The document discusses autoregressive moving average (ARMA) models and their properties. It begins by asking about including an insignificant moving average term in an ARMA model. The response notes that including insignificant lags does little harm, especially with large samples, where there is little benefit to dropping them. Subsequent sections explore the autocorrelation and partial autocorrelation functions of different ARMA processes and derive the autocovariance functions of some ARMA models.
The document discusses autoregressive moving average (ARMA) models and their properties. It begins by asking about including an insignificant moving average term in an ARMA model. The response notes that including insignificant lags does little harm, especially with large samples, where there is little benefit to dropping them. Subsequent sections explore the autocorrelation and partial autocorrelation functions of different ARMA processes and derive the autocovariance functions of some ARMA models.
The document discusses autoregressive moving average (ARMA) models and their properties. It begins by asking about including an insignificant moving average term in an ARMA model. The response notes that including insignificant lags does little harm, especially with large samples, where there is little benefit to dropping them. Subsequent sections explore the autocorrelation and partial autocorrelation functions of different ARMA processes and derive the autocovariance functions of some ARMA models.
The document discusses autoregressive moving average (ARMA) models and their properties. It begins by asking about including an insignificant moving average term in an ARMA model. The response notes that including insignificant lags does little harm, especially with large samples, where there is little benefit to dropping them. Subsequent sections explore the autocorrelation and partial autocorrelation functions of different ARMA processes and derive the autocovariance functions of some ARMA models.
1. (ARMA lag inclusion) Review Table 8.1. Why is the MA(3) term included even though the p- value indicates that it is not significant? What would be the costs and benefits of dropping the insignificant MA(3) term? What we are usually doing is including all the lags up until the maximum that can be adopted, however we can still remove or drop insignificant lags without doing damage. The costs and benefits of dropping depend on the number of samples. If the sample is large there would be a little benefit, but if the sample is small, which has limited degrees of freedom, the benefit would be larger.
2. (Shapes of correlograms) Given the following ARMA processes, sketch the expected forms of the autocorrelation and partial autocorrelation functions. (Hint: examine the roots of the various autoregressive and moving average lag operator polynomials.)
yt = 1.05yt-1 + 0.09 yt-2 + 𝜀t We use eviews to generate the correlogram: From the sketch above, the autocorrelation failed to damp. This reveals that the process is not covariance stationary.
b. 𝑦𝑡 = (1 − 0.4𝐿)𝜀𝑡 yt = 𝜀t - 0.4L𝜀t
Since L𝜀t = 𝜀t-1 , then
yt = 𝜀t - 0.4𝜀t-1 Using eviews, we generate the correlogram:
From the sketch above, we can see that there is a sharp cutoff beyond lag one due to MA(1) structure.
yt = 0.7yt-1 + 𝜀t From the sketch above, we can see that there is an exponential decay due to AR(1) structure.
3. (The autocovariance function of the MA(1) process, revisited) In the text we wrote
( ) ( ) ( )( ) 𝜽𝝈𝟐 , 𝝉 = 𝟏 𝜸 𝝉 = 𝑬 𝒚𝒕 𝒚𝒕−𝝉 = 𝑬( 𝜺𝒕 + 𝜽𝜺𝒕−𝟏 𝜺𝒕−𝝉 + 𝜽𝜺𝒕−𝝉−𝟏 ) = { 𝟎, 𝒐𝒕𝒉𝒆𝒓𝒘𝒊𝒔𝒆 Fill in the missing steps by evaluating explicitly the expectation
𝑬((𝜺𝒕 + 𝜽𝜺𝒕−𝟏 )(𝜺𝒕−𝝉 + 𝜽𝜺𝒕−𝝉−𝟏 )).
𝑬((𝜺𝒕 + 𝜽𝜺𝒕−𝟏 )(𝜺𝒕−𝝉 + 𝜽𝜺𝒕−𝝉−𝟏 ))
= 𝑬(𝜺𝒕 𝜺𝒕−𝝉 + 𝜺𝒕 𝜽𝜺𝒕−𝝉−𝟏 + 𝜽𝜺𝒕−𝟏 𝜺𝒕−𝝉 + 𝜽𝜺𝒕−𝟏 𝜽𝜺𝒕−𝝉−𝟏) = 𝑬(𝜺𝒕 𝜺𝒕−𝟏 + 𝜺𝒕 𝜽𝜺𝒕−𝟏−𝟏 + 𝜽𝜺𝒕−𝟏 𝜺𝒕−𝟏 + 𝜽𝜺𝒕−𝟏 𝜽𝜺𝒕−𝟏−𝟏 ), 𝝉 = 𝟏 = 𝑬(𝜺𝒕 𝜺𝒕−𝟏 + 𝜺𝒕 𝜽𝜺𝒕−𝟐 + 𝜽𝜺𝒕−𝟏 𝜺𝒕−𝟏 + 𝜽𝜺𝒕−𝟏 𝜽𝜺𝒕−𝟐 ), because ɛ is white noise, so the covariance of any two ɛ’s at different times is zero.
= 𝑬(𝟎 + 𝟎 + 𝜽𝜺𝒕−𝟏 𝜺𝒕−𝟏 + 𝟎)
= 𝑬(𝜽𝜺𝟐𝒕−𝟏 )
= 𝜽𝑬(𝜺𝟐𝒕−𝟏 )
= 𝜽𝝈𝟐 When we set 𝝉 > 𝟏, 𝑬(𝜺𝒕 𝜺𝒕−𝟐 + 𝜺𝒕 𝜽𝜺𝒕−𝟑 + 𝜽𝜺𝒕−𝟏 𝜺𝒕−𝟐 + 𝜽𝜺𝒕−𝟏 𝜽𝜺𝒕−𝟑 ), 𝝉 = 𝟐 𝑬(𝜺𝒕 𝜺𝒕−𝟑 + 𝜺𝒕 𝜽𝜺𝒕−𝟒 + 𝜽𝜺𝒕−𝟏 𝜺𝒕−𝟑 + 𝜽𝜺𝒕−𝟏 𝜽𝜺𝒕−𝟑 ), 𝝉 = 𝟑 and so on. Notice that all expected cross products of ɛ’s vanish, so we simply get 0. 4. (ARMA algebra) Derive expressions for the autocovariance function, autocorrelation function, conditional mean, unconditional mean, conditional variance and unconditional variance of the following processes:
