children: [_jsx(_components.mi, { children: "t" }), _jsx(_components.mo, { children: "−" }), _jsx(_components.mi, { children: "q" })] })] })] }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "y_t = d + \\phi_1 y_{t-1} + \\cdots + \\phi_p y_{t-p} + \\varepsilon_t + \\theta_1 \\varepsilon_{t-1} + \\cdots + \\theta_q \\varepsilon_{t-q}" })] }) }) }), _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, { 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})] })] })] })] }) }), "\n", _jsx(_components.p, { children: "ARMA models are widely used for covariance-stationary series with richer dependence patterns than a simple AR or MA can represent." }), "\n", _jsx(_components.h3, { children: "Identification approach used in practice" }), "\n", _jsx(_components.p, { children: "A typical workflow is:" }), "\n", _jsxs(_components.ol, { children: ["\n", _jsx(_components.li, { children: "Confirm the series is stationary (or transform it until it is plausibly stationary)" }), "\n", _jsxs(_components.li, { children: ["Use ACF and PACF patterns to propose candidate ", _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.mi, { children: "p" }), 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_jsx(_components.li, { children: "Estimate candidates and compare fit using information criteria (IC) that penalize complexity" }), "\n", _jsx(_components.li, { children: "Diagnose residuals: residual autocorrelations should be statistically insignificant (residuals close to white noise)" }), "\n"] }), "\n", _jsx(_components.h3, { children: "Residual autocorrelation tests" }), "\n", _jsx(_components.p, { children: "A visual residual ACF check is helpful, but FRM questions often reference joint tests of residual autocorrelation." }), "\n", _jsxs(_components.p, { children: ["For residual sample autocorrelations ", _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, { 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className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "1.2777em" }, children: _jsx(_components.span, {}) }) })] }) }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.1667em" } }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.02778em" }, children: "r" }), _jsx(_components.span, { className: "msupsub", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsxs(_components.span, { className: "vlist", style: { height: "0.8641em" }, children: [_jsxs(_components.span, { style: { top: "-2.453em", marginLeft: "-0.0278em", 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: "i" }) })] }), _jsxs(_components.span, { style: { top: "-3.113em", 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: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.247em" }, children: _jsx(_components.span, {}) }) })] }) })] })] })] })] }) }), "\n", _jsxs(_components.p, { children: ["Ljung-Box (better in smaller samples, often ", _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: 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style: { height: "0.6444em" } }), _jsx(_components.span, { className: "mord", children: "100" })] })] })] }), "):"] }), "\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: "Q" }), _jsxs(_components.mrow, { children: [_jsx(_components.mi, { children: "L" }), _jsx(_components.mi, { children: "B" })] })] }), _jsx(_components.mo, { children: "=" }), _jsx(_components.mi, { children: "T" }), _jsx(_components.mo, { stretchy: "false", children: "(" }), _jsx(_components.mi, { children: "T" }), _jsx(_components.mo, { children: "+" }), _jsx(_components.mn, { children: "2" }), _jsx(_components.mo, { stretchy: "false", children: ")" }), _jsxs(_components.munderover, { children: [_jsx(_components.mo, { children: "∑" }), _jsxs(_components.mrow, { children: [_jsx(_components.mi, { children: "i" }), _jsx(_components.mo, { children: "=" }), _jsx(_components.mn, { children: "1" })] }), _jsx(_components.mi, { children: "h" })] }), _jsxs(_components.mfrac, { children: [_jsxs(_components.msubsup, { children: [_jsx(_components.mi, { children: "r" }), _jsx(_components.mi, { children: "i" }), _jsx(_components.mn, { children: "2" })] }), _jsxs(_components.mrow, { children: [_jsx(_components.mi, { children: "T" }), _jsx(_components.mo, { children: "−" }), _jsx(_components.mi, { children: "i" })] })] })] }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "Q_{LB} = T(T+2)\\sum_{i=1}^h \\frac{r_i^2}{T-i}" })] }) }) }), _jsxs(_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: "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: "1em", verticalAlign: "-0.25em" } }), _jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.13889em" }, children: "T" }), _jsx(_components.span, { className: "mopen", children: "(" }), _jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.13889em" }, children: "T" }), _jsx(_components.span, { className: "mspace", style: { 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className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "1.2777em" }, children: _jsx(_components.span, {}) }) })] }) }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.1667em" } }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mopen nulldelimiter" }), _jsx(_components.span, { className: "mfrac", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsxs(_components.span, { className: "vlist", style: { height: "1.4911em" }, children: [_jsxs(_components.span, { style: { top: "-2.314em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "3em" } }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.13889em" }, children: "T" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2222em" } }), _jsx(_components.span, { className: "mbin", children: "−" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2222em" } }), _jsx(_components.span, { className: "mord mathnormal", children: "i" })] })] }), _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", style: { marginRight: "0.02778em" }, children: "r" }), _jsx(_components.span, { className: "msupsub", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsxs(_components.span, { className: "vlist", style: { height: "0.8141em" }, children: [_jsxs(_components.span, { style: { top: "-2.4413em", marginLeft: "-0.0278em", 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: "i" }) })] }), _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: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.2587em" }, 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: "0.7693em" }, children: _jsx(_components.span, {}) }) })] }) }), _jsx(_components.span, { className: "mclose nulldelimiter" })] })] })] })] }) }), "\n", _jsxs(_components.p, { children: ["Both statistics are compared to a chi-squared distribution 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: "h" }) }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "h" })] }) }) }), _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: "h" })] }) })] }), " degrees of freedom (in the basic form)."] }), "\n", _jsx(_components.h3, { children: "Worked Example 3.1" }), "\n", _jsxs(_components.p, { children: ["A fitted ARMA model 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, { children: "T" }), _jsx(_components.mo, { children: "=" }), _jsx(_components.mn, { children: "60" })] }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "T=60" })] }) }) }), _jsxs(_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 mathnormal", style: { marginRight: "0.13889em" }, children: "T" }), _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: "60" })] })] })] }), " observations produces residual autocorrelations:"] }), "\n", _jsxs(_components.ul, { children: ["\n", _jsx(_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: [_jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "r" }), _jsx(_components.mn, { children: "1" })] }), _jsx(_components.mo, { children: "=" }), _jsx(_components.mn, { children: "0.10" })] }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "r_1=0.10" })] }) }) }), _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", style: { marginRight: "0.02778em" }, children: "r" }), _jsx(_components.span, { className: "msupsub", children: _jsxs(_components.span, { 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Use ", _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.msubsup, { children: [_jsx(_components.mi, { children: "χ" }), _jsxs(_components.mrow, { children: [_jsx(_components.mn, { children: "3" }), _jsx(_components.mo, { separator: "true", children: "," }), _jsx(_components.mn, { children: "0.95" })] }), _jsx(_components.mn, { children: "2" })] }), _jsx(_components.mo, { children: "≈" }), _jsx(_components.mn, { children: "7.81" })] }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "\\chi^2_{3,0.95} \\approx 7.81" })] }) }) }), _jsxs(_components.span, { className: "katex-html", "aria-hidden": "true", children: [_jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { 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}), _jsx(_components.annotation, { encoding: "application/x-tex", children: "0.774 < 7.81" })] }) }) }), _jsxs(_components.span, { className: "katex-html", "aria-hidden": "true", children: [_jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.6835em", verticalAlign: "-0.0391em" } }), _jsx(_components.span, { className: "mord", children: "0.774" }), _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: "7.81" })] })] })] }), ", so we fail to reject the null that residual autocorrelations up to lag 3 are jointly zero. This supports (but does not prove) that the model has captured the linear dependence in the conditional mean."] }), "\n"] }), "\n", _jsx(_components.h3, { children: _jsx(_components.strong, { children: "Exam Warning" }) }), "\n", _jsxs(_components.blockquote, { children: ["\n", _jsx(_components.p, { children: "Many candidates treat “no significant individual residual autocorrelation” as sufficient. The FRM syllabus emphasizes joint tests (Box-Pierce/Ljung-Box): a set of small residual correlations can be jointly significant, especially when many lags are tested." }), "\n"] }), "\n", _jsx(_components.h2, { children: _jsx(_components.strong, { children: "Unit roots, random walks, and ARIMA differencing" }) }), "\n", _jsxs(_components.p, { children: ["Not all financial series are stationary in levels. A common pattern is a ", _jsx(_components.strong, { children: "stochastic trend" }), ": persistent level shifts where shocks do not fade away."] }), "\n", _jsx(_components.h3, { children: "Random walk as the unit-root case" }), "\n", _jsx(_components.p, { children: "Consider 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: "y" }), _jsx(_components.mi, { children: "t" })] }), _jsx(_components.mo, { children: "=" }), _jsx(_components.mi, { children: "d" }), _jsx(_components.mo, { children: "+" }), _jsx(_components.mi, { children: "ϕ" }), _jsxs(_components.msub, { children: 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"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: "Iterating forward:" }), "\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: "=" }), _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "y" }), _jsx(_components.mn, { children: "0" })] }), _jsx(_components.mo, { children: "+" }), _jsx(_components.mi, { children: "d" }), _jsx(_components.mi, { children: "t" }), _jsx(_components.mo, { children: "+" }), _jsxs(_components.munderover, { children: [_jsx(_components.mo, { children: "∑" }), _jsxs(_components.mrow, { children: [_jsx(_components.mi, { children: "j" }), _jsx(_components.mo, { children: "=" }), _jsx(_components.mn, { children: "1" })] }), _jsx(_components.mi, { children: "t" })] }), _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "ε" }), _jsx(_components.mi, { children: "j" })] })] }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "y_t = y_0 + dt + \\sum_{j=1}^{t}\\varepsilon_j" })] }) }) }), _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: 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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", style: { marginRight: "0.05724em" }, children: "j" }) })] }) }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.2861em" }, children: _jsx(_components.span, {}) }) })] }) })] })] })] })] }) }), "\n", _jsx(_components.p, { children: "Key implications:" }), "\n", _jsxs(_components.ul, { children: ["\n", _jsxs(_components.li, { children: ["No mean reversion to a constant ", _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: "μ" }) }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "\\mu" })] }) }) }), _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", children: "μ" })] }) })] }), " (the mean depends on time through ", _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: "d" }), _jsx(_components.mi, { children: "t" })] }), 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})] }) }) }), _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: "mord text", children: _jsx(_components.span, { className: "mord", children: "Var" }) }), _jsx(_components.span, { className: "mopen", children: "(" }), _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: 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children: ["\n", _jsxs(_components.p, { children: [_jsx(_components.strong, { children: "Key Term: Unit root" }), _jsx(_components.br, {}), "\n", "A unit root occurs when an AR process has a root at 1 (for AR(1), ", _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: "ϕ" }), _jsx(_components.mo, { children: "=" }), _jsx(_components.mn, { children: "1" })] }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "\\phi=1" })] }) }) }), _jsxs(_components.span, { className: "katex-html", "aria-hidden": "true", children: [_jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.8889em", verticalAlign: "-0.1944em" } }), _jsx(_components.span, { className: "mord mathnormal", children: "ϕ" }), _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" })] })] })] }), "), making the series non-stationary and causing shocks to have permanent effects on the level."] }), "\n"] }), "\n", _jsx(_components.h3, { children: "Why unit roots complicate modeling" }), "\n", _jsx(_components.p, { children: "Unit roots cause several practical problems relevant to risk measurement and forecasting:" }), "\n", _jsxs(_components.ul, { children: ["\n", _jsxs(_components.li, { children: [_jsx(_components.strong, { children: "Unstable second moments:" }), " variances and covariances are not time-invariant"] }), "\n", _jsxs(_components.li, { children: [_jsx(_components.strong, { children: "Spurious regression risk:" }), " regressing one trending series on another can show 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 significant t-stats even if there is no meaningful relationship"] }), "\n", _jsxs(_components.li, { children: [_jsx(_components.strong, { children: "Forecast uncertainty grows quickly:" }), " long-horizon prediction intervals can widen much faster than under mean reversion"] }), "\n"] }), "\n", _jsx(_components.h3, { children: "ARIMA as “ARMA after differencing”" }), "\n", _jsx(_components.p, { children: "A standard remedy is differencing. The first difference 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: "y" }), _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: "−" }), _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "y" }), _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 y_t = y_t - y_{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: "0.8778em", 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", 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[_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: "0.6389em", verticalAlign: "-0.2083em" } }), _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: "0.3011em" }, children: _jsxs(_components.span, { style: { top: "-2.55em", marginLeft: "-0.0359em", marginRight: "0.05em" }, children: [_jsx(_components.span, { className: "pstrut", style: 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_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, {}) }) })] }) })] })] }) })] }), " is 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: "y" }), _jsx(_components.mi, { children: "t" })] }), _jsx(_components.mo, { children: "=" }), _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "y" }), _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.mspace, { width: "1em" }), _jsx(_components.mo, { children: "⇒" }), _jsx(_components.mspace, { width: "1em" }), _jsx(_components.mi, { mathvariant: "normal", children: "Δ" }), _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: "ε" }), _jsx(_components.mi, { children: "t" })] })] }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "y_t = y_{t-1} + \\varepsilon_t\n\\quad\\Rightarrow\\quad\n\\Delta y_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: "0.625em", 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, { 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[_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, {}) }) })] }) })] }), _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: 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_jsxs(_components.semantics, { children: [_jsxs(_components.mrow, { children: [_jsx(_components.mi, { children: "p" }), _jsx(_components.mo, { separator: "true", children: "," }), _jsx(_components.mi, { children: "d" }), _jsx(_components.mo, { separator: "true", children: "," }), _jsx(_components.mi, { children: "q" })] }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "p,d,q" })] }) }) }), _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", children: "p" }), _jsx(_components.span, { className: "mpunct", children: "," }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.1667em" } }), _jsx(_components.span, { className: "mord mathnormal", children: "d" }), _jsx(_components.span, { className: "mpunct", children: "," }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.1667em" } }), _jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.03588em" }, children: "q" })] }) })] }), ") model means: after differencing ", _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: "d" }) }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "d" })] }) }) }), _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: "d" })] }) })] }), " times, the transformed series follows an ARMA(", _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: "p" }), _jsx(_components.mo, { separator: "true", children: "," }), _jsx(_components.mi, { children: "q" })] }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "p,q" })] }) }) }), _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", children: "p" }), _jsx(_components.span, { className: "mpunct", children: "," }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.1667em" } }), _jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.03588em" }, children: "q" })] }) })] }), ")."] }), "\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: "d" }), _jsx(_components.mo, { children: "=" }), _jsx(_components.mn, { children: "0" })] }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "d=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: "d" }), _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" })] })] })] }), ", ARIMA reduces to ARMA"] }), "\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: "d" }), _jsx(_components.mo, { children: "=" }), _jsx(_components.mn, { children: "1" })] }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "d=1" })] }) }) }), _jsxs(_components.span, { className: "katex-html", "aria-hidden": "true", children: [_jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.6944em" } }), _jsx(_components.span, { className: "mord mathnormal", children: "d" }), _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" })] })] })] }), ", model ", _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, {}) }) })] }) })] })] }) })] }), " rather than ", _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, {}) }) })] }) })] })] }) })] })] }), "\n"] }), "\n", _jsx(_components.h3, { children: "Worked Example 4.1" }), "\n", _jsx(_components.p, { children: "A price level follows:" }), "\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: "=" }), _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "y" }), _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.mo, { separator: "true", children: "," }), _jsx(_components.mspace, { width: "1em" }), _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "ε" }), _jsx(_components.mi, { children: "t" })] }), _jsx(_components.mo, { children: "∼" }), _jsx(_components.mi, { children: "W" }), _jsx(_components.mi, { children: "N" }), _jsx(_components.mo, { stretchy: "false", children: "(" }), _jsx(_components.mn, { children: "0" }), _jsx(_components.mo, { separator: "true", children: "," }), _jsxs(_components.msup, { children: [_jsx(_components.mi, { children: "σ" }), _jsx(_components.mn, { children: "2" })] }), _jsx(_components.mo, { stretchy: "false", children: ")" })] }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "y_t = y_{t-1} + \\varepsilon_t,\\quad \\varepsilon_t \\sim WN(0,\\sigma^2)" })] }) }) }), _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: "0.7917em", verticalAlign: "-0.2083em" } }), _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: "0.3011em" }, 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: 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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, {}) }) })] }) })] }), _jsx(_components.span, { className: 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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: "1.1141em", verticalAlign: "-0.25em" } }), _jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.13889em" }, children: "W" }), _jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.10903em" }, children: "N" }), _jsx(_components.span, { className: "mopen", children: "(" }), _jsx(_components.span, { className: "mord", children: "0" }), _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", style: { marginRight: "0.03588em" }, children: "σ" }), _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: "0.8641em" }, children: _jsxs(_components.span, { style: { top: "-3.113em", 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: "mclose", children: ")" })] })] })] }) }), "\n", _jsxs(_components.ol, { children: ["\n", _jsxs(_components.li, { children: ["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: "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, {}) }) })] }) })] })] }) })] }), " covariance-stationary?"] }), "\n", _jsxs(_components.li, { children: ["Show 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, { 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" }), 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_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.mn, { children: "100" })] }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "y_t=100" })] }) }) }), _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" }), 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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: "0.6444em" } }), _jsx(_components.span, { className: "mord", children: "100" })] })] })] }), " today 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.mo, { stretchy: "false", children: "[" }), _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "ε" }), _jsxs(_components.mrow, { children: [_jsx(_components.mi, { children: "t" }), _jsx(_components.mo, { children: "+" }), _jsx(_components.mi, { children: "h" })] })] }), _jsx(_components.mo, { 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"strut", style: { height: "0.6944em" } }), _jsx(_components.span, { className: "mord mathnormal", children: "h" })] }) })] }), "-step-ahead point forecast 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" }), _jsxs(_components.mrow, { children: [_jsx(_components.mi, { children: "t" }), _jsx(_components.mo, { children: "+" }), _jsx(_components.mi, { children: "h" })] })] }) }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "y_{t+h}" })] }) }) }), _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", 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Its variance increases with time: ", _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.mtext, { children: "Var" }), _jsx(_components.mo, { stretchy: "false", children: "(" }), _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "y" }), _jsx(_components.mi, { children: "t" })] }), _jsx(_components.mo, { stretchy: "false", children: ")" }), _jsx(_components.mo, { children: "=" }), _jsx(_components.mi, { children: "t" }), _jsxs(_components.msup, { children: [_jsx(_components.mi, { children: "σ" }), _jsx(_components.mn, { children: "2" })] })] }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "\\text{Var}(y_t)=t\\sigma^2" })] }) }) }), _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: "mord text", children: _jsx(_components.span, { className: "mord", children: "Var" }) }), _jsx(_components.span, { className: "mopen", children: "(" }), _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" } }), 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[_jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.03588em" }, children: "σ" }), _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" }) })] }) }) }) }) })] })] })] })] }), " (given fixed ", _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, 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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: ")" }), _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", 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: "0.3011em" }, 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: _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: "0.2778em" } }), _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", _jsxs(_components.p, { children: ["Since ", _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, ", _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, {}) }) })] }) })] })] }) })] }), " is stationary. This is ARIMA(0,1,0)."] }), "\n", _jsxs(_components.p, { children: [_jsxs(_components.strong, { children: ["3) ", _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: "h" }) }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "h" })] }) }) }), _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: "h" })] }) })] }), "-step forecast"] }), _jsx(_components.br, {}), "\n", "With zero-mean shocks, ", _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: "y" }), _jsxs(_components.mrow, { children: [_jsx(_components.mi, { children: "t" }), _jsx(_components.mo, { children: "+" }), _jsx(_components.mi, { children: "h" })] })] }), _jsx(_components.mo, { children: "∣" }), _jsxs(_components.msub, { children: [_jsx(_components.mi, { mathvariant: "script", children: "F" }), _jsx(_components.mi, { children: "t" })] }), _jsx(_components.mo, { stretchy: "false", children: "]" }), _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: "E[y_{t+h}\\mid \\mathcal{F}_t]=y_t" })] }) }) }), _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: "mord mathnormal", style: { marginRight: "0.05764em" }, children: "E" }), _jsx(_components.span, { className: "mopen", children: "[" }), _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: "0.3361em" }, 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: "1em", verticalAlign: "-0.25em" } }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mord mathcal", style: { marginRight: "0.09931em" }, children: "F" }), _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: "-0.0993em", 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: "]" }), _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: "0.625em", 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.br, {}), "\n", "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: "y" }), _jsx(_components.mi, { children: "t" })] }), _jsx(_components.mo, { children: "=" }), _jsx(_components.mn, { children: "100" })] }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "y_t=100" })] }) }) }), _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: "0.6444em" } }), _jsx(_components.span, { className: "mord", children: "100" })] })] })] }), ", then the point forecast is 100 for any horizon ", _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: "h" }) }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "h" })] }) }) }), _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: "h" })] }) })] }), " (even though the forecast uncertainty 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: "h" }) }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "h" })] }) }) }), _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: "h" })] }) })] }), ")."] }), "\n"] }), "\n", _jsx(_components.h3, { children: "Testing for a unit root" }), "\n", _jsx(_components.p, { children: "The syllabus expectation