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Lecture 9 The Lag Operator

1. The lag operator L is defined such that Lxt = xt-1, shifting a time series variable one period back. 2. Using the lag operator allows time series models like ARMA models to be written compactly as polynomials in L. 3. The algebra of polynomials, including addition, multiplication, and inversion, can be applied to filters represented as polynomials in L. This provides a useful way to study and manipulate the properties of stationary time series. 4. For a filter's inverse to exist and maintain stationarity, the filter's coefficients must be absolutely summable, which requires that the filter's characteristic equation have all roots outside the unit circle.

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154 views

Lecture 9 The Lag Operator

1. The lag operator L is defined such that Lxt = xt-1, shifting a time series variable one period back. 2. Using the lag operator allows time series models like ARMA models to be written compactly as polynomials in L. 3. The algebra of polynomials, including addition, multiplication, and inversion, can be applied to filters represented as polynomials in L. This provides a useful way to study and manipulate the properties of stationary time series. 4. For a filter's inverse to exist and maintain stationarity, the filter's coefficients must be absolutely summable, which requires that the filter's characteristic equation have all roots outside the unit circle.

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z_k_j_v
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Lecture 9 The Lag Operator

(Reference 6.1, Hayashi)


Let {xt} denote a sequence of real numbers or
random variables.
The lag operator L is defined according to:
Lxt = xt-1
Thus, a single application of the lag operator to a
sequence {xt} defines a sequence {yt}, such that yt =
xt-1.
Similarly,
L2xt = L(Lxt) = xt-2
and, more generally,
Lsxt = xt-s , for s = 0, + 1, + 2,
(so that, for example, L-2xt = xt+2).

We can define a (finite or infinite order) polynomial


in L or a filter according to:
a(L) = a0 + a1L + a2L2 +
Then, for example, we can write the MA(q) model as:
q

yt = + where 0 = 1
t s

s 0

= +
s 0

Ls t

= + (L)t , where (L) =


s 0

Ls

Similarly, we can write the MA() model as


y t ( L) t ,

where

( L) s Ls
0

So, one benefit of introducing the lag operator is that


it provides us with a compact notation for writing
filters.

Another advantage is that the algebra of polynomials


can be applied to filters. This turns out to provide us
with a very useful way to study and manipulate the
behavior of covariance stationary processes, as we
will soon see.
The algebra of polynomials (in L)
1.Addition
Let a(L) and b(L) be p-th and q-th order polynomials
in L, p < q < :
a(L) = a0 + a1L ++ apLp
b(L) = b0 + b1L+ + bqLq
Then c(L) = a(L)+b(L) is defined according to
c(L) = c0 + c1L + + cqLq
where c0 = a0 + b0,,cq = aq + bq (and ap+1 ==aq=0
if p < q).

2. Multiplication
Let a(L) and b(L) be p-th and q-th order polynomials
in L, p < q < :
a(L) = a0 + a1L ++ apLp
b(L) = b0 + b1L+ + bqLq
Then c(L) = a(L)b(L) is defined according to
c(L) = c0 + c1L + + cq+pLq+p
where c0, c1, are defined as follows
c(L) = (a0 + a1L ++ apLp)( b0 + b1L+ + bqLq)
= a0b0 + (a1b0 + a0b1)L + (a0b2 + a1b1 + a2b0)L2 +
We sometimes say that c(L) is the convolution of
a(L) and b(L).
Note that a(L)b(L)=b(L)a(L).

Suppose, for example, that

y t h j xt j h ( L ) x t
j 0

Then,
zt

b ( L ) y t g ( L ) xt ,

g(L)=b(L)h(L)

Fact If {xt} is covariance stationary and {bj} and


{hj} are absolutely summable, then {yt} and {zt} are
covariance stationary. (We already know that if the
hs are absolutely summable then yt will be
covariance stationary. Then, since yt is covariance
stationary and the bs are absolutely summable, zt
will be covariance stationary, too.)

3. Inversion
Let a(L) be a finite or infinite order polynomial in L.
We define a(L)-1 to be the polynomial in L such that
a(L)-1a(L) = 1
That is,
a(L)-1a(L)yt = yt
For example
Suppose a(L) = 1-L. Note that
(1+L+2L2+ )(1-L) =
(1+L+2L2+3L3+ )-(L+2L2+3L3+) = 1
So 1+L+2L2+ is the inverse of 1-L (and, vice
versa).

If, for example,

yt s t s s t s ( s Ls ) t ( L) t

then

(L)-1yt = (L)-1(L)t = t
i.e.,
(1-

L)yt = yt - yt-1 = t

and, therefore,
yt = yt-1 + t
Hayashi (pp.372-373) provides a very nice general
procedure to calculate the inverse of a polynomial in
L.

Absolutely Summable Inverses Consider the inverse of 1-L,


1+L+2L2+
This inverse is defined, regardless of the value of .
However, the coefficients of this infinite-order
polynomial are absolutely (and square summable) if
and only if < 1.

2s

= 1/(1-2) if < 1
= if > 1

We will often be interested in inverses whose


coefficients are absolutely summable (so that
inverting covariance stationary processes maintain
stationarity).

A necessary and sufficient condition for an inverse to


meet the absolute summability condition
Let a(L) = 1 - a1L - - apLp
Define the polynomial in z:
a(z) = 1 a1z - - apzp
If the roots of a(z), i.e., the values of z that satisfy
a(z)=0 are all strictly greater than 1 in absolute
value (i.e., they all lie outside of the unit circle),
then the coefficient of a(L)-1 will be absolutely
summable. This condition is called the stability
condition.
Note that if a(L) = 1-L, this condition is the
condition that < 1, since z = 1/ is the only
solution to the a(z) = 1-z = 0.
So, another form of the stability condtion
Suppose a(L) = 1-a1L --apLp. Since the roots of 1a1z--apzp are the reciprocals of the roots of zp-a1zp-1-ap, the coefficients of the inverse of a(L) are
absolutely summable if and only if the roots of zpa1zp-1--ap lie inside the unit circle.

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