S£conD EDTON Secon oer APPLIED ECONOMETRIC TIME SERIES alter Enders @WILEY www.wiley.com/collegejendersSTATIONARY TIME-SERIES MODELS The thoy of linea diereneequtonscan be extended alow he orcng process tee si, hrc te ce ence puss ede (ove) methodology fe stating testis model of he orn a? ODI oF Marg 4 Bier Blog Such movels ar elled autoregressive integrated movng-verage (ARIMA) timeeresmodss Ts caper hs hee sn 1 Preset th theory of sot ine dierence equations and conser The imesrespoperies of tionary ARIMA odes a tana ‘ARIMA mode calle n autoregressive moving-averags (ARMA) ‘node ir shown ht the sity cogs othe previous bape ae [remsary coos for satonsy. 2 Develop th tol se meting ARMA models. Especially useful ae the sscosaton a pra tear anton est Heme the Bow Jenkins metousgy tlio fee tol to eximate an ARMA ‘model ro sample dan. 2 Consider ais et tics to check fr model adegtaey. Sever ear Peseta ARMA tel reanalyzed Jeti Ie shown how Propet estimated model canbe se fo oecasing. 1, STOCHASTIC DIFFERENCE EQUATION MODELS In this chaptes, we contin o wink with dlcrete, ate han continous, time ‘Sces model Resll fom he icasion im Chapter {ht we can eae he fine thon =f aya ie tof y= Ae h)=) ‘As pation mate, mot ecoomi tine-seres at acl or derete time pede Th we conse oly the ein Mera fh "2A, fe she eand convenient sat = | Be caret to recoptize however. hat dite tists implic tj bu at nesensaly ye Seret- Fr expe although ‘Soima' anna rfl is sontincor varable the Sequence of ch al 4 ‘nn a you 1th 13» de ines many encnic ‘pcan rete“ et ops ange ne Hower ‘edt rer ee of tne nls men yn es inca orem sb, ye ea ‘anc om oi vet sume We cody se i soca ona ‘ona roulete whee», can then tke on any af the 38 values 00,0 36. ‘Seco vrai) van tote stoner vues any sa mire ei rab p= ary wen eae on Creator Th nto ty gn ncn wae pea thether i atlearanenacofreranshO cpg eT irbwe ame br shiengo =) "thy douminse a han eo "eee cnet cameo sce fe ets yP sen rent esos of ca ets At caer ace tos rte non’ he wan ema i aie scone ie lt exami, ote heute of non sul cere ‘tm ough Fes neces Sopren me come int sae. my coal ew det ese pao tte pea Scene Sm ave GDP ech) an ve Gace en tee aC nod yee o oeae as fom aca pees (Oem eae ey eo ek Inwing ec sof) ordre sas the py don ony oe tn) hat pies eh pons eed tle of) ae nay ‘rn aos Thera a ined ee ee ot Foto rym yt wt and et Feral ing aed efi racecar nce oe Sivas ctnt oe seed aloes Toot me ci ety kneel Ebsco ‘tems retest ceo lg fi i hee po sy dns my Serserted cea ay everte iva coe dic denne te uly de fr CDF Reve. te ta of onic rt desop mth capes tei ak ering pony Sechni dicen once nce om fing syne emma pce To espe als es oe Federal Reserve's moncy sap ars grows 3 pret esha Heme mm) = 1.08 5 an sh gren e inta conon mt wna. shen te loth fe oy py tine isthe na enon ret enya per 20 cof os, el mony py) tl he td ot feo Surpass nb ond te ns set ee atti oo Heathen cee se soa‘he gup betweun he argt ante atl money supply my. Suppose athe ed cannot perf cota the mone supoy but aterps to change he money sap ‘iy by» ptent (= 100%) of ay pap Berean the denied nd act ONE SP Ply We con del his bebo ab Amy = in =m ce ming 2.0, me btn im = A195 HAM ke en tre the contol pean fe money sp esc eman ena tay points discussed above. Note the following: : 1. ough e money spl na otis var 22) ie {eencerqusion Siete acing proce (sch, we ply soda wecancall@2)s tar shen ier eon 2 we kw te dsb of, we ol cate edition or tachaenct ath nq Sins 3) sows howe eins Ofte fm) seen te kd seine, we wold be ate oa tienes ont pba Nec hn ie tbat the nay Stel seqcce completly deemed ye poner ie Soe asin G2) ad ie Gln of (seen 4. Having cbc heft baratone he segue, An take Hees en my For change, wpaang 2) oe fda tang nn enpeone reo Bom nooner, Ate we posed fr long he ies, otk he a bing ofc vse ate eae ec ee {eh cs we pec a nthe spe har an rt Shschc sisted ial be eae Foal ston ‘3 dest eos ca vale Of, estes (gh a whNenoe procar i foreach ne pod p= BG. = Grae )= "To (orvans) vata) = A Aen d= Any pd Otel ands [coy oedema 9) Inte emer of hie (5) wil ahaa refer whee proces <= wl roe varie otha cms hen tt nce oer 0 oe inor witnesses he) al fy) wa be Nowe {umoke pocne tcoate mov ring ne oes Less es) fog cay wana Aserce med aac 'moving average foie gan denoted by MA\g) Tis aypl moving veep proses suppose you win 1 ia arom shows neal a ke Sif ans ‘tal Denote the otome on sy (fort nee Steet) yo ano hep ack of your ba sels, You might want acl our neage i "ings he st four oes. For each cin oy average pot on hee fos toses is s+ W455 + ena Lips Interne of.) fs segwence ea Ing average process sath that = 025 far 23 anda therwins Altoua he (5 sequence a white noe process the comin (x) seuence ina be 3 white-ie proces if two ar more othe ie form seo le sing an MACD proces et b= 1} “05, sable 0, nth cms Eta)" Bl) = Dan vray ~ va «0 $5.3) 350 You can cay con ince youre ht Bs) ~ By) a a as) =e, oral Het ee "wo coition for {5 o be a white-noise poses te ted. However Ele "055 X61 05e,g)" Ele 2 Og PF OSaae Oe ee ive ihre st ve of 8 uch a Ea.) Oe Seance Everitt | thee of his chapter ak ou to find the mean, vane, at ovine of your ot seaks in coi ong Fr pace you sold we a 2. ARMA MODELS {tis posible wo combine a moving average roe wth linea dfecae eqenton "0 obtain an atoregrsive moving verge mode Consider te pth onda en = 40+ Samet eo "Now le i Bethe MAL@) process gives by (23) 0 ht we an we rene Sant Si We follow the convention of romaizing wits 40 tha is ways equ to ny If he charters rots of (2) ae all inthe ut cinta, jn) caked oy {autoregresive moving-average (ARMA) model fry, The serene sate {be model ithe afoence quaion ven yt mogentons prin af Oy asd ‘he moving verge pai te (5) squanc. Ifthe bomogeneos pat The Se fe eqaton consis pags andthe mod! for coins gg te moet called an ARMA. nodal. fq = 0 the proses cle pure torepeave roses denoted hy AR) an fp 0, the pres apate moving ee ented hy Ma(g-In an ARMA modi perio permaniie oslce hee 40 be infrteIn hie chaper we consider nly moves wich allo I chen, {ete ots of (25) are within the unit cle lonever fone ar oe saan ‘ie ots of (2.5) i gree than regu to ui te bi} sees eae lnmprated oes Sd (25) scaled anatase tnepcd monn sense es“Tretng 25 a erence equation sgt tat we cole” for ine ort ay Sige. The stun of aw ARMA ) ode expressing es oF with’ muningraverage representation of y, The procedure is 9 ‘neem ards Chapler | Forte ARC) 0», ~ a9 1 ~ Sn the movingeverge representations shown 10 Be y+ Seal ee net For the gencal ARMA) oe ete (25) sig Ins operons that ayes 8 | eo wnat i wil not be eset fo us to expand (2.0 oobi the pei cocoa fr ach elmer nfs The portant pitt coaize i hat the Sep wl it on MAC) en Te i et ah a cere Slt the sochasedference union given by 2.6) i tbl. As OH carer Fe aa soto, the say codon tha the root fhe pyar TREES ante ouside othe utc Iris shown (9. near soc (eee seron te abt ondon iar necessary conaton forthe time Soviet (yl to Be stations ATIONARITY Suppose that the quality conto division of « manufactring fem saps oor SSERISE, Sue hou Every hur, galt conol nds the mean ofthe machines ae eretee The par afeach machine's our cup shown fn Figure 2.11 1- Pe machine ys esp at ou te ean (7) a realy ented as For hours 5, 10, and 1S thse mean values ae 461, 5.14, a 5.03, respectively “Peep variance foreach hou ean silary be constucte. Unfortu, appa conbrecucians door wally have de ary of being able to bain 28 TERESA Ge, mpl tine scner daa of the sume process over the same Ke Fee diy we observe only one sto alton for ty parca sei. Feeaate ie Ls» atatonary sere, the ean, varias, an aoc cary fe we apprunimaed by scien Tong time averages based on te SEITE Srrestantons Suppose you absrved only te ouput of machine I fr 20 iy a") Ie ids you knew that he op Wa stoma You cul Test expat by you cou approsimate he mean FeaDoyu!20 feck pti Foy soca pres hava tte sno es ‘ovariaceSationary fra fand ee ne memantine F9)" E,)=a an Fb HPI= Bl. 4= WPI~ oF (0a) va) 0] es FGM 9) ~ gra Tey) OHO Fnpsd= W129) ‘whee 09 and ral constant, 'm@29) allowing = 0 meas tay equivalent tothe vas ts time sever i variance sanay if fs mean a al tsovrcaee oe Stected by a change of tine ogi nthe erates covrance Stora process ho fers ta eay toa cn aoa od ‘Sie stationary grees, (Note that strongly Canary process nerd fs aes Fine mean alr varnc) The ten cone enycoratancesabesey seo Sat there I no ambigty tm sing the Teme enn) and ova oan inerchageably. One rer word atouttrmology fh mulivarate oss ‘erm atooraince i escrved fo the covariance between andi os CGot-covariane refs tothe covariance been one est nae Ivan 1M estes md theca ambigny td he tems ssw Sd ovalance ae ured neste,4 cyurrina sanuARY IME SERS MODELS ‘Fora covariance tons series, we cn define the autocorrelation between whee ya ae defied by (2.9) “Se a are tne independent the autcorltion cee are ao time nsepidentAthough the scerelaion Between andy can er fom {heauacorcluion between he aoc Dewees aby 4s een that betwen 3a ObviUSD 4 ~ wr wns for an AR(1) Process Station: ‘or exposition comveriece irs onder the ncesary and suiclent conditions for en ARI pocest tobe atonry. Let ity Reste Bray tauren 6 where «= whites Sopone tn fe process tre in period to, so ha determi ini sit Sono. Secon 3 of the ast chapter, war sown that the solion 1 hs ‘Suntan oc ls Question 2a the end of his chapter) soma al toto Sal a1 “oking the epee ve of 2.10, eosin Bye Seal + obo ew Upting by» eid ils Byam Sed tel y en Coin 21a 212 Se at th ens in nen sine Bs nt aul Bo he necator However a Se eee eng ae fy se (10-1 |= fe arson eas crea tse as becomes nny eg abe bum at 6? OO gee ag na) Tam ast saa) tiny Bee Dal a ‘Now tke expectations of (213) s ht fr society lng vale of #8, = ata) Thon the mean vals teatime dependent 0 ha = Bea ahr na) forall Turing othe variance, we ft Fy WPS 53 + EWEN d= eK (0) ich to ine nd inept. ily ely eons ha Tinting values ofl scares ae te nd eden 1 Nea N= Ble yee *lPaa* (oo ues eaten) = eon Maye Ae eap— a} aL Insummany fe can i ling vale of 10) the (sauce wil saonary Forty gc sala, nos Gat man sete ase Thi sample pened byt prot ht oe erly bogie ena iy aoe stony i for ery en tty Cees ae {he the di geerting process habe ocung fro iil on ine. Pai ember oy i fam ep Fes example.) cold represent he ly Can tS excane rat Ueshning mmc afer he deme ote Breton Wood Ted Shy ae sytem: Sch series may ot maton dc ti hr ete dene Isao tangs tine tae een Wes tr) The crf esearhe wang nay su might cia xa Stn of ie eater hervnions ham i pd of og _ Lite wou hangs wee we ot ene nl codon Wit te aia ‘al jp the sum of he bompenens nd pcan fre remap Salat Ale eas, weet amarbiary comin Tryout he exper f 2.15), ler ha he (7) sequence cane sation nes the expression (eq ts Ets esas na ate Sed ity long ago (0 f= or he airy cost 4 met 2. Real hat he abo contan incre 2 devon fom ong eg. ‘iam. The tabi condions ante vated acct ‘eens 1. The hmoseneou soliton it Be either the Sequence must ane sted infil far nthe pore pres at sve be incl. Fm that te aiay cst Se). “ 2. The chum ott bees thn ity in bole vale “These to condone ety seer nal ARMA, process We baow thatthe omeenco ston (23) te fr ne Eat or ifthere are m epened rot, het ae al airy cont, the repented rox andthe ae eiIr ny potion of the homogeneous equation present the mean, variance, nd all covarianes wl ete dependent Hen, for aty ARMAG, ) rode, sao thesia eatation forthe paral solution 4, STATIONARY RESTRICTIONS FOR AN ARMA(p, a) MODEL [As prelude othe statonaityconons for he general ARMA) model fis onrider the ettons nesesry to ens ht an ARMA 1) ml ona Since the magnitude ofthe rcpt erm dos na ase the Sabla sonal) peveves tara 4 Bees ew ‘From the previous seston, me ko tat he homogeneous ston must Be 2ero. At sch oly necesay to nde parca slaton. Using the mets of ‘dcr’ coefficients, we can wie the challenge sltion a8 “Sass en For (17) 10 ea solution of 216) the vous ost satisfy Kases* sia Ons * 6.4?) Sos de Ase #54 asa es Lagan os To match coeficieas onthe ems comaining 5S 5.2 ve MEE 1 3 aymaj0yy +a ‘The key point tat for > 2, the coef sty the diferance equation cy ayo on Ifthe characters rot (216) are within the unt ele the (mus consti convergent sequence. For example, reconsider the ease Imvbich a =1.6,0)-09, and let = 05 Worksheet? shows tat be cet ‘ens saisying (2.17) 1,21, 2462086, 1.06, 0196, (lose Workseet 117 of he peevious caper. “Tvverfy tate (sequence generated by (2.17) stationary, tke he exec tation of (2:17) 0 frm f=), 0 forall and Hence, de mean ft ad time ineran, Since the (5) sequence i sued fo bea white-nose proves, he ‘ince of, contin sd ie sndependent that Yat) = Blogs * 6.4 sea eases * 32) oh COEFFICIENTS OF THE ARMA(2.1) PROCESS: E11 OS¢2* G+ O55. see te pet of ndeterine cote amas ~ 1-098) Seca) Ts om (3) tnd 21 = DOW, a 56 8) Since Vea), me seh sino cou (O94921) cog + 4) =O ‘From abe, te ain fr 4-187 Hence 8 (eMuis= 08! -cagos61 1199, Aerie ean eth ni vale fy it ter by in, ‘hemes othe ys shown athe bap ence, at) = vr.) fr alan Fly te covaince betwee ej Cons) = Gees + one-2* Mesa ees eas 2 ecg OY = oXG, ma} + yen) Fle cert Ona KOs oes esa e554 = ody etsy eam) in Gover nad oe + en +209 * 0) ew“Ts, con.) conan ad independent of Convery the care inte rot (216) So ese wit the rit eee the (sence wl Not be eo ‘erBet AS sch, the seqence enne be convegen Tesnet ioe fia generalize these rests he ene ls of ARMAGS. rode Begin by considering the conitonrenetns the sana of pute aCe) process. By appropri resting the al ofthe inerder SIAL) Droveue canbe oblaned arses eases. Conder Ss, ere ta) a white-noise proces with variance ‘Wettve stety determined tat (x) rot white-noise process now he sve fs wheter {x} Is ovariance stony, Given condions 2.7), @.8) and 29), we 1. te the mean finite and ime sndependnt Take the expected vale of sand ‘een the eypestion of sum ihe sm of dial xe Pls) = B16 Dh gs +) Bes Ate wk 8 Repeat the provers with Fl) = Epa et Bnd P= )=O ence all laments inthe (segues Rave he sre Ste mean 2 Isevaringc fit and ine indepen? For vars) as Wate) = A+ ees +is.9 =) ‘Sauar the term in gaenaes ad ake expectations. inc (88 white sabe process all ts B,,~ U ors = 0 Hence Vata) = Be? = PALS 9? + BELG 2? + Sol AEP ed ‘Aston at (i ite, flows that va) i fine Thos, PL Being finite is nserary conan fr) tobe stationary Todeternte wheter va) = vrs fom Visa) Ba Bithet * Atco + P= A+ OE HORE I “Tha, are) = arts) fall and ‘reall socovarianes nite and time-independent Fie form Bleed Flere) B= Ble laa Kloet Pines * Bina +3 Canying ou te mukipioton and nating B_) = Ofer s =O, we set Bi) = HO, Dah * Btn) Resting he sm 9, ies + Sao» 0 Be Hite means at Bs 5.) 8 Ste. Given thi second rein, lear a th covariance Been aN ety Serends o te mer of pris separating he varie (he vale 2) Setar ene tine org | ee. a een ii ny Ans Since (ims i ral vac ofr nd ee (roid. Th inplion hats rer MA poco wi sys satay Pra es ede rcs 3) mast ols Soe of dea lel wahoo ‘ete sina of MA pcs ede pene taps Now conser the pre atorepresve mode +Ea yorke 219) the carci ots ofthe homogeeoas eatin of(2.1) al ie ise be om lis posse o write the pai salto a8, Bees em her the = undetermined cote eaten 1 postin inte nicemind otic (9), nek at (220 ira converet sequence lng tthe chests) ase {he unit ce To sketch te pro, the mtd of deen coins tse st ne he parca solution inthe fom of (220, We ae hn bat ‘race fo) il erential solve he iternce eqns 812104) 23019~ 2 geg a) tthe charac ots of (2.21 alse ent ci he 9) sneet wi be convergent Although 220s an infineorey moving stonge ce he onverence af the MA coefiints impli hat Soff ne Tiss we en oe (220) chek th tes conto for tata, Soe = B-Ball Ea) You shoal eal fo Cap hat essay contin fl ceric ‘oo i side the unit ile 1 ~ Ha, > 0. Hence mea the eens {nite and nena " Sia Wa Bl Fara tones tom + Val) = Blea Met baka ed Hoe ‘Given that Dai nt, he variance iit nd ine-indepenen Cone r= MG sea On2 Kee Ott abe * TAG ues * a Kea mast aga“Ts the covariance betwen and ental imevariant for all 1 Nothing of sostance xchange combining the ARP) a MAC) os ‘Shino the general ARMA, 2) ode oo Soares Tee rot ofthe inves charctrisiceuatin He oubie ofthe unit ice fie, fe rato he homagencous form of 2.22) Hie inside the unit cle] a8 {he fa sequence aon. the) sequence wil be stationary. Coser Petr, Aiea 4. ea Sa Dye tae With very effort, you can convince yous atthe () sequence ste she tee coon for stoarig: Each of the expressions on the iht-hand ide {@23)is sony a long terse of | ~areeutlde the uit ciel. Given {hat fission nl the tot ofthe atresesive portion of 222) determine tr he) seqsence stationary 5. THE AUTOCORRELATION FUNCTION ‘he asocovrances and atocorelins ofthe type Fund in (218) seve a ef tos ne Bow lnk (1079) apes o Wenn sd estinains ness nod (Se Wella ty consring four imporant examples the ARCARQ), MAC. 806 “ARMA(, modes Forbe ARI) mode 9,—ay a). 5p 210) sows w= Al 09] B= Mayet = Forming th msoareltins by ving each by Wei a )~ 1. ~ 0 pa=laphe n= tay Foran AR() process, ecu condition for tna eta |< Th the plot ofp agains called the auneneltin fencon (CP ot eoveelogram—sdconerg to ero geome le weiss son Site, postive coavengence willbe dos anait,fnesive te socom ‘ons wil flow dampened wily pts round 2, The st two aps the Ich sde of Figure 23 sow the neil atocoeiaion frei oy 0.7 Toulon 09 especvely, Here, at sown se ts values mete ty The Autoco: lation Function of an AR(2) Process ‘Now comer the more omplicted ARQ) wos) 2% + =a 6, We min Tptcepr ter (aes ten efoto he ACE atthe eo er ross fo Stora we whe iis esesary worst he ots ofa ~l)tobe ot athe con ctke I Section 4. we derived the autecovarances of at: ARMAG2, 1) ne acoconeunoNnncros 61 | = rocesby it of het of vein ois Now we mano ine an Sicmnive tectngue ung the Yale‘ Walker equations Mult scantondr ference euton By f= yt = Tote 2d ae expan foe Bx = as abv * Bey Boi ABeves Peover Eaves Bora= mB via* ebiearea* Bates Bie aBi ae OE aIe5* Bes 2562 cuurnns sraonanymMesenESMoRES By dfnion, the atocovarinces fa sation sere ae sch ht Ey = Byte Binaieey~ iy Weal kom that Boy, and gy 0 Het oe xe the equation in (2.2 wo form neantante 225) arent an 226) See en Diving (2.26 and (227) by viel many en 225) Our as 229) Welaow that y= 1,0 that fm (228), ~~, Hens we an idl ‘ors 2 2 solving te ifernce eqn (239) Fr exahpes oes and s= P= laPAL 0) ap Pa alta 03) a) + aga lt ~a) Although ine values ofthe at cumbersome to drive, we can easily charter lee he proper. Give th satin fran the ky pot ont tha te ‘al sats the dilerence anon 2.29), As ine fener eae Ws cc oder Aiterence equatoa, te solution maybe ocr or irc. Note tha the toate iy condition for ybecessaes tat the character ot of (279) ene te ‘cil, Hence, the fp) sequence mist be convergent. The corelogam fr an ‘ARG process mst be seh that yy = Ed a be determined by (2.28) These 0 "ale canbe viewed ss il sofur forthe seconde difrencs equation 29) The fourth panel onthe chad side of Figure 22 showe We ACP foe the proces 9, 07}n1 ~ 048)¢- 2 cy The properties of he warour flow dey {othe omogsntouseqston yy 0.7, + 48), =O. The 0 ae lined fom he ston to 2 07 (077 -4049)12)72 Since the ecriminnt d= (0.72 ~ (040) enentv, the carci rots ae imaginary so tat the slution oscil. However since oy = 0.4 the souton ‘Sonera nd the (sequence stators ‘ial we may wish o find the auocoarances rather than he atoconlations. Since we know alo th aatacoeltios, if we cn find the varie op ‘wean fed ll fhe ther, T iad ye (225) and nae a = iy 0 ak hl a= 9p) = Substion or ya eh ereneen) ty) (105) 40-+49)1 ‘Te nuroconmeunon unction 68 ‘The Autocorrelation Function of an MA(1) Process Nex coasider the MACD) prosess y= &) + Sep Aplin, we can obtain the Yule-Walerequaton by mulpiyingy by tch snd ake expecatone 07 YO = yay Ble e+ De, = (0+ T= Bouvet Bea) eee 0d "Bs A? ene Ab EO foralls> 1 Hence, dividing ech byt can be instantly sen ht the ACF isi ly mya tery ~ UL = 3) and pp 0 foralla> 1 The hd wap on he end Side oF Fiat 2. shows the ACF for the MAC) proses y=, Bop Avan ee, ‘be. yu should demonstate Da the ACF for a MAG) foes hs fie ops ‘The Autocorrelation Function of an ARMA\1, 1) Proce ia ety = a4 + 6% yep Using the sow familiar proce, we fd the ‘ulate equine Brie abr Beare BG. ry ~ a1, 924 B04 02 230) Brea Eee eens A Aary Be? — 231) Bam aBrves Bevra* Een ap ex) Epa Adee Bene MBee ig 2 %— aI ea Solving 30) and 2.31) simutaneousiy fry dyes 10h an na ye ttaboitay 2 One) Hence, +9) 1499 0a 294) (+5 Hq) 04 par fae 2 “Tins, AC fer ao ARMA(L, 1) roses isch ht he rigid of pends en eth ad, Bening with is value fe he ACF af an ARMA pees(64 couvrens savonanyTesenes wooe.s looks ie tat of the AR) process 1F0< 0) < In convergence wil be ret pd i 2a 20th sstaconelaton wl nile. Phe ACF forthe ineton = 09 +5 coher shown thet pp on th end se oF age 22 The to por ‘We eve you with he exec of dvving the coelogram of the ARMAL2 1), sce ured in Wokahet 21. You shouldbe leo recognise the pin tt the cr Flora ca ee he pater of the atorepetine coffers eran ARMA (p 4) model Depining ae ag the ales athe sats = Apes Oe Ag ‘CALCULATION OF THE PARTIAL AUTOCORRELATIONS OF YO.) + O75 Sep 1 Ges atocoraatins. Ue (234) ae (0049%-07-07) —paqye Teo e300) peers Si ser Coseaseyt —costisy) --0406 Step 3: Conus a eating by ttn (237 Tn te at y= Sit ea e120 aed ome = 0414120940591) co-D6K OBST 12081-0845) oe hoe on Simic tn