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Conditional means of time series processes and time series processes for conditional means

  • Economics


We study the processes for the conditional mean and variance given a specification of the process for the observed time series. We derive general results for the conditional mean of univariate and vector linear processes, and then apply it to various models of interest. We also consider the joint process for a subvector and its expected value conditional on the whole information set. In this respect, we derive necessary and sufficient conditions for one of the variables in a bivariate VAR(l) to have a white noise univariate representation while its conditional mean follows an AR(l) with a high autocorrelation coefficient. We also compare the persistence of shocks to the conditional mean relative to the observed variable using mea sures of total and iterim persistence of shocks for stationary processes based on the impulse response function. We apply our results to post-war US monthly real stock market returns and dividend yields. Our findings seem to confirm that stock returns are very close to white noise, while expected returns are well represented by an AR(l) process with a firstorder autocorrelation of .9755. We also find that small unexpected variations in expected returns have a large negative immediate impact on observed returns, which is thereafter compensated by a slowly diminishing positive effect on expected returns.

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