Economics 275: Time Series Analysis

Professor Peter Hansen

Lectures: Tuesdays and Thursdays: 11:00am12:50pm in Econ 139.
Oce: Landau 229.
Oce Hours: After class or by appointment.
Email: peter.hansen@stanford.edu.

Spring 2005

Course Description:
The course will cover econometric topics of time-series analysis. First, we discuss stationarity, ergodicity, and mixing that are important concepts for dependent processes and we
establish law of large numbers and central limit theorems in this context. Second, we study
maximum likelihood estimation (MLE) and quasi maximum likelihood estimation (QMLE) in
the context of time-series, where the latter motivates robust covariance estimation. Third,
we analyze autoregressive and moving average process, their multivariate extensions, and
unit roots and cointegration in this framework. Forth, we review some issues related to
forecast evaluation and comparisons. Fifth, the course is ended with a brief introduction to
the recent literature on volatility models and volatility estimation based on high-frequency
data.
Required Textbook:
(H) Hamilton (1994): Time Series Analysis, Princeton University Press.
Other useful textbooks include:
Davidson (1994): Stochastic Limit Theory, Oxford University Press;
Davidson (2000): Econometric Theory, Blackwell Publishers;
Johansen (1996): Likelihood-Based Inference in Cointegrated VAR Models, Oxford University Press;
White (1994): Estimation, Inference and Specification Analysis, Cambridge University
Press;
White (2000a): Asymptotic Theory for Econometricians, Academic Press.
Grading and Problem Sets:
Grading will be based on a number of problem sets. You must turn in you own solution
to each of these problem sets. However, you are allowed/encouraged to work together, in
particular on the problem sets that involve computer simulations. The computer simulations
are meant to improve your understanding of the theoretical results and their limitations.
The simulations will require knowledge of matrix oriented packages, such as: Gauss, Matlab,
or Ox.
Ox Console can be downloaded for free at: http://www.doornik.com/download.html
Course Homepage: See Stanford Coursework.
Announcements: No class on April 7th (Thursday) and May 24th (Tuesday).

Course Outline:
1. Stochastic Processes in Discrete Time. H:Ch.7
(a) Stationarity, Ergodicity, and LLN for Dependent Processes.
(b) Mixing and CLTs for dependent variables.
2. Maximum Likelihood Estimation (MLE) and Quasi-MLE (QMLE).
(a) Heteroskedasticity and Autocorrelation Consistent (HAC) Estimators.
White (1980, 1982), Newey & West (1987), Andrews (1991), Kiefer & Vogelsang
(2004).
3. Univariate Times Series (stationary). H:Ch.3
(a) Autoregressive processes (AR).
(b) Moving average processes (MA).
(c) Autoregressive moving average processes (ARMA).
4. Multivariate Time Series. H:Ch.11
(a) Vector autoregressive processes (VAR). Sims (1980), Stock & Watson (2001).
5. Unit Roots and Cointegration. H:Ch.17-19
(a) Univariate. Stock (1994).
(b) Multivariate. Engle & Granger (1987), Johansen (1991), Watson (1994).
(c) Grangers representation theorem. Hansen (2005a)
(d) Structural changes and unit roots. Perron (1989, 1990).
6. Forecasting.
(a) Combination: Bates & Granger (1969).
(b) Macro forecasting: Stock & Watson (1999), Stock & Watson (2002a), Stock &
Watson (2002b)
(c) Comparisons: Diebold & Mariano (1995), West (1996), White (2000b), Hansen
(2005b), Hansen, Lunde & Nason (2004), West (2005).
7. Volatility Models and Realized Variance (RV ). H:Ch.21
(a) ARCH/GARCH. Engle (1982), Bollerslev (1986).
(b) RV Defined and used for Prediction. Andersen & Bollerslev (1998), Andersen,
Bollerslev & Meddahi (2004).
(c) RV Distribution/Accuracy. Andersen, Bollerslev, Diebold & Labys (2000), Andersen, Bollerslev, Diebold & Ebens (2001), Andersen, Bollerslev, Diebold &
Labys (2001), Barndor-Nielsen & Shephard (2002).
(d) Macro Applications. Andersen, Bollerslev, Diebold & Vega (2003).
(e) RV and Market Microstructure Noise. Hansen & Lunde (2006), Zhang, Mykland
& At-Sahalia (2005), Barndor-Nielsen, Hansen, Lunde & Shephard (2004).

