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1)
a) MA(1)
b) MA(2)
c) AR(1)
d) AR(2)
e) ARMA(1,1)
i.e.
t
yt s
s 0
and therefore V ( y t ) 0 t (by the independence of the ). Hence, as t grows so does the variance
t 2 2
of y.
3)
(i) E(yt) = E( (-1)tt) = 0
(ii) E(yt2) = E( (-1)2tt2) = E(t2) <
(iii) COV(yt, yt+h) = E((-1)t(-1)t+htt+h) = (-1)hCOV(tt+h) = 0 (note (-1)2t = 1 for all t).
4)
5)
6)
7)
a)
i) Et-2yt = Et-2(a0 + a2yt-2 + t) = a0 + a2yt-2
Note the Et-1yt = Et-2yt since information obtained in period (t-1) does not help to predict the value of yt.
iii) Etyt+2 can be obtained directly from the answer to part i. Simply update the time index by two periods to
obtain:
Etyt+2 = a0 + a2yt
b)
To find the forecast function, first find the general solution for yt in terms of y0. For a given value of y0, students
should be able to show that if t is even, then:
yt = a0[1 + a2 + (a2)2 + ... + (a2)t/2-1] + t + a2t-2 + (a2)2t-4 + (a2)3t-6 + ... + (a2)t/2y0
Hence: E0yt = a0[1 + a2 + (a2)2 + ... + (a2)t/2-1] + (a2)t/2y0. To find Etyt+2s, update the time subscripts such that:
Generalizing the result from part a above, note that for odd-period forecasts, Etyt+2s-1 = Etyt+2s-2. To find the forecast
error, subtract Etyt+s from yt+s. For even values of s, we can let s = j/2 and form:
et (s) = t+s + a2t+s-2 + (a2)2t+s-4 + ... + (a2)s/2-1t+2
The forecast error has a mean of zero, since:
Et[t+s + a2t+s-2 + (a2)2t+s-4 + ... + (a2)s/2-1t+2] = 0
Similarly, the variance is [1 + (a2)2 + (a2)4 + ... + (a2)s-2]2.
The correlations between the forecast error for any period t+s and the forecast error for any odd period is zero. For
even periods, we can begin by forming the covariance between et(2) and et(4) as:
E[(t+4 + a2t+2)(t+2)] = a22 so that the correlation coefficient is a2/(1 + (a2)2)1/2.
Similarly, the covariance between et(2) and et(6) as:
E[(t+6 + a2t+4 + (a2)2t+2)(t+2)] = (a2)22
so that the correlation coefficient is:
(a2)2/[1 + (a2)2 + (a2)4]1/2