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P1:IML CB698-Driver CB698-LUTKEPOHI CB698-LUTKEPOHI-Sample.cls February28,2004 21:33 AppliedTimeSeriesEconometrics Timeserieseconometricsisarapidlyevolvingfield.Inparticular,thecointegration revolutionhashadasubstantialimpactonappliedanalysis.Asaconsequenceof the fast pace of development, there are no textbooks that cover the full range of methodsincurrentuseandexplainhowtoproceedinapplieddomains.Thisgapin theliteraturemotivatesthepresentvolume.Themethodsaresketchedoutbrieflyto remindthereaderoftheideasunderlyingthemandtogivesufficientbackgroundfor empiricalwork.Thevolumecanbeusedasatextbookforacourseonappliedtime serieseconometrics.Thecoverageoftopicsfollowsrecentmethodologicaldevelop- ments.Unitrootandcointegrationanalysisplayacentralpart.Othertopicsinclude structuralvectorautoregressions,conditionalheteroskedasticity,andnonlinearand nonparametric time series models. A crucial component in empirical work is the softwarethatisavailableforanalysis.Newmethodologyistypicallyonlygradually incorporatedintotheexistingsoftwarepackages.ThereforeaflexibleJavainterface hasbeencreatedthatallowsreaderstoreplicatetheapplicationsandconducttheir ownanalyses. HelmutLu¨tkepohlisProfessorofEconomicsattheEuropeanUniversityInstitutein Florence,Italy.HeisonleavefromHumboldtUniversity,Berlin,wherehehasbeen ProfessorofEconometricsintheFacultyofEconomicsandBusinessAdministration since1992.HehadpreviouslybeenProfessorofStatisticsattheUniversityofKiel (1987–92) and the University of Hamburg (1985–87) and was Visiting Assistant ProfessorattheUniversityofCalifornia,SanDiego(1984–85).ProfessorLu¨tkepohl isAssociateEditorofEconometricTheory,theJournalofAppliedEconometrics, Macroeconomic Dynamics, Empirical Economics, and Econometric Reviews. He has published extensively in learned journals and books and is author, coauthor and editor of several books on econometrics and time series analysis. Professor Lu¨tkepohlistheauthorofIntroductiontoMultipleTimeSeriesAnalysis(1991)and aHandbookofMatrices(1996).Hiscurrentteachingandresearchinterestsinclude methodologicalissuesrelatedtothestudyofnonstationary,integratedtimeseries, andtheanalysisofthetransmissionmechanismofmonetarypolicyintheeuroarea. MarkusKra¨tzigisadoctoralstudentintheDepartmentofEconomicsatHumboldt University,Berlin. i P1:IML CB698-Driver CB698-LUTKEPOHI CB698-LUTKEPOHI-Sample.cls February28,2004 21:33 ii P1:IML CB698-Driver CB698-LUTKEPOHI CB698-LUTKEPOHI-Sample.cls February28,2004 21:33 ThemesinModernEconometrics ManagingEditor PETERC.B.PHILLIPS,YaleUniversity SeriesEditors ERICGHYSELS,UniversityofNorthCarolina,ChapelHill RICHARDJ.SMITH,UniversityofWarwick ThemesinModernEconometricsisdesignedtoservicethelargeandgrowing need for explicit teaching tools in econometrics. It will provide an organized sequence of textbooks in econometrics aimed squarely at the student popula- tionandwillbethefirstseriesinthedisciplinetohavethisasitsexpressaim. Writtenatalevelaccessibletostudentswithanintroductorycourseinecono- metricsbehindthem,eachbookwilladdresstopicsorthemesthatstudentsand researchersencounterdaily.Althougheachbookwillbedesignedtostandalone asanauthoritativesurveyinitsownright,thedistinctemphasisthroughoutwill