Solved – How to show that a random walk is not covariance stationary

self-studystationaritystochastic-processestime series

How can I show that a random walk ($y$ follows a random walk) is not covariance stationary? I tried to work on the formula below (with no results) Could you give me just a hint on how to proceed please?

$$Cov(y_{t+h},y_t)=E(y_{t+h}\times y_t)-E(y_t)E(y_{t+h})$$

Is this approach right?

Important: $\epsilon_t$, the shock, is an iid sequence with mean $0$ and variance $\sigma^2_\epsilon$.


If $y$ follows a RW we have
$$y_t=y_{t-1}+\epsilon_t$$

then,

$$Var(y_t)=Var(y_{t-1}+\epsilon_t)=Var(y_{t-1})+\sigma_\epsilon+2Cov(\epsilon_t,y_{t-1})$$
Now I see that the variance of $y_t$ depends on the variance of $y_{t-1}$. This should suggest me that we lack covariance stationarity.

Best Answer

I think you're making life hard for yourself there. You just need to use a few elementary properties of variances and covariances.

Here's one approach:

  • start with the algebraic definition of your random walk process.

  • derive $\text{Var}(y_t)$ in terms of $\text{Var}(y_{t-1})$ and the variance of the error term

  • show that $\text{Cov}(y_t,y_{t-1}) = Var(y_{t-1})$

  • argue that $\text{Cov}(y_s,y_{s-1})\neq \text{Cov}(y_t,y_{t-1})$ if $s\neq t$.

... though, frankly, I think even just going to the second step (writing $\text{Var}(y_t)$ in terms of $\text{Var}(y_{t-1})$ and the variance of the error term) is sufficient to establish it's not covariance stationary.