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AUTOCORRELATION

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33 views14 pages

AUTOCORRELATION

Uploaded by

amanikeshsingh
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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PROJECT MANAGEMENT

AUTOCORRELATION
SECTION A

SUBMITTED BY:

CHIRAG GOEL- 2K21/BBA/32


ARSHAD ANSARI- 2K21/BBA/89
TANMAY GARG- 2K21/BBA/156
VIDHI AGGARWAL- 2K21/BBA/171
INTRODUCTION

Autocorrelation refers to the degree of correlation of


the same variables between two successive time
intervals. It measures how the lagged version of the
value of a variable is related to the original version of
it in a time series.
It is usually more associated with time series data.
It measures the relationship between a variable's
current value and its past values.
An autocorrelation of +1 represents a perfect positive
correlation, while an autocorrelation of -1 represents
a perfect negative correlation.
NATURE
Autocorrelation occurring in cross-sectional data is also sometimes called spatial
correlation (correlation in space rather than in time). In CLRM we assume that there is no
autocorrelation. This implies:

This means that the stochastic error term associated with one observation is not related to
or influenced by the disturbance term associated with any other observation. For instance,
the labour strike in one quarter affecting output may not affect the output in the next
quarter. This implies there is no autocorrelation in the time series. Similarly, in a cross-
section data of family consumption expenditure, the increase in one family’s income on
consumption expenditure in not expected to affect the consumption expenditure of
another family. In the example of output affected due to labour strike above, if

this implies a situation of autocorrelation. This means the disruption caused by the strike in
one quarter is affecting the output in the next quarter. Similarly, increase in consumption
expenditure of one family may influence the consumption expenditure of other families in
the neighbourhood due to the ‘demonstration effect’ (cross-sectional data).
It is thus more a case of spatial correlation. It is therefore important to analyse the data
carefully to bring out what exactly is causing the correlation among the disturbance terms.
KEY APPLICATIONS

Time Series Analysis: Autocorrelation is extensively used in time series analysis to identify repeating
patterns or trends within a dataset. By measuring the correlation between a time series and its lagged
values, analysts can detect periodicity, seasonality, and other temporal dependencies.

Econometrics: Autocorrelation plays a crucial role in econometrics for analyzing economic time series data.
Detecting autocorrelation in residuals (the differences between observed values and predicted values) of a
regression model indicates that the model might be missing relevant explanatory variables .

Quality Control: Autocorrelation is used in quality control to monitor processes for randomness and detect
patterns or trends that may indicate issues or abnormalities. It helps in identifying whether observations in a
process are independent or correlated over time.

Finance and Stock Market Analysis: Autocorrelation is utilized in finance for analyzing stock returns and
volatility. Detecting autocorrelation in stock returns can provide insights into market trends, investor
behavior, and the efficiency of financial markets.
DRAWBACKS

ASSUMPTION OF MISLEADING COMPUTATIONAL


STATIONARITY CONCLUSIONS COMPLEXITY

Autocorrelation analysis High autocorrelation can Calculating autocorrelation


assumes that the underlying sometimes lead to misleading can be computationally
time series data is stationary, conclusions. For instance, a expensive, especially for
meaning that the statistical high autocorrelation might large datasets or when using
properties such as mean and be interpreted as a strong certain methods such as the
variance do not change over pattern in the data when it autocovariance function.
time. could actually be caused by
some underlying trend or
seasonality.
DETECTION OF
AUTOCORRELATION
1. RUN TEST
There are several method for the detection of
autocorrelation among which commonly used This method is similar to the run test for
methods are: randomness.
In this method first the regression model is
01 RUN TEST fitted using OLS method and the residual are
obtained.
The residuals are arranged according to time.
02 GRAPHICAL METHOD The no. of runs (R) formed by + and – signs are
counted. If it exceeds the tabulated value then
autocorrelation is said to be absent.
03 DURBIN–WATSON TEST
2. GRAPHICAL
METHOD

In this method the residuals are plotted against


the time.

This plot is called as Time Sequence Plot.

If time sequence plot doesn’t exhibit any pattern


then autocorrelation is said to be absent (fig. e).

If it exhibit some pattern then autocorrelation is


said to be present (Figure a, b, c & d)
3. DURBIN–WATSON TEST
This test was developed by Statisticians Durbin and Watson.
It is most frequently used test for the detection of autocorrelation. It is also called as Durbin– Watson d test.
It is used to test the null hypothesis that there is no autocorrelation. The value of d statistic lies between 0
and 4. A value near 0 shows the presence of positive autocorrelation, value near 4 shows presence of
negative autocorrelation whereas value near two shows absence of autocorrelation.
However it is difficult to decide how much near to 0, 2 or 4. Therefore a criteria was suggested by Durbin
and Watson. They construct a table for upper bound (dU) and lower bound (dL) for the d statistic. This
table is for 6 to 200 observations and maximum 20 explanatory variables. The decision criteria is explained
in figure on next slide.
The Durbin – Watson test is used under following
assumptions only:

The Regression model includes intercept term.

The explanatory variables must be non stochastic (non random


or fixed).

The error term must be normally distributed.

The regression term doesn’t include any lagged (past) value of


dependent variable.

There must be no missing observation.


It can be used only for first order autocorrelation
EXAMPLE OF CORRELATION

Data of indexes of real compensation per hour Y(RCOMPB) and output per hour X (PRODB) in the
business sector of the U.S. economy for the period 1960-2005, the base of the indexes being 1992 = 100.

First plotting the data on Y and X, we obtain Figure 1. Since the relationship between real compensation and labor
productivity is expected to be positive, it is not surprising that the two variables are positively related. What is
surprising is that the relationship between the two is almost linear, although there is some hint that at higher values
of productivity the relationship between the two may be slightly nonlinear. Therefore, we decided to estimate a
linear as well as a log-linear model, with the following results:
Indexes of Real
Compensation and
Productivity, U.S.,
1960-2005
(Index numbers,
1992 = 100; quarterly
data seasonally
adjusted)

Source: Economic
Report of the
President, 2007,
Table B-49.
Since the model is double-log, the slope coefficient
represents elasticity. In the present case, we see that if
labor productivity goes up by 1 percent, the average
compensa- tion goes up by about 0.65 percent.

Qualitatively, both the models give similar results. In


both cases the estimated coeffi- cients are "highly"
significant, as indicated by the high values. In the
linear model, if the index of productivity goes up by
a unit, on average, the index of compensation goes
up by about 0.67 units. In the log-linear model, the
slope coefficient being elasticity (why?), we find that
if the index of productivity goes up by 1 percent, on
average, the index of real compensation goes up by
about 0.65 percent
REFERENCES

EconometricsBook

https://www.lkouniv.ac.in/site/writereaddata/siteContent/202003271457478

511akash_Autocorrelation.pdf

https:/egyankosh.ac.in
Thank You

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