ee - [>] 1.95 an yp 07. Hee wehbe Sine y= yay lo $y vena ewe ama hi bin it pose to demenate a f -0.17, = ‘The previous p vales can be tested a inal conditions that satis he Yle-Wather equations For thre Tap, the tape ofthe ACE i denied By the character eatin 6. THE PARTIAL AUTOCORRELATION FUNCTION nan ARC) proces, any ae coma even gh doesnt eyo sel Te cna teen 7m n'a De oen ‘ewecn andy Lea lipo y theca Rese ey ey in) 30 tat 2 oe pean onde tl ach nde! contigs eset in he ACF of ny autoepresve process In conta he partal ator fon teen ay elites the eff he erring es ey See_ As sch ian ARI) proses the pl sulceenon Feoecn yan ros {alo zr, The js lea oid epsilon fan x he seis (9) By utc the mean Of the srs (sy) om each cr ot ban y=, ye Nexto the seer stregresson ‘ire che symbol fe, 8 used since this ror process may not be white nis. Since hte aro terverng ales ye th etn pr turacentaton between any, Now fo te sender aurgreon ei taps toma ter Here oi the pani autscoeltio cece between yay: ter words ithe colton tte an, caneling for (eet oa) The eet of yy. Repeating ti process fo ll adr gs ¢ ile the pata ‘ose iciba GACH, fn pac, wth samp 7 aly Te a te ‘Since mst statist compute packages pero hese wansfomatons, here ‘sine ned to elaborate onthe computtiona!procedie, However shold be Boined out that simple computasonsl method relying ot the rolled Nole-Walke equation i avaiable: One ca fr he pata etcoreltons fom the sutoconlatons a ana 235) ea =- eM) 239) for ain Lg, sana enFor an AR) proces, there is no det comeatin beeen st, Fp ence, foes» pal values af wl be sero and he PACE fora pre Ap) poses sould eto zt oral lgs pater than p This ase etre othe PAC hat {a ai intheiensifestion ofan ARP ode Tn const connie PACT forthe Matt proces y=," Sey As long ae oT, we can write) (1 30) ™ ey ‘hich we know steffi onder nseposive represen 2 Bis Psp ton = As sch th PACF wil jp to zr sng wil be created with all ofits ‘own lgs insted, the PACE coffers exhibit geomet dssyng pater. [BOs gecy sect an if 9> 0, the PACP cet ola ‘irks 22 itstats the procedare sedi constructing the PACE fr the [ARMA 1 ode shown ithe th anton the gh and soe of Fire 22 Fit caeuate he atoorlations, Cla y= I: se easton 24) to cles: Inte as py = 08448 Thera the ACF coil decy atthe at) (-0 704 {oe /3 2 Using 235) ana (236), we obtain Gy, = -0 a4 anl ds “04250 All subepuet andy an be clelated for 237) in Workshet22 Mor gta he PACF of satadonary ARMA\p. 2) process ma imstshy és ova eo besoning at agp. The dey pater eyed oth cote of the polyoma (1 ls DL > La Tae 21 rants sme the pope tisof he ACF ad PACE for varias ARMA process, A he igh-handeide p ‘oF Figure 22 show he arta uscoaton frst oh fe nied pros For stationary processes, the ky post nt eth fellow ng 1. The ACF ofan ARMAYp proces wll ein to doc afer Ig. Aer agg the cocfien ofthe ACF (ie thep) wil sata the irene Spa coon Ale ARIA 1 Onng dey bopning tg xan San begining st Among Dens rar onsinoy) yin dt orc tin ae ta tn. Sit tai Moreover. he pater ofthe azcoreltonceflet wi in ht Sugesedy te chastise. 2 The PACK of an ARMA proces wil begin to desy afer gp. Ae lag, the coeients of the PACE (xe the ¢,) will imc the ACF coe cits ro the mol (= +L +8). ‘We can ilasrate the uf ofthe ACF and PACP Scions ing te model yay Oy + If we compare the op wo graph Figure 29, he ACE shes ‘hemonoton dos of he aaconsatos whe he PACT eas he sgl sie tag 1 Suppose that a researcher called sample dts a pated the ACF and PACE finctons If the actual pares compared favorably othe tortie ptet, ‘he researcher might yt estimate ita wing an ARC) model. Creeping ‘he ACF exited single spe andthe PACT exited mnotnie decay (oe he ‘hid ap forthe model y= 0-7) the researcher mig yan MA) ede 7. SAMPLE AUTOCORRELATIONS OF STATIONARY SERIES In practice, the theoretical mean, variance a aucorelatons of a series ae ‘nna the retather iver nt seer sana, econ we the ape Imea,varence and aulocorttion o estimate the prt of the stl at _pvering proce Let thre be Pauretons ably, Unougiyy We ce et Prand, be etimites of and propel wher! wT y, e38) WDLOA-7F a9) M16-D ean Don “The sample autocurtltion fonction i he ACF derived fo (2.4) and he sample PACE can te compared fo vais toil fost hal dey the ‘cl nature ofthe dra pnerating process. Box nd Jen (197) eat the die {busin ofthe sample vals af, under the ml hat, onary wth nonally ‘istbote enor Allowing wan) 0 dente the sampling vance oy they ba vege eset “042539) fer >t eanif he ne ve ofr = 0 be the re da-geeting proces san MAGI) pros Maeve ae spl Lefre valor Pr willbe al SFebtd wits ean et so. For he PACK cet under te al fypotec of an ARG) mode (nar tml ha a ge a he a ance of the Qyeiyys is approximately 1/7: 2 in prc ante tee nape vals ofr he spl asacorelion sn ural acta fan lt fe spence ig(241) Pore ‘ie ie sees 95 poet conics areal es sn tony a ‘Stand value ofrycxconde 7° pre oer ligt at fore mwocoaon ot aiily sire om a Raji he ‘pote ans ecg an MAG" 1) = MAO) poe an ten eer Eeegsa neue t= Rta (sayoyr feb a 10, vans rs 0005 dod en bat 0128 Ts natal ve ir excends 40.1290 esi te tulfmear ccna he stem fa > 1 Repeating Wee aru aes of ein domingo rb oe ices: Fhe murs numberof ple ‘wun yng pow faces some wl eos ro ad dev sonar of pre canc eve ow he ee lesa the gern fro tem The Qs con bs wnt ower gr of coca {Sere lgntemdy afte tom ae Boxand iste 970) wed be ane te cola fore at o-r et ‘Under he nal ypshesi all values of 0, 0s asympeically 3? dstib- ued with depres of feed The intuition behind the eof the snc that ‘igh sample autocrine led fo lng valuer of 0. Cana, white nose roces (which ll uocorreltionssbold be zea) would have a Qvale of zr Ifthe calulted vate of @ exceeds te appropriate value ina abl, we can elec {gan lterive tt tes ne autcireltion mt sto "pram it the Box Perce ttn ht wos por ven in mod csncly Te samples, Ljung ad Box (1978) repo supe sell arp pera Sic forthe modi Qstatisue called as 1 n42) ORT Wy ea Ite spe value of clei om (2.42) exceed the eal vate of <2 with s dgres of feeder ten aon ae of tical dierent om 2 a he ‘ec sgfieaes level. The Bo Pier and Ljung-Box D-saisis als seve 3 ‘ecko see if the ei orn ay enisted ARMA ) model eave et we ‘se proces However then tes clos fom a ood ARMA 2) made ‘sored tds of eedom ae eed byte muber estimated coetsens Hence, wing the residual f'n ARMA, model Qa a2 with pa degees ‘of leeds ia constants neu hedges of feed tes pg”) Model Selection Criteria, ‘One natural question tak of any estimated mode How wel docs fe dat? ‘Adding aioe! ag frp aor q wil oss rece the sum of gue of be extmatd vein However, ing rich ngs etal etmaton of ae ‘ional eoeiients anda sociated ln depres of eed Moreno nc son of extaneos coon wil dace he foecstng Prone of the ied ode. As dincnsed in some dtl in Appendix 2.2 oft chapen here est a tm mde season errata trades rosin in the stm of sar of he ‘idols for moe parsimonious adel. The sv most commory ad noel ‘Slevin entra te the Akaike Information Crisron (ARC) ae te Schwere Bayesian Crteion (SBC). Although here are several dere: we op tec ‘erin (a illastted by question 10 the end of hie capa, wil ele the sae ‘ode: In he tet