ch16 - Chapter 16 Additional Topics in Time Series...

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Chapter 16 Additional Topics in Time Series Regression
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Orders of Integration Recall the random walk model Y t = β 0 + Y t 1 + u t . The first difference is stationary. A series that has a random walk is said to be integrated of order one , or I(1) .
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Orders of Integration If the first difference follows a random walk Δ Y t = β 0 + Δ Y t 1 + u t , the difference of the first differences Δ Y t Δ Y t 1 (called second difference, denoted Δ 2 Y t ). A series that follows a random walk with its first difference is said to be integrated of order two , or I(2) . A series that does not have a stochastic trend and stationary is said to be integrated of order zero, I(0).
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Consider the change in the rate of inflation, Δ Inf t . We could use OLS estimation because Δ Inf t is stationary I(0). I You do not detect stochastic trend with DF test The rate of inflation is Inf t = Δ p t is I(1). I
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ch16 - Chapter 16 Additional Topics in Time Series...

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