Parameter Space Restrictions in State Space Models

Abstract

The state space model is widely used to handle time series data driven by related latent processes in many fields. In this article, we suggest a framework to examine the relationship between state space models and ARIMA models by examining the existence and positive-definiteness conditions implied by the auto-covariance structures. This study covers broad types of state space models frequently used in previous studies. We also suggest a simple statistical test to check whether a certain state space model is appropriate for the specific data. For illustration, we apply the suggested procedure in the analysis of the United States real Gross Domestic Product data.

Keywords: State space models, ARIMA models, Parameter space restrictions, Trend-cycle decomposition