Financial Risk Manager Part 1
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A covariance stationary time series must satisfy which of the following requirements?
I. The expected value of the time series must be constant and finite in all periods II. The variance of the time series must be constant and finite in all periods III. The covariance of the time series with itself for a fixed number of periods in the past or future must be constant and finite in all periods
Which of them is correct?
Other
Community
NNikitesh
A
Only III
B
I, II and III
C
I and III
D
II and III
Explanation:
To be covariance stationary, a time series has to satisfy the following three conditions:
- Constant and finite expected value: The expected value of the time series should be constant over time.
- Constant and finite variance: The time series volatility around its mean (i.e., the distribution of the individual observations around the mean) should not change over time.
- Constant and finite covariance between values at any given lag: The covariance of the time series with leading or lagged values of itself is constant.
All three conditions (I, II, and III) must be satisfied for a time series to be covariance stationary. Therefore, option B is correct.
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