Cointegrated Density-Valued Linear Processes

Abstract: In data rich environments we may sometimes deal with time series that are probability density-function valued, such as observations of cross-sectional income distributions over time. To apply the methods of functional time series analysis to such observations, we should first embed them in a linear space in which the essential properties of densities are preserved under addition and scalar multiplication. Bayes Hilbert spaces provide one way to achieve this embedding. In this paper we investigate the use of Bayes Hilbert spaces to model cointegrated density-valued linear processes. We develop an I(1) representation theory for cointegrated linear processes in a Bayes Hilbert space, and adapt existing statistical procedures for estimating the corresponding attractor space to a Bayes Hilbert space setting. We revisit empirical applications involving earnings and wage densities to illustrate the utility of our approach.