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    Solution To Exercise 13.4: Econometric Theory and Methods

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    Leonard Gonzalo Saavedra Astopilco

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    Solution To Exercise 13.4: Econometric Theory and Methods

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    Leonard Gonzalo Saavedra Astopilco
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    Exercise 13.4

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    41 views2 pages

    Solution To Exercise 13.4: Econometric Theory and Methods

    Uploaded by

    Leonard Gonzalo Saavedra Astopilco

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PDF, TXT or read online from Scribd
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    Econometric Theory and Methods

    Answers to Starred Exercises

    131

    Solution to Exercise 13.4


    13.4 Show that, along the edges 1 + 2 = 1 and 1 2 = 1 of the AR(2) stationarity triangle, both roots of the polynomial 1 1 z 2 z 2 are real, one of them equal to 1 and the other greater than 1 in absolute value. Show further that, along the edge 2 = 1, both roots are complex and equal to 1 in absolute value. How are these facts related to the general condition for the stationarity of an AR process?

    According to the standard formula for the roots of a quadratic equation, the roots of the polynomial 1 1 z 2 z 2 are z=
    1 /2 1 (2 1 + 4 2 ) . 22

    (S13.10)

    When 1 + 2 = 1, we can replace 2 by 1 1 in this formula, which then becomes 1 /2 1 (2 1 (1 2) 1 + 4 4 1 ) = . z= 2 21 2 21 Thus one root is 1 (1 2) 2 21 = = 1, 2 21 2 21

    and the other is 1 + (1 2) 2 1 = = . 2 21 2 21 1 1 This second root is evidently greater than 1 in absolute value, because, along the edge where 1 + 2 = 1, 1 must take values between 0 and 2, which implies that 1/(1 1 ) > 1. Similarly, when 1 2 = 1, we can replace 2 by 1 + 1 in expression (S13.10), which then becomes z= Thus one root is
    1 /2 1 (1 + 2) 1 (2 1 + 4 + 4 1 ) = . 2 + 2 1 2 + 21

    1 (1 + 2) 21 2 = = 1, 2 + 21 2 + 2 1

    and the other is 2 1 1 + (1 + 2) = = . 2 + 21 2 + 2 1 1 + 1 Copyright c 2003, Russell Davidson and James G. MacKinnon

    Econometric Theory and Methods

    Answers to Starred Exercises

    132

    Once again, this second root is greater than 1 in absolute value, because, along the edge where 1 2 = 1, 2 < 1 < 0, which implies that 1/(1 1 ) < 1. Finally, consider the edge of the triangle along which 2 = 1. In this case, expression (S13.10) becomes
    1 /2 1 ( 2 1 4) . 2

    Both roots of this polynomial are evidently complex, because |1 | < 2 at every interior point of this edge of the triangle. Therefore, the quantity 2 1 4 must 1/ 2 be negative. Thus its square root is the imaginary number (4 2 ) i. This 1 implies that the two roots of the polynomial are 1 1 1 /2 (4 2 i. 1) 2 2 The absolute value of a complex number a + bi is the square root of a2 + b2. In this case, both roots have absolute value 1 2 4 2 1 1 1 1 /2 ) = + (4 2 + 1 2 2 4 4
    1 /2

    = 1.

    The general condition for the stationarity of an AR process is that all the roots of the polynomial equation 1 (z ) = 0 must be greater than 1 in absolute value. In this case, this equation is 1 1 z 2 z 2 = 0 . We have just seen that, at points on the stationarity triangle, all roots are either exactly equal to 1 in absolute value or greater than 1 in absolute value. In the interior of the triangle, it can be shown that all roots are greater than 1 in absolute value.

    Copyright c 2003, Russell Davidson and James G. MacKinnon

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