I have a time series $x_t$. If I use the transformation $u_t = log(x_t) - log(x_{t-1})$, my new time series $u_t$ has properties of white noise (random). I wonder whether there is any practical interpretation for $u_t$?
Thanks for your help.
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3$\begingroup$ You can treat it as an approximate growth rate. $\endgroup$– dimitriyCommented Jan 29, 2013 at 7:58
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$\begingroup$ See also discussion here $\endgroup$– Glen_bCommented Nov 6, 2016 at 4:16
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2 Answers
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If a continuous-time process $x_t$ is geometric brownian motion it would have this property, or the discrete-time equivalent (geometric random walk).
A difference in logs is is (for $u_t$ small at least) effectively a percentage change.
See also the connection to the force of mortality (what actuaries used to call the hazard function, or rather they seem to be using it less these days) and the force of interest, which are 'instantaneous' equivalents of your annualized (or more generally, periodized) discrete measure.
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1$\begingroup$ Hi @PeterFlom, for $u_t$ small because of the approximation of $ln(1 + u) = u$. This is what I think. $\endgroup$– SamCommented Jan 29, 2013 at 16:43
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1$\begingroup$ @peterFlom The actual percentage change would be $(x_t-x_{t-1})/x_{t-1}$ (well, times 100% I guess); this is not the same as $log(x_t/x_{t-1})$ when the percentage change is large. $\endgroup$– Glen_bCommented Jan 29, 2013 at 22:24
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If $u_{t}$ is near 0, then after multiplication by 100 it could be interpreted as percentage change of $x$ minus 100% from period $t-1$ to $t$ , that is beacause we could approximate $log(x_{t}/x_{t-1})$ by $x_{t}/x_{t-1}-1$ "very near" the point $x=1$, when $x$ is far away from 1 this approximation doesn't hold. Put functions $y=log(x)$ and $y=x-1$ on one plot.
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$\begingroup$ Thanks @Qbik, this is what I also guess. Thanks for your help. $\endgroup$– SamCommented Jan 29, 2013 at 16:45