beonpedagogicexcellence. TitlesintheSeries StatisticsandEconometricModels:Volumes1and2 CHRISTIANGOURIEROUXandALAINMONFORT TranslatedbyQUANGVOUNG TimeSeriesandDynamicModels CHRISTIANGOURIEROUXandALAINMONFORT TranslatedandeditedbyGIAMPIEROGALLO UnitRoots,Cointegration,andStructuralChange G.S.MADDALAandIN-MOOKIM GeneralizedMethodofMomentsEstimation EditedbyLA´SZLO´ MA´TYA´S NonparametricEconometrics ADRIANPAGANandAMANULLAH EconometricsofQualitativeDependentVariables CHRISTIANGOURIEROUX TranslatedbyPAULB.KLASSEN TheEconometricAnalysisofSeasonalTimeSeries ERICGHYSELSandDENISER.OSBORN SemiparametricRegressionfortheAppliedEconometrician ADONISYATCHEW iii P1:IML CB698-Driver CB698-LUTKEPOHI CB698-LUTKEPOHI-Sample.cls February28,2004 21:33 iv P1:IML CB698-Driver CB698-LUTKEPOHI CB698-LUTKEPOHI-Sample.cls February28,2004 21:33 APPLIED TIME SERIES ECONOMETRICS Editedby HELMUT LU¨TKEPOHL EuropeanUniversityInstitute,Florence MARKUS KRA¨TZIG HumboldtUniversity,Berlin v cambridge university press Cambridge, New York, Melbourne, Madrid, Cape Town, Singapore, São Paulo Cambridge University Press The Edinburgh Building, Cambridge cb2 2ru, UK Published in the United States of America by Cambridge University Press, New York www.cambridge.org Information on this title: www.cambridge.org/9780521839198 © Cambridge University Press 2004 This publication is in copyright. Subject to statutory exception and to the provision of relevant collective licensing agreements, no reproduction of any part may take place without the written permission of Cambridge University Press. First published in print format 2004 isbn-13 978-0-511-21739-5 eBook (NetLibrary) isbn-10 0-511-21739-0 eBook (NetLibrary) isbn-13 978-0-521-83919-8 hardback isbn-10 0-521-83919-x hardback isbn-13 978-0-521-54787-1 paperback isbn-10 0-521-54787-3 paperback Cambridge University Press has no responsibility for the persistence or accuracy of urls for external or third-party internet websites referred to in this publication, and does not guarantee that any content on such websites is, or will remain, accurate or appropriate. P1:IML CB698-Driver CB698-LUTKEPOHI CB698-LUTKEPOHI-Sample.cls February28,2004 21:33 HL Tomydelightfulwife,Sabine MK Tomyparents vii P1:IML CB698-Driver CB698-LUTKEPOHI CB698-LUTKEPOHI-Sample.cls February28,2004 21:33 viii P1:IML CB698-Driver CB698-LUTKEPOHI CB698-LUTKEPOHI-Sample.cls February28,2004 21:33 Contents Preface pagexv NotationandAbbreviations xix ListofContributors xxv 1 InitialTasksandOverview 1 HelmutLu¨tkepohl 1.1 Introduction 1 1.2 SettingUpanEconometricProject 2 1.3 GettingData 3 1.4 DataHandling 5 1.5 OutlineofChapters 5 2 UnivariateTimeSeriesAnalysis 8 HelmutLu¨tkepohl 2.1 CharacteristicsofTimeSeries 8 2.2 StationaryandIntegratedStochasticProcesses 11 2.2.1 Stationarity 11 2.2.2 SampleAutocorrelations,PartialAutocorrelations, andSpectralDensities 12 2.2.3 DataTransformationsandFilters 17 2.3 SomePopularTimeSeriesModels 22 2.3.1 AutoregressiveProcesses 22 2.3.2 Finite-OrderMovingAverageProcesses 25 2.3.3 ARIMAProcesses 27 2.3.4 AutoregressiveConditionalHeteroskedasticity 28 2.3.5 DeterministicTerms 30 2.4 ParameterEstimation 30 2.4.1 EstimationofARModels 30 2.4.2 EstimationofARMAModels 32 2.5 ModelSpecification 33 ix