we wil se he following formas [AIC= nur of squared sess) +2 ‘SBC Tin Gum af sured reds) = 97) whee: = number of parses estimated (p+ 9+ possible constant erm) P= numberof erable observations When you estimate a model using need varibls, some oberon a ot ‘Toadequtly compare altemstive modes shouldbe hp ned. terse, ou wil te emparing the performance ofthe tndls ove ent sep pigs, Moreover, decrnsng Tes diret effet of eocing the AC andthe SBCs he ssh Ssnotto select amd! beasts the let beso we ccrations, For example, with 100 data ois, xine an ARI) and 28 AL) xing ony he at 8 ‘hseritions in each extiatin. Compare thet modes ing T= 98 Ideal he AIC and SBC wl be ssl spose ante tha bth can be neg sive Aste ote mae roves be Le ad SAC wl aprch —m. Weae Ie than model Bf he AIC (or SIC) for sali tn for ose I 8M the criteria compare aerate models, we mst exit ht these an Pie periods that hey willbe compar Fo ih nressing ae be eee Sore inceases bu shoud have the efi of ecg the em of ome Fel “Ths ifs represor has o explant power, adding th ne wl ae th {he AIC and SBC to inrese. Since In) wile gent than 2, he SBC wil says ‘elet amore parsimonious model tan wil the AI he maria cos of ang ‘ese ih he SC tan wh eal ew cera the SBC hs sper re seple popeis. Let thee er ‘oft at penning process be "and upp ta we ae he AIC al SB ‘stint all ARMA mel of adr ip 9) whee p =p" dg = 9" Het the AIC and ‘he SBC wil net moss of ors ctr hor ual os) a theses se proaches infty. However, the SBC is saympeocaly contest wh tae AIC70 owrrens sunoranynie sine ones ‘inst toward slong a overpramateised mod! However, sal samples, he ‘AIC can work Heer than the SBC. You ca be te confi you eae bth the AIC andthe SBC sett these model. they set direst noel, You nee ta pcesl caus: Since SBC mee the moe parsons ode, You should ‘heck fo determin if the resid appear be mie one, Since the Ai ca select ‘Ss overparamtized model, he attic fal eof sl be spits eeventona eves A umber fhe dapstic checks tat cane edo compe teal sepsis of your entatad mal han da ets fost nt posse eto fine one mode tat clerly dominates ltrs These mthing wong with reporig th restr nd the forest ung leat rato, Estimation of an AR(1) Mod Locus use specific example se how te spe atoorelton Sinton nd pri suocrcton fincon cam be sed a anata ARMA telco se progia was wed dw 100 oral stb nd arbre wth ‘elvan equal unity Cal he dm ates whet tae fom 1 10. ‘Beguning wh =I, vals of wre generated ing the fol) aed ‘he oodion yy =. Not ta te pele of nna voted snc the inal enon i conse with log-in equa. The upperlef-hand graph Figure. shows te spe conlogram andthe opperigh hand pat shows le PACE You shui the mint o compar the ACT nd PACE eae othe te ‘rei proces shown Fig 22 Tn pte, we nver Kao the toe data-generating proves. However, suppose ‘we were presented wah thee 10 sample vues td wee ake so uncover te toe ‘roe. The fist sep might be to compare the sample ACF and PACF tahoe of he ‘anus theoretical models The deeying ater ofthe ACF a henge le pe ‘ag {inthe sample PACE sages an AR(1) model The three stocoreatone tier, 074 7)" 038, andy =D (which are some preter tan te tee fl als of 07 049 (.77 04), and 18 Inte PACE, there sabe ike '9F 0.74 ar lag, nal other paral eocrelitins exc ing 12) ae very al Unreal ypotess of an MAYO) proer, he snr deviation OF is T1201, Since the spe vale ofr = 074 ote than seven stand evi ions hom aero, wean ret the ul pers hry equals 0 The snd dee ton of is btn by appivng (2:41) othe sampling Sats, where Var) = (1+ 20074100 = 0.021 Since (0.021)12 = 0.1449, the sample valve ofr is more than thee sander evans trom 2eo; at conventional signfeance level we sa eject the all, Iypotess that requis eo. We an snarl test th sigilicace of ter val Ser of the auacorelaone ‘As you can se i the second panel ofthe Ggure, eer thn $y, ll pti sutcorsatins (excep for lag 12) at les han 27-2 ~ 2. The Sey of he [ACF andthe nnge spike ofthe PACK ive the tong impression of «fiat sme aurocomesos or stanonane sens 71 AMManae Ste autoregressive mode. Nevertheless, if we dd sot know the te undying ‘rocess and happened tobe using moatly as, we might be concrsed withthe ‘Sgnifcant pal sntocoelation at ng 12_ fe al, with nootly data we might fnpec some direct satonshin betes yah 1. “Although we know that the da was actly genertd fom an ARC) poses, ‘tis iuminaing to compare the extinater ftw diferent models Suppose we tate am AR(1) model and ia ty to caper th pte ap 12 with an MA owt "Sen. This, we can comer he to tetatve model Model 9, = a4 Model? 3}= 0h 4 Asn “Table 2.2 reports the esate ofthe two esinatons, The coef of model sts the sty condition | |= 1 andar low standard eros ‘statis for alo zeros mere ha 13) Areal signee check we pl the orelogam of te residuals ofthe fined mode! in Figure 24 Te Qua for ‘hose residuals inet that each one of the stocotlatons i ls th 2 tana evans fom zero. The Ljng- Box Qstaisic of these eis nt tat ot ‘grup lags | trough {hough yaad I tough 2 are ot sean ie fet tom sr. Thins strong evidence hat he ARIT} model" he dnl ee itresidualavoconctatins were signin the ARI) mol onl lise72 oueren? srmounyTMe sens MoOELS rarer ot rensor 5 c ences tow ol =aas aaa) att availabe aforation concerning movement athe (7) soqunce For example ‘ppore we wanted forces, condoned om all awnahe information op ot looting prod 1 With mode! ye value of ry 1 yy ~ Op ey Hee, he {orca fom model 1s ay, I he veil aceoreatins bad bon significant ‘his forecast would not apt al ofthe avalible infomation st Examining the este or model 2, note Wat oth models yield iil estinates for the frntorder storgrenive coeticint and the tscisted staré coe However the estimate for 2p of poor quali the insignificant value suggests (tat i should te dropped ft the adel Moreover, comparing the AIC and he SSBC values ofthe tro modes sggents tat any Benet of & reduced sum Of Square residuals is overelmed by the deinen eects of estimating a {Gal parameter All of hse indeatrs point to the cote of mode! 1 ‘Ekercne the end ofthis chap ental various eimation ing this data set nie exris ou sake a show tat he ARI) model performs Btn ‘ome lteratvespcictions Is important hat you competi exer Estimation of an ARMA(1, 1) Model A second jy) sequence wis consruced to ili the estization of an ARMA, 1) Given 100 normally datrbtedvales of (100 vals of by) HDI +4076. where yo andy were Both et ua te Both the sple ACF andthe PACE rom he ime data ete second set ‘of gris in Figure 23) ae rouely eutaien tn those of the tec ode ‘Shown in Figure 22. However fhe te dat-getesting proven were lo the ‘escarcher might be concerns abut cern Srpances An ARG) mde ol Sols sample ACF and PACE sina town he Hie Table 23 ep he Fels of estiating te dawn heli te male Model 1:3)= 0%. 