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Basic Regression Analysis With Time Series: Chapter 10 - Review

The document discusses time series regression analysis. It explains that time series analysis focuses on modeling the dependency of a variable on its own past values and the present and past values of other variables. It describes static and distributed lag models. Static models model the current value of a variable based on current explanatory variables, while distributed lag models allow explanatory variables to influence the dependent variable with a time lag. The document also outlines the classical assumptions of time series regression models, including that the models are linear, there is no perfect collinearity, the errors have zero conditional mean and are homoskedastic and not serially correlated.

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Uyen Phan
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81 views

Basic Regression Analysis With Time Series: Chapter 10 - Review

The document discusses time series regression analysis. It explains that time series analysis focuses on modeling the dependency of a variable on its own past values and the present and past values of other variables. It describes static and distributed lag models. Static models model the current value of a variable based on current explanatory variables, while distributed lag models allow explanatory variables to influence the dependent variable with a time lag. The document also outlines the classical assumptions of time series regression models, including that the models are linear, there is no perfect collinearity, the errors have zero conditional mean and are homoskedastic and not serially correlated.

Uploaded by

Uyen Phan
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Basic regression analysis with time series

Chapter 10_Review

Course tutor: Ms. Le Thi Ngoc Mai 1


Time series & its nature
• A sequence of random variables indexed by time is stochastic process.
• Example: US inflation and unemployment rates 1948-2003
Time series analysis focuses on modeling
the dependency of a variable on its own
past, and on the present and past values
of other variables.

• Typical feature: serial correlation (present value depends on its past values)
Time Series Regression – Static model
• In static time series models, the current value of one variable is
modeled as the result of the current values of explanatory variables
• Examples:
There is a contemporaneous relationship
between unemployment and inflation.

The current murder rate is determined by the current conviction rate,


unemployment rate, and the fraction of young males in the population.
Time Series Regression – Distributed lags model
• In finite distributed lag models, the explanatory variables are allowed
to influence the dependent variable with a time lag
• Example: The fertility rate may depend on the tax value of a child, but
for biological and behavioral reasons, the effect may have a lag

Children born per Tax exemption Tax exemption Tax exemption


1,000 women in year t in year t in year t - 1 in year t - 2
Time Series Regression – Distributed lags model
• Interpretation of the effects in finite distributed lag models

• Effect of a past shock on the current value of the dep. variable

Effect of a transitory shock: Effect of permanent shock:


If there is a one time shock in a past If there is a permanent shock in a past period,
period, the dep. variable will change i.e. the explanatory variable permanently
temporarily by the amount indicated increases by one unit, the effect on the dep.
by the coefficient of the variable will be the cumulated effect of all
corresponding lag. relevant lags. This is a long-run effect on the
dependent variable.
Time Series – Classical assumptions
• Assumption TS.1 (Linear in parameters)

The time series obey a linear relationship. The stochastic processes yt, xt1,…, xtk are
observed, the error process ut is unobserved. The definition of the explanatory
variables is general, e.g. they may be lags or functions of other explanatory variables.

• Assumption TS.2 (No perfect collinearity)


“In the sample (and therefore in the underlying time series process), no independent
variable is constant nor a perfect linear combination of the others.”
Time Series – Classical assumptions
• Assumption TS.3 (Zero conditional mean)
The mean value of the unobserved
factors is uncorrelated to the values of
the explanatory variables in all periods

• Assumption TS.4 (Homoskedasticity)


The volatility of the errors must
not be related to the explanatory
variables in any of the periods
Time Series – Classical assumptions
• Assumption TS.5 (No serial correlation)
Conditional on the explanatory variables,
the error terms in different time periods
are uncorrelated.

• Assumption TS.6 (Normality)


The error terms are independent of X and
are independently and identically
distributed

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