References
Andersen, T. G. & Bollerslev, T. (1998), Answering the skeptics: Yes, standard volatility
models do provide accurate forecasts, International Economic Review 39(4), 885905.
Andersen, T. G., Bollerslev, T., Diebold, F. X. & Ebens, H. (2001), The distribution of
realized stock return volatility, Journal of Financial Economics 61(1), 4376.
Andersen, T. G., Bollerslev, T., Diebold, F. X. & Labys, P. (2000), Exchange rate return
standardized by realized volatility are (nearly) Gaussian, Multinational Finance Journal 4(3&4), 159179.
Andersen, T. G., Bollerslev, T., Diebold, F. X. & Labys, P. (2001), The distribution of
exchange rate volatility, Journal of the American Statistical Association 96(453), 42
55.
Andersen, T. G., Bollerslev, T., Diebold, F. X. & Vega, C. (2003), Micro eects of macro
announcements: Real-time price discovery in foreign exchange, American Economic
Review 93(1), 3862.
Andersen, T. G., Bollerslev, T. & Meddahi, N. (2004), Analytic evaluation of volatility
forecasts, International Economic Review 45, 10791110.
Andrews, D. W. K. (1991), Heteroskedasticity and autocorrelation consistent covariance
matrix estimation, Econometrica 59, 817858.
Barndor-Nielsen, O. E., Hansen, P. R., Lunde, A. & Shephard, N. (2004), Regular and
modified kernel-based estimators of integrated variance: The case with independent
noise.
http://www.stanford.edu/people/peter.hansen.
Barndor-Nielsen, O. E. & Shephard, N. (2002), Econometric analysis of realised volatility
and its use in estimating stochastic volatility models, Journal of the Royal Statistical
Society B 64, 253280.
Bates, J. & Granger, C. W. J. (1969), The combination of forecasts, Operations Research
Quarterly 20, 451468.
Bollerslev, T. (1986), Generalized autoregressive heteroskedasticity, Journal of Econometrics 31, 307327.
Davidson, J. (1994), Stochastic Limit Theory, Oxford University Press, Oxford.
Davidson, J. (2000), Econometric Theory, Blackwell, Oxford.
Diebold, F. X. & Mariano, R. S. (1995), Comparing predictive accuracy, Journal of Business
and Economic Statistics 13, 253263.
Engle, R. F. (1982), Autoregressive conditional heteroskedasticity with estimates of the
variance of U.K. inflation, Econometrica 45, 9871007.
Engle, R. F. & Granger, C. W. J. (1987), Co-integration and error correction: Representation, estimation and testing, Econometrica 55, 251276.
Hamilton, J. D. (1994), Time Series Analysis, Princeton University Press, Princeton N.J.
Hansen, P. R. (2005a), Grangers representation theorem: A closed-form expression for I(1)
processes, Econometrics Journal 8, 2338.
Hansen, P. R. (2005b), A test for superior predictive ability. Stanford University Working
Paper: 2005-003.
Hansen, P. R. & Lunde, A. (2006), Realized variance and market microstructure noise,
Journal of Business and Economic Statistics . The 2005 Invited Address with Comments. Forthcoming.
3

Hansen, P. R., Lunde, A. & Nason, J. M. (2004), Model confidence sets for forecasting
models.
http://www.stanford.edu/people/peter.hansen.
Johansen, S. (1991), Estimation and hypothesis testing of cointegration vectors in gaussian
vector autoregressive models, Econometrica 59, 15511580.
Johansen, S. (1996), Likelihood Based Inference in Cointegrated Vector Autoregressive Models, 2nd edn, Oxford University Press, Oxford.
Kiefer, N. & Vogelsang, T. (2004), A new asymptotic theory for heteroskedasticityautocorrelation robust tests, Working paper .
Newey, W. & West, K. (1987), A simple positive semi-definite, heteroskedasticity and autocorrelation consistent covariance matrix, Econometrica 55, 703708.
Perron, P. (1989), The great crash, the oil price shock, and the unit root hypothesis,
Econometrica 57, 13611401.
Perron, P. (1990), Testing for a unit root in a time series with a changing mean, Journal
of Business and Economic Statistics 8, 153162.
Sims, C. A. (1980), Macroeconomics and reality, Econometrica 48, 148.
Stock, J. H. (1994), Unit root, structural breaks and trends, in R. F. Engle & D. L. McFadden, eds, Handbook of Econometrics, Vol. 5, North-Holland, chapter 46.
Stock, J. H. & Watson, M. W. (1999), Forecasting inflation, Journal of Monetary Economics
44, 293335.
Stock, J. H. & Watson, M. W. (2001), Vector autoregressions, Journal of Economic Perspectives 15, 101115.
Stock, J. H. & Watson, M. W. (2002a), Forecasting using principal components from a large
number of predictors, Journal of the American Statistical Association 97, 11671179.
Stock, J. H. & Watson, M. W. (2002b), Macroeconomic forecasting using diusion indexes,
Journal of Business and Economic Statistics 20, 147162.
Watson, M. W. (1994), Vector autoregressions and cointegration, in R. F. Engle & D. L.
McFadden, eds, Handbook of Econometrics, Vol. 5, North-Holland, chapter 47.
West, K. D. (1996), Asymptotic inference about predictive ability, Econometrica 64, 1067
1084.
West, K. D. (2005), Forecast evaluation, Working Paper .
White, H. (1980), A heteroskedasticity-consistent covariance matrix estimator and a direct
test for heteroskedasticity, Econometrica 48, 817838.
White, H. (1982), Maximum likelihood estimation of misspecified models, Econometrica
50, 125.
White, H. (1994), Estimation, Inference and Specification Analysis, Cambridge University
Press, Cambridge.
White, H. (2000a), Asymptotic Theory for Econometricians, revised edn, Academic Press,
San Diego.
White, H. (2000b), A reality check for data snooping, Econometrica 68, 10971126.
Zhang, L., Mykland, P. A. & At-Sahalia, Y. (2005), A tale of two time scales: Determining
integrated volatility with noisy high frequency data, Journal of the American Statistical
Association . Forthcoming.