6, Model 2 9)=apiet Fe* Asa Model 3:3)=a0%e1 Manica h In examining Table 23, notice that al ofthe eis vas of a ae bighly spn eah of he estimated values eo Io eight stndand deviations fem ‘ro Ii clear that the AR(I) model napproprie The Qtr ml | Indicate tnt thee i significant sutcoretsion Inthe reid, The erated ‘ARMA, 1) model does not sue fom thi problem. Morse, oth the Ale sod the SBC select modal ver model Te an pe of eight m2 refed om 3. Ne Sha for ech model, te existed cnet se igly saint ad the pn ‘mates imply convergence. Altsouh the stati a 4 lg nts dat cee Mosel? aj-os701om “ayeaaevs56) —-Ale=ario Si-Berstcan) ae aera cam) Sesame Mote! ay-\ietoma)” “aqajanas(emn —-xecanewo modes dono ur fom comelated resid the O-tiicat§ np nates {eal cosaton lathe resus of mel 3. Ths, he ARC) model doesnot eae ‘ortseom dynamics a well the ARMAT, 1) mol. Alo pote hat the ATC and SHC och est model Estimation of an AR(2) Mode! “The estimated ACF andthe PACF ofthe series follow: Hi: @466 -o161 0322 0408 0052-0165 O01 013% 0180 Osa “nos? “0113 1304 até 0058 1s 0251 0046-0175, O10 Ho10 HOR ase Doe 0052 12: 066 0482 ons 9085-0255 -0121 Dior 00m tare Gers 000-0139 13.26 0167 0207 0.007 08s 0216 0013 Shon? 032 0015 bos “a0s8 0188 Note the age atocmsation st ag 16 andthe ln partial autocorltons st lags Hand 7, Given th way the proces wa simulated the presence of hee ao ‘Selon dao to nuthing more than chan. However am economic Unaware of he can at generating process might be concer aout hese 2 ‘elton The ovens of the AR(2) model re extiated os CCouficient _—itimate Standard Error Staite Slgneanee Le = O69E380807 GoROSIS769 7173484 .00000000, GL aSeonraeao — Gaosresae-S36831.po000055| Aic=21987833 SBC =22808827 “Grell th model apes o be ndequnt, However, he evo ARG) coefcens arabe capre the correlations at ery ln lags. For example the patil uo ‘Sees the ned for ngs 1 a 17 ae bth rere than 02 im asa Sale Te cles jang-Box tai fr 16 apes 2465248 (whch s infent ihc 0038 level ath pon fume tempting oy to motel he cereltion st tag Tet fcading the moving average tern Sige Sch an estinon ress n= suimate Standard Error _¢Starstle _Sigifiance Level D716681247 ogPIaGH4SI 786561 c.oooEOHNO Dacaooonos Baptasains Sia noo0r6s Danssi3s68 —Glosssebes 278172 OOGS2IRE 1340055 SRC= TIL 15885 swig aurocommeLmens orstanonany sence 78 cfc resin an he Ljn-Bx sais o he cds ea inst coe alien a SHEA ant SC ben ler ncn nt te see one ete proces mah te tn ros nse depnontg ees ee Imvng vege ag ‘Nu atl chek sos he splint wo pr. taco es iting su oe td een a ‘sous aes opto pe CP and PAC seers 0460-0207 0280 003s 0095-0153 0133 “Gla “ist 0027 D009 ao 2k ows ous aoe omms 464-0162 Torse “nose bm} iss tor “aas6 Pace 12; 0460-0581 0193 0968-0197 010 2m “aor es Boes ats “0259 82% 0m OMG 0038 got -0054 aoe O17 -o0e 34 009 “0009 “230 [As you cn ce, the st ofthe patil mocomelans a gs 14 and 17 i imine Now estnang ise ARC) nal veh sod to oe a pile yields ne 2) —DTISRSS7RS@anssiszs 52207 0.000031, 2 -D337Ra3744 Or2oiaNSIS —t46639 — LopeoNG? 8) = 78 significance level 0251 20) ~ 1593, sgnicane lve 317 (0028) = 2606, sgtcacs lve 299 Alestimatedcoetciens ae spice Lang-Box Qs do tre the neta at geerting proce ge We. Inti exam age ops ‘ocorelaions ofthe ong tap canbe eliminate by change the sane ee ‘Thus tishard omnia he colton wae 3b ening Mot ph spain wrt yi any tee eg Ao ‘mn inter tom Gt) wriane or, xs be asl when sag: Morcoves Salsas, fw “nua burns cance te spent a spa ‘Mtocrsatons at ong tgs. Since conan estima volves tk a ‘strain proces, thee goer pont that we lye need wo teway ooo Simmel mel Ponstel Bx od Sekine (197) elated st recedes thatcan bowed chek mod adeguny8, BOX-JENKINS MODEL SELECTION “he eet ofthe ARG, ARMA, 1) a AR2) mols inthe previos section Alaa the Bow Bekins (1976) ste for ppropnte model selection Bo aed Skin poplarind see sage metou aimed msec an appropiate mods fr the purpose of eimaing and forecasting iar ine seve. nthe Metie ‘on sage, the sserhervieualy examines the ne pla ofthe sve, he stor ‘elon Tension, ang the pa const fnetion” Plating the tne pth ofthe {bp seqvence provides weal infrmaton concerning es, ising vals, and ‘Stata reskin the dats Nonstasonary varie may hve ponouced end ot pyearo meander without conn long-run mean or rane Misi vaues hd ‘Suir canbe soreced ahs pn Aone ime the standard pace wat = ‘iteence any ates deemed foe tonsadonay. Caen, © lye Werte is ‘roving that develops formal progfuresochack fr nonsttonnty. We eer his ‘Gizoson antl Cheer and ssune tat we are working with sonar data. A Simprtson ofthe smple ACF and PAC ty those of Vtious torte! ARMA rover ny suggest sever pavsble models Inthe etimation tage cach othe {Emative sco ind the various ad coetiens are examined In NS oo- tnd sing the estinuted mos are compared wing the following oe Parsimony [A fondant en in the Rox-Jenkins approach ie se principle of parsimony ‘Parsimoay (ening spaseness © sngnet) shoud come a seond pare to eo ‘ist, Incorporating additonal ccc wil eceariy pctease (eB the “eof il create) at cst of reducing depres of feedom. Box ad eke {ue tat pusimonous movls produce beter forecasts than ovrprameterized Inc Apursamons val fit he da well without pcrprating any eels Coeficiente The aim sto approximate the ve dt-generting process bt Mt op ‘tom the east poses Te pal of yrsimony suggested clinnating te MACT2) ection in th smut ARCI) mel shown eae Insleing an appropri model, the constr need to be aware ha v= ral diferent model ay have rmilar popes. As an extene example, note hat {he ARC) model yy 0 3p. 4 has he Suvaleninfnte-nder movingaverage fepesetaton 9, 5, OSepy 0854 0135544 0062S» In most ‘arple,aprocmating this MA(c) proces wih an MAG) or MAG) mode will [vee good fe However the ARI) model the more pasmonious mol and EreferrdAv atest you toul thw hts ARI) model asthe etal = ‘le, be tare of he common factor problem. Suppose we wanted ofthe ARMIAG, 3) mode ab ag2by= (04 Lt A+ BD, es Suppose tat (1 a, ~ a2) an (0+. x? +s) ca ec be factored as (1 eb) ad aod + cK + Ls al reget. Sine (IL) is3com ‘mon factor each, (2.48) has the equa, Bt more parsimonious, fm (eam 0+ bb+ m5 eas It you passed the at oui you know tat (1 ~0.2E7y, = (1 +0 St) ieee: leat (0 = OSE\1 -03E),~ (1+ OSE) s0 hat y,~ 0.) +5 In pate, te polyoma wil not faetr eae However, he fore ilar, usb Tn oder to east that he model pasimonous. the vos a shuld all vette of 20 greater (wo Bat each cele’ i sgn leet from sera atthe 58 evel: Moreover te spffiensshoulé pot be sony cme Inte wih each ter Hihiy colic coef arena, esc one ee ‘ib elite om te model witout ecing feces peionmancs ¥y and Invertibility nn ny a be Ne anbaee eases ceca car nae Seon ie sna ts re Stee ‘underlying assumption. Hence, we should be suspicious of an AR(I) model ifthe est- cetatiovethaao reagents eceeaapens ae tha tone acter Gad gio ees tem oon marron bara Sep ech cvecrmetertctetiotae Sri eri era eh eng mp Fe bore ceureninan antonio 4 045) sorhat 11 K-82) 2B Ai ats mm 246) IF (9, < 1,246) canbe estimated using the Box Jenkins method. However, 4) | 1, he seguance canot be represented hy fit oder AR proces Ss ruth, no inverble More gene foraa ARMA model to ave 3 comer! [S0AR repreenation, the rou the polyoma (I= i+ BL? = = 0) ‘amie oti ofthe unit cle Noe tha thr stag popes at 4 fo invertible mode. The (7 sequence implied by yy", ose staonay in at is constant tme-invaint mesn 2, = B=, consi imeivain a ance [v= ar) =U)» Sa td the con aancee yon and Itother y=. The problem