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AMFE Module 3 AR ARMA Model

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27 views13 pages

AMFE Module 3 AR ARMA Model

Uploaded by

kirthana22022001
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Applied Macro and Financial

Econometrics
Auto Regressive Process
Auto Regressive Moving Average Process

Course Instructor:
Dr. Devasmita Jena
Pth-order, AR(p) Auto Regressive Process
•
Pth-order, AR(p) Auto Regresive Process
•
•
Wold’s Decomposition Theorem
•
Wold’s Decomposition Theorem
•
Partial Autocorrelation Function
• PACF measure the correlation b/w an observation k periods ago and the current observation,
after controlling for observations at intermediate lags, i.e., the correlation between Yt and Yt-k
after removing the effects of Yt-k+1, Yt-k+2,…Yt-1.
• In case of AR(p), there will be direct connections between Yt and Yt-s for s≤ p, but no direct
connection for s>p.
• Thus, PACF will have non zero partial autocorrelation for lags up to the order of the model, but
will have zero partial autocorrelation coefficients thereafter.
• What Shape would PACF take for an MA process
• Hint: Think MA model as being transformed into an AR in order to consider whether Yt and Yt-k, k=1,2,3,…
are directly connected. In fact, as long as MA(q) process is invertible, it can be expressed as AR process of
infinite order.
Auto Regresive-Moving Average Process (ARMA)
•
ARMA(p,q) Process
•
A note on the ACF and PACF of ARMA Process
• ACF and PACF can distinguish between a pure AR and MA process
• AR process has a geometrically declining ACF process, but a PACF which cuts off at zero
after pth lag
• MA process has a geometrically declining PACF process, but an ACF which cuts off at
zero after qth lag
• An ARMA process will have geometrically declining ACF as well as
geometrically declining PACF
Invertibility
•
Invertibility of MA(1): Some important points
•
Invertibility of MA(q) process
•
Recap
•

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