is to understand that unit roots can be tested formally. The classic approach is (Augmented) Dickey-Fuller logic." }), "\n", _jsx(_components.p, { children: "A simple Dickey-Fuller regression 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: [_jsx(_components.mi, { mathvariant: "normal", children: "Δ" }), _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: "γ" }), _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "y" }), _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 = \\alpha + \\gamma y_{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: "0.03588em" }, children: "y" }), _jsx(_components.span, { className: "msupsub", children: 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_jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.05556em" }, children: "γ" }), _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" })] })] })] }), " (unit root; non-stationary)"] }), "\n", _jsxs(_components.li, { children: ["Alternative: ", _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: "H" 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"2.7em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsx(_components.span, { className: "mord mathnormal mtight", children: "i" }) })] }) }), _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: "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: "0.3117em" }, 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: "Important exam idea: the test uses special critical values (not the standard t-table), so the decision rule is not “compare to 1.96”." }), "\n", _jsx(_components.h2, { children: _jsx(_components.strong, { children: "Forecasting summary for AR, MA, ARMA, and ARIMA" }) }), "\n", _jsxs(_components.p, { children: ["Forecasting is ultimately about computing conditional expectations given information at time ", _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" })] }) })] }), ", denoted ", _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, { mathvariant: "script", children: "F" }), _jsx(_components.mi, { children: "t" })] }) }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "\\mathcal{F}_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 mathcal", style: { marginRight: "0.09931em" }, children: "F" }), _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: "-0.0993em", 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.h3, { children: "AR(1) forecasts and long-horizon behavior" }), "\n", _jsx(_components.p, { children: "For stationary 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: [_jsx(_components.mi, { children: "E" }), _jsx(_components.mo, { stretchy: "false", children: "[" }), _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "y" }), _jsxs(_components.mrow, { children: [_jsx(_components.mi, { children: "t" }), _jsx(_components.mo, { children: "+" }), _jsx(_components.mi, { children: "h" })] })] }), _jsx(_components.mo, { children: "∣" }), _jsxs(_components.msub, { children: [_jsx(_components.mi, { mathvariant: "script", children: "F" }), _jsx(_components.mi, { children: "t" })] }), _jsx(_components.mo, { stretchy: "false", children: "]" }), _jsx(_components.mo, { children: "=" }), _jsx(_components.mi, { children: "μ" }), _jsx(_components.mo, { children: "+" }), _jsxs(_components.msup, { children: [_jsx(_components.mi, { children: "ϕ" }), _jsx(_components.mi, { children: "h" })] }), _jsx(_components.mo, { stretchy: "false", children: "(" }), _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "y" }), _jsx(_components.mi, { children: "t" })] }), _jsx(_components.mo, { children: "−" }), _jsx(_components.mi, { children: "μ" }), _jsx(_components.mo, { stretchy: "false", children: ")" })] }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "E[y_{t+h}\\mid \\mathcal{F}_t] = \\mu + \\phi^h(y_t-\\mu)" })] }) }) }), _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: "mord mathnormal", style: { marginRight: "0.05764em" }, children: "E" }), _jsx(_components.span, { className: "mopen", children: "[" }), _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: "0.3361em" }, 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: _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", children: "h" })] }) })] }) }), _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: "0.2778em" } }), _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: "1em", verticalAlign: "-0.25em" } }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mord mathcal", style: { marginRight: "0.09931em" }, children: "F" }), _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: "-0.0993em", 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: "]" }), _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" } }), _jsx(_components.span, { className: "mord mathnormal", children: "μ" }), _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: "1.1491em", verticalAlign: "-0.25em" } }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mord mathnormal", children: "ϕ" }), _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: "0.8991em" }, children: _jsxs(_components.span, { style: { top: "-3.113em", 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: "h" }) })] }) }) }) }) })] }), _jsx(_components.span, { className: "mopen", children: "(" }), _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: "1em", verticalAlign: "-0.25em" } }), _jsx(_components.span, { className: "mord mathnormal", children: "μ" }), _jsx(_components.span, { className: "mclose", children: ")" })] })] })] }) }), "\n", _jsx(_components.p, { children: "This formula is frequently tested because it shows:" }), "\n", _jsxs(_components.ul, { children: ["\n", _jsxs(_components.li, { children: ["the role of mean reversion (", _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: "μ" }) }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "\\mu" })] }) }) }), _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", children: "μ" })] }) })] }), ")"] }), "\n", _jsxs(_components.li, { children: ["the role of persistence (", _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: "ϕ" }), _jsx(_components.mi, { children: "h" })] }) }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "\\phi^h" })] }) }) }), _jsx(_components.span, { className: "katex-html", "aria-hidden": "true", children: _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "1.0435em", verticalAlign: "-0.1944em" } }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mord mathnormal", children: "ϕ" }), _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: "0.8491em" }, 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 mathnormal mtight", children: "h" }) })] }) }) }) }) })] })] }) })] }), ")"] }), "\n", _jsxs(_components.li, { children: ["why long-horizon forecasts converge to ", _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: "μ" }) }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "\\mu" })] }) }) }), _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", children: "μ" })] }) })] }), " 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: [_jsxs(_components.mrow, { children: [_jsx(_components.mi, { mathvariant: "normal", children: "∣" }), _jsx(_components.mi, { children: "ϕ" }), _jsx(_components.mi, { mathvariant: "normal", children: "∣" }), _jsx(_components.mo, { children: "<" }), _jsx(_components.mn, { children: "1" })] }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "|\\phi|<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: "mord", children: "∣" }), _jsx(_components.span, { className: "mord mathnormal", children: "ϕ" }), _jsx(_components.span, { className: "mord", 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" })] })] })] })] }), "\n"] }), "\n", _jsx(_components.h3, { children: "MA and ARMA forecasts" }), "\n", _jsxs(_components.p, { children: ["For MA(", _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: "q" }) }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "q" })] }) }) }), _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: "q" })] }) })] }), "), beyond horizon ", _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: "q" }) }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "q" })] }) }) }), _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: "q" })] }) })] }), ", the effect of currently known shocks dies out, so forecasts beyond ", _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: "q" }) }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "q" })] }) }) }), _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: "q" })] }) })] }), " steps often revert quickly to the mean level (depending on how the model is written)."] }), "\n", _jsxs(_components.p, { children: ["For ARMA(", _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: "p" }), _jsx(_components.mo, { separator: "true", children: "," }), _jsx(_components.mi, { children: "q" })] }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "p,q" })] }) }) }), _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", 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"\n", _jsx(_components.p, { children: "AR/MA/ARMA/ARIMA models most often appear in risk work in these roles:" }), "\n", _jsxs(_components.ol, { children: ["\n", _jsxs(_components.li, { children: ["\n", _jsxs(_components.p, { children: [_jsx(_components.strong, { children: "Conditional mean models for risk factors" }), _jsx(_components.br, {}), "\n", "Yield curve factors (level/slope/curvature), spreads, convenience yields, and macro growth rates often show mean reversion that an AR model can represent."] }), "\n"] }), "\n", _jsxs(_components.li, { children: ["\n", _jsxs(_components.p, { children: [_jsx(_components.strong, { children: "Pre-processing for volatility modeling" }), _jsx(_components.br, {}), "\n", "Asset returns are often close to white noise in the mean, but volatility is time-varying. A common structure is:"] }), "\n", _jsxs(_components.ul, { children: ["\n", _jsx(_components.li, { children: "ARMA for the conditional mean" }), "\n", _jsxs(_components.li, { children: ["ARCH/GARCH-type model for the conditional variance", _jsx(_components.br, {}), "\n", "This separation matters because “no predictability in returns” does not imply “no predictability in volatility.”"] }), "\n"] }), "\n"] }), "\n", _jsxs(_components.li, { children: ["\n", _jsxs(_components.p, { children: [_jsx(_components.strong, { children: "Scenario design and stress testing" }), _jsx(_components.br, {}), "\n", "A stationary mean-reverting model implies shocks fade; a unit-root model implies shocks persist. That distinction changes multi-month stress paths and the accumulation of risk."] }), "\n"] }), "\n", _jsxs(_components.li, { children: ["\n", _jsxs(_components.p, { children: [_jsx(_components.strong, { children: "Seasonality and calendar effects (when relevant)" }), _jsx(_components.br, {}), "\n", "Seasonality can be represented by including seasonal lags (for example, lag 12 for monthly data) or by using deterministic seasonal regressors (dummy variables). The key exam idea is to separate deterministic seasonal patterns from stochastic dependence in the residual component."] }), "\n"] }), "\n"] }), "\n", _jsx(_components.h2, { children: _jsx(_components.strong, { children: "Summary" }) }), "\n", _jsxs(_components.p, { children: ["Stationary time-series modeling in FRM Part 1 is built around covariance stationarity, white noise shocks, and the way dependence appears in the ACF and PACF. AR models represent persistence through lagged values and naturally produce mean reversion 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: [_jsxs(_components.mrow, { children: [_jsx(_components.mi, { mathvariant: "normal", children: "∣" }), _jsx(_components.mi, { children: "ϕ" }), _jsx(_components.mi, { mathvariant: "normal", children: "∣" }), _jsx(_components.mo, { children: "<" }), _jsx(_components.mn, { children: "1" })] }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "|\\phi|<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: "mord", children: "∣" }), _jsx(_components.span, { className: "mord mathnormal", children: "ϕ" }), _jsx(_components.span, { className: "mord", 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" })] })] })] }), ", with forecasts converging to a long-run mean. MA models represent finite shock propagation and are always stationary in finite order, but rely on invertibility conditions for stable identification."] }), "\n", _jsx(_components.p, { children: "Many important financial series are non-stationary in levels due to unit roots and random-walk-like behavior. This breaks the assumptions that make historical autocovariances stable and creates risks such as spurious regression. ARIMA modeling addresses this by differencing the series until it is stationary, then applying ARMA tools to the transformed data. Diagnostic checking (especially joint tests such as Box-Pierce and Ljung-Box) is a core step in confirming that a fitted model has removed linear dependence from the residuals." }), "\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: "Covariance stationarity conditions in terms of time-invariant mean, variance, and lag-dependent autocovariances" }), "\n", _jsx(_components.li, { children: "White noise as the benchmark for “no linear predictability” and as the model shock term" }), "\n", _jsx(_components.li, { children: "ACF vs PACF interpretation for initial AR vs MA vs ARMA identification" }), "\n", _jsxs(_components.li, { children: ["AR(1) stationarity condition ", _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: "∣" }), _jsx(_components.mi, { children: "ϕ" }), _jsx(_components.mi, { mathvariant: "normal", children: "∣" }), _jsx(_components.mo, { children: "<" }), _jsx(_components.mn, { children: "1" })] }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "|\\phi|<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: "mord", children: "∣" }), _jsx(_components.span, { className: "mord mathnormal", children: "ϕ" }), _jsx(_components.span, { className: 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[_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: "y" }), _jsxs(_components.mrow, { children: [_jsx(_components.mi, { children: "t" }), _jsx(_components.mo, { children: "+" }), _jsx(_components.mi, { children: "h" })] })] }), _jsx(_components.mi, { mathvariant: "normal", children: "∣" }), _jsxs(_components.msub, { children: [_jsx(_components.mi, { mathvariant: "script", children: "F" }), _jsx(_components.mi, { children: "t" })] }), _jsx(_components.mo, { stretchy: "false", children: "]" }), _jsx(_components.mo, { children: "=" }), _jsx(_components.mi, { children: "μ" }), _jsx(_components.mo, { children: "+" }), _jsxs(_components.msup, { children: 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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: "0.2222em" } }), _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: "1em", verticalAlign: "-0.25em" } }), _jsx(_components.span, { className: "mord mathnormal", children: "μ" }), _jsx(_components.span, { className: "mclose", children: ")" })] })] })] })] }), "\n", _jsxs(_components.li, { children: ["MA(", _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: "q" }) }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "q" })] }) }) }), _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: "q" })] }) })] }), ") interpretation as finite shock transmission and the concept of invertibility"] }), "\n", _jsx(_components.li, { children: "ARMA structure and the role of residual diagnostics" }), "\n", _jsx(_components.li, { children: "Box-Pierce and Ljung-Box statistics for joint residual autocorrelation testing" }), "\n", _jsx(_components.li, { children: "Unit roots and random walks as non-stationary processes with permanent shocks and time-growing variance" }), "\n", _jsxs(_components.li, { children: ["ARIMA(", _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: "p" }), _jsx(_components.mo, { separator: "true", children: "," }), _jsx(_components.mi, { children: "d" }), _jsx(_components.mo, { separator: "true", children: "," }), _jsx(_components.mi, { children: "q" })] }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "p,d,q" })] }) }) }), _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", children: "p" }), _jsx(_components.span, { className: "mpunct", children: "," }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.1667em" } }), _jsx(_components.span, { className: "mord mathnormal", children: "d" }), _jsx(_components.span, { className: "mpunct", children: "," }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.1667em" } }), _jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.03588em" }, children: "q" })] }) })] }), ") as ARMA modeling after differencing, and the purpose of unit-root testing (Dickey-Fuller/ADF logic)"] }), "\n"] }), "\n", _jsx(_components.h2, { children: _jsx(_components.strong, { children: "Key Terms and Concepts" }) }), "\n", _jsxs(_components.ul, { children: ["\n", _jsx(_components.li, { children: "Time series (stochastic process)" }), "\n", _jsx(_components.li, { children: "Covariance stationarity" }), "\n", _jsx(_components.li, { children: "Autocovariance and autocorrelation" }), "\n", 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Time-series and volatility modeling - AR, MA, ARMA/ARIMA models and stationarity