Time Series transformation Let an annual series Yt be stationary. However, the series transformed and differentiated...

Time Series transformation

Let an annual series Yt be stationary. However, the series transformed and differentiated Dt = ln(Yt) - ln(Yt-1) is stationary. Moreover, we suppose that it obeys the following theoretical model: Dt = -0.12 + 0.75 Dt-1 + et, in which the error term and is a white noise of variance σ2 = 0.012.

How can I transform this model to get the original one before the transformation?

Homework Answers

Answer #1

As,   we can write ,

and since, the transformed and differentiated series follows model given by -

, where   is white noise with variance 0.012, we can write the original model as -

i.e. will be the original model.

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