shat the tcbigue dees ot alo fort ertinaon ‘such models IF= 1,246) bomen ay escrito nd al mcolcns ewes any, MlGoodness of Fit ‘Agood model wl ithe daa wel Obviously and the average ofthe ei sm ‘tsqares ate common goodness oft measures moda ests The pr Ton wi hese ears tate cesar iproncs more prtcs e {nce nde model Pasion sugges ing the ATC olor SB oe more appro ‘te messes ofthe overall ofthe mde Also be aus of stints at ‘Sean iy Nw wae pags ioe ry ARO osble tha the etinted parameter are unable Tn such cumstances aig dationa bzeraon orto can grat er the eximates The third sage ofthe Box Jenkins methodeogy involves dlagoste checking. ‘The standard practice opt he reid look foro ad for even of vids in whic de mode does mo the dats el al plasie ARATA model Show evidence ofa por fit ing essen lov pot te spl ts wise to consider ying inrsnton anal ranae incon sali or any ee of he multivariate estimation methods dacined in Ine chaptes. I the vane of the Fesduas st increasing, 2 lognihmis.traaformaton may be appro ‘Akematively; you may Wish osctuly mel any tency o te variane oda ‘ing the ARCH tchaques cused in Chapter 3 ally unorelated Any evidence of serial soreiaton implies 4 sstetntle nove ‘nent inthe (y} sequence tat ino acoonted forty the ARMA soefcets Included i the model. Hence, any of the tentative modes yelling nonrandom ‘esiuas should be elininated fm consieraton. To check for coeltion he ‘esas, construct the ACF andthe PACE othe nets othe etna rode ‘You can ten use (21) and (2-42) 10 determine whe any ol of theresa sutocorlaions oe part! sutocorlations are eatscalysigfieam* Altough there smo sigaiicance level that ie deemed soe spproest be way af ay ‘model yielding (1) sever rest orcas that are marginal signa and (2) Qstatstic wat i Brey significant athe 10 percent lve. In sch cea ‘nce, ss ually posse to formulate exer parforming model toes are fulfiient oberon, fiting the sme ARMA model o sachet to stbsamples an provid weal infomation consming the sssumgton tt the date generating rose s unchanging Inthe AR() model that war estimated inthe ast tion, the sample was spilt inhale ta general suppose you estisted an ARMA, 9) ode sing sample sizeof Joberetons Dente the sum ofthe squared es ‘leas SSR: Divide the Fobtervtions nt wo subsamples with fo observation in {he fiat nl fp TY aeration inthe second Use each subple oesnae HAD? Aas FoF Gg 54 HDG ADg wg WO) Og 8 GDDig = 4 HDA os Dig Lat the sum of the squared residuals fom cach mod he SSR, and SSR respectively. To test the estton that al offs eel fe. 29(1)= a2) sede) ep) ag) = 98) nd HO) =A) od A) YD ae _ (SSR S9R,-$5R)/n at (sor s5R3)17 ~2n) where = numberof parameters eimstd (n= p+ 9+ 1 inert ened {nd eerie) an the mumber of Seqrss off ary 3). Tontively if the restriction s ot inn (x, he oases eu, he sum SSR, "88M shoul equal tes of he ued esd hen sa Pie estmacon, Hence. spud equal zr The age tse ale of Fhe Ino rearictve isthe ssmgtion hatte cote te aa, ‘Similar, mde can be ema ove ny potion ote dla et. The ct mated rode am then be eet force Known lef te srs, The sam of ‘he aunt forecast evar 62 wef way to compare te adegucy o rae ‘modes Those models with por outafwanple frsat shuld be linia Some ‘ofthe dems nconsrcing ot of apes are cued inte ont secon \OPERTIES OF FORECASTS eaps the most important use of an ARMA endl eo frecast fate values of ‘he (1 sequence To simplify th following diruson it eased to he ee ‘etpenerating process and the crrent an past reantiorsote )andy) ‘Sequences ae known oe renercer Fit Snare fects te ARG ‘model y= ay aun ey Updating one pera, we tain Fat 4 * Et you know the eaten ay and, 00 can fret yn, coniioned on the ‘nfoton aves period Fxmzaton, eas) here £68 shor-tand way 6 wet the contol expeciton of piven he Formally Ey = se Det Ie 4 Sot) Inthe sae ice f.a ap} ons see seas fy conned ‘on te infrmation saab period” Even a0 Ee, snd uring 248) Fn ~ > eo ay) “Ths, the oes of cam be edo fred. The pn eh fects «amb costed sing forward eaten he Treat can be we a ese ape SiN iat A ey En. med fs Ua Forges a0 ED ew)80 ourrens sranonanrnecenes ones Frm (248) and (249) shoud be lea that i posible wo obtain the entre “Tis guton calle te frees fanetion, expres lf ete aoa fe ‘asso funtion ofthe informaon stn ponod Unfonuntly, ne ity of Tereza declines awe freaa frtber ot int the ute Think of (249) 8 fis er difeence equation ie (yy) sun. ine] othe diferente ee ‘ton i stable, and ts straightforward to find the particular solution tothe difference ‘tution we take heh ot yyy a -= mere fin that Egy yl a. “This eu ely ute general Fa any staionary ARMA mele condinal Joc of converges thecal man |= cate the lores om an ARMA mel wl ot prety acute, important to comer te popes of the freer ors Forecasting fom HOE Period we can define the /stepaend forcast err eas the ference wen the rai vale of andthe forecasted Value A= YF Hence, the one-stp-ahend forecast eri ef) Jn) Ein ~ et Gta the “unforecastable™ potion of gen the tfomation availabe) "To ind the wo-stepahesd fret er we ned 1 ort 2) ~ ia ~ Bie Since yon ay "aps tan td Een a) #2 Pe Hoa Sak £2) ~ ae) E i a Ea itt ‘You shoud tke a few moments to demonstate that forthe AR(I) model, the aegahead feast cori given by = sj tres arena AP spat oe Mea 280) tla, taf taf hala, ‘Sie the mean of (2.5) irr, the forecasts are unbiased estimates ofeach aloe yy Th prot Wt. Since Eyer, = Egy t= oe Bye =a con onal expectation oF (20) i Eef/}~ 0. Since te expected Yala of he Forest “vor in aero the forecasts are ube ‘hough wise, he forecast rom an ARMA model are necessarily inacc ‘of the (=) sequence are independent with a variance equal to 22. Hence fom (2:50) Walch N= A tat tattogt to @sh “Thus ate one-step forcast enor variance ie the two-tep-ahead fore cast enor variance is (12, and 39 fh The este pot oe tat he tor eontdence shorter forecast tha fong-em oyecat othe Ui a Poca th forcast evar variance converges to (1. bece the Treest ‘srr variance converges the ancondtonal variance of he) sequence Moreover. suming the {sequence ioral stud, you can pace co ‘dence neve round he Forcast The one step aed oe 8 snd the frei eror As ch, the 95 pence intel for he one Sepaead forecast can be onset ay ay, 1.960 Wie can conse confidence interval or the two-step shea frat emo in ‘he same wa. Pom (249) the ost arcat alt) rend 2) Indes that ares 40» Tha 95 erent oie cal or te twesatp akan fect agit) bey tL Sot Higher-Order Models ‘To.penelie the iscstion, it posible to ze he terave etnig to dere the forests for any ARMAS, g) model. To Resp the agen simp, consider the ARMAG, 1) ode Mat apey baat Aes es Updating one prin yh erate Oa +a we contin asime hat (1) al eoetcient are kn (2) rales sete 1 62 ae ow pe 28) By or > son Forma ou, taney Be, ess) quaton 53 isthe oe stephen freat of. The one-step ahead fire at ertor the iference betwen yar En 90 atof1) = To i ts ‘wostep ahead froast opt 252) by wo pe a= 60 aie Epa Bln ‘The cndtonl expectation fi Een a9 Eves a3), est) Equation (24) express the wo-step-head forecast in tems ofthe one send Toes and cient vale of, Combining (23) ad (25) yee Eoipa a edn * a, ayes +8) “ay, Foye a) alt aly oven A To find the ewo step ahead frst eo, at (2:4 om jy Ths £12)" abo Ee) 2 Be 235) Since yn) Bye tthe one tep-aead frat ror we cn wit the Fest ‘The intone that he vate fF wiley if the fret ern tom the two modes are deteal Avery large value of mp ht the forecast eros rm the fst model are subsanty larger than those om the second. Unde the tull Inpoteste of equal forecasting performance, (260) tas a sted Febaton ‘sith (Hy dope feds if te flowing te aeumption ols 1 The free erre ve zero mean and are morally dst 3. The forecast enor are conteporneouy uncoated wth eachother 260) Alibough ts common practice to asume tht the sequence nomally ds tite snot recess te eset te forest erate morally dieihted ‘th mean vale oar. Sims he forsat ay be sry created the pict te you use mu-tp-aend forest Forename, cation 236) Inst thatthe twostepahead forcast eae 8 42) =(a, Bien eo tnd updating by one pid yield the two-stpahend fort er Br 42) ~ + nn Te should be clear the two forecast errs are orld npr Bley 2)) (0, * Bot The pin tha predicting ys fom the perspective of pei and precting oy omibe peepee of pied bth conan an err doe ee proetee af fy Howeves for > 1, Ele {2)] = 0 since here eno eveapping fren Hee, he utceretaton fhe tworsep- aad forces er ett eo ae la {You shuld be able to demonstate the penal rr that sepa fst rr at aan MAGI) proces ally the forcet eros om he 0 aera models wil uly be ily corlted with ach otber For example, 3 nepuvereaanon of ys wil edt ise the oecast fom both models be ooh, Unfortunatly the vlaton of Sty one of tone ssmptions meas tht thera te MSPES To (20) des ak Ive an Fitton THE GRANGER-NEWBOLD TEST. Granger and Newhold (1976) show how to overcome the problem of comemporaneouty comeied forest err. Urs the to Sequences of foreseen for syn ey ayant Given tht he fist wo asumpins above ae valid unde he ml pois of equ frees seers and shoul be uote Model 1 hi lnger MSPE if spose an model 2 ba large MSPE i 8 oagative Lt ye denote spl comsiatonseeffiient between) ao 1) Granger and Nesbol (1970) show hat rah) @sn asa isribution with A— 1 dares of som, Tir siti dir ft fom zee mode | hea ager MSPE ir piv model 2 as age SPE epnve ‘THE DIEBOLD-MARIANO TEST Thee is «very le rare tying tte the Granger Newbold test 201 eat stsunptons Land 2 Mores ‘ll econometrians mgt be terested ears recs peante than the sum of sued err. Indeed shuld ler ht sing he sm of Squared ear zm ereron make ans oly the ls own takings nord ‘orcas quadrati. Homever tere are many other pees. For exampe if ‘ours depends ome sie of he forest ero ou shold be caer th Be Boole ales ofthe foresters Alri m epionstraerecven 4 Py IsTof zero ithe vale of te undertyng sz! le lw the sie price eos ‘one lla pay foreach dlr the se io ses sms the ste pe. Dich ed Mario (1995 hve developed ste tht lane ramps | te nd allows Toran ojetse tinction tat smo gence. Teveconier only one ep ahead fra, we cn imine tesa AS sc, we cn et th las fo forecaeleor ead be dened by get he ‘apis ese of mean eased erry te los i ef Neverthe 0 allo the tos Fact toe general we en writ te ie in opr on wing madd ‘vers mode 208d = s(e,)~ ste). The mea low canbe obtained a a= fia ae an) Unde dtp qa at che ae of ze Sie 2 Stent et el tan ea an cect Seen gn Fae ces eee Se na ee ee ee Sirtuatee see a a atte bet eee re erneienereu asian eae Score eee eee has hones cy aera a age ee oy aot Sag i Srna sete ce “Tench ingen psn sue Srn td inne oracle nas srasoeeaes ee eee SONIA BAe Stee teen 9 eG Tee ap rey el ope nce ee Tt SETS las ede yr tems at Shah carer nel key Lvmine Beaks se ee eo ee eee DM = 21 Yq FI FED as) Compare the supe valu of 248) 0 satiate with 1 degrees of eedom.® Ie is also posible to use the method for fatp-ahead forecast If Ce) nd (en) leno tre sequence of ep ahend frcartthe BM sisi DM = Tog Hin soap aH AGG [An example showing the appropriate use of the Granger-Newbold and Diet Maran tests proviged in he net section. 10. A MODEL OF THE PRODUCER PRICE INDEX “The ARMA eatimstions performed in Seton 7 wee aiot to sighs, fe acts, we rarely find & data seis eesely conforming to 2 theorecl ACT oF PACE. This secon ‘> intended to iste sme ofthe ambiatesfequey xcounteed in the Box- Jenkins techni. These ambgutis may lead Wo aeally ‘Skilled econometrcian o estate wesc ie tne sein wing vy erent [ARMA proseser Many ew the necessity of lg on te resarher uot hlerperince a serious meanse of process ta desigoed tobe etic Yer if you make reasonable choses, you wl seas mals hat come ery lose © Tris wef io tlstote te Boxcieakies modeling pocedte By eimai 2 the U'S. money Supp et messed by Mss a deciely upward wend. These, alee MINSA, ‘contained on tele QUARTERLYXLS, You can ae he it flonan i Soathe dcssion oom: The gai change shown the soli ire apts et ‘onary Nevers healer seasonal ptm tthe se fe fot et {erforany year analy igh thant raja antes “This ombration of tong sensory and anton fen uh in 600 ‘ome dat, Toe ACF fora process wth song sana sara fe 4 Mon ‘Sssonal proces the main erences he spe tre 2, mates ‘ap dey, We iow tts nessay to diferente the opie change ‘te nonstationary process Silay, the autcoreltios the seal as dot ‘ey is neces to take he ston cierene sot teste utcorcations treo dared by the taser effec: The ACF and PACT forthe prot ae ot MI tne show Panel) of Figure 28 Forno, jst foe on the staat he ‘sonal lags. Al seasonal autacosstons rare an show no ene oa. ance py 68,402.99 Oaiv py 0-2, ry Oa ag” 049. Tete “taconite fc hehe change Mf one Chats ese othe ext is ot as pronounced she chang between the fourth quer and other guoor= “The fist stp in the Box-Jenkin read so afm th aa at ake staonary. A sue, agar antonio te help esse can en ‘he oninear end in MI Let, denote he log of MI. A mented above Ft irene ofthe sequen, tne by the soli ne in Figure 2.7, apes testatony However remove he ong teal persistence nthe i wend {© ake te seasonal ference: For quarry dt, the bessoal erence 9) Sine the ore of direncing i nlevant, ve can frm he wanton sequence mp1 EXt Ey, Cl pert ree sessoume 97 “Ths, we ute he seasonal iene ofthe fit ifeence. The ACF and PACE forte oy} ssguene te shown im Panel (9) of Figure 2; the popeies of this ‘eves reach more amenable the Dot-lenkiea methodology. Thesuacoreaion {Sed pata suncorelan forte ft fw ing ae song sugaeive fn ARO rcee (p= Opp = 0.1,and opp 0.0) Recall tat he ACF fran ARGO [roces wi decay od the PACE il a sor afer tag Given tat x= 28 Pre ODI, day= "034, and dng 0.28, thee evidence of reaming scan ‘Be tm saqonce, Te seal en emt ly en efor of ay MA cet ficient since the astocorelation utr io zero whereas the” PACE. docs ot ‘Novena i bes etinate several te mole ad then select he Best Model ARI) wih Seasonal MA mirage th Cady vam, +6, Model 2 Mulipetve aoreressve monags UDC ate} Med 3 Malpieaive Moving Arr ‘The pit entiates of the coficets ll imply stingy and ive Morgner are at ast st wanda devin rm sro. However the dane sal sat at mae! i peered Mods hs the et in hath he (Ges of squared rae (SSR). Moreover, he Ottis er as 4,8 and 12 inate thatthe rsd autores re gta Inconel cr ‘irs ty ode 2 spt he gL an U2 we sie $