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Lagged Residuals
The Durbin-Watson test (first-order autocorrelation):
i i i-1 i-2 i-3 i-4 H0: 1 = 0
1 1.0 * * * * H1: 0
2 0.0 1.0 * * *
3 -1.0 0.0 1.0 * * The Durbin-Watson test statistic:
4 2.0 -1.0 0.0 1.0 *
5 3.0 2.0 -1.0 0.0 1.0
6 -2.0 3.0 2.0 -1.0 0.0 n 2
7 1.0 -2.0 3.0 2.0 -1.0
( ei ei 1 )
d i2 n
8 1.5 1.0 -2.0 3.0 2.0
9 1.0 1.5 1.0 -2.0 3.0
10 -2.5 1.0 1.5 1.0 -2.0
2
ei
i 1
DW d Test
4 Steps
Step 1: Estimate Yi 1 2 X 2i 3 X 3i
And obtain the residuals
=-43.802+35.95*C3
=(E4-F4)^2
=E4^2
=B3-D3
=E3
Reject H0
Positive Autocorrelation Fail to reject H0
Inconclusive No Autocorrelation
dl=1.20 du=1.41
(e e t t 1 )2
2338.5829
d t 2
n
0.8522
(e ) 2 2744.2685
t
t 1
Autoregressive Models
11
Box Jenkins
or
Arima
Forecasting
All stationary time series can be modeled as
AR or MA or ARMA models
A stationary time series is one with constant
mean ( ) and constant variance.
Stationary time series are often called mean
reverting seriesthat in the long run the
mean does not change (cycles will always
die out).
If a time series is not stationary it is often
possible to make it stationary by using fairly
simple transformations
Nonstationary Time series
Linear trend
Nonlinear trend
Multiplicative seasonality
How to make them stationary
Linear trend
Take non-seasonal difference. What is left over will be
stationary AR, MA or ARMA
Nonlinear trend
Exponential growth
Take logs this makes the trend linear
Take non--seasonal difference
Non exponential growth ?
Take logs
Multiplicative seasonality often occurs when growth is exponential.
Identification
What does it take to make the time series
stationary?
Is the stationary model AR, MA, ARMA
If AR(p) how big is p?
If MA(q) how big is q?
If ARMA(p,q) what are p and q?
ARMA models
If you cant easily tell if the model is an AR
or a MA, assume it is an ARMA model.
Box-Jenkins Method
First of all, the analyst identifies a tentative model
considering the nature of the past data. This tentative
model and the data are entered in the computer. The
Box-Jenkins program then gives the values of the
parameters included in the model. A diagnostic check
is then conducted to find out whether the model gives
an adequate description of the data. If the model
satisfies the analyst in this respect, then it is used to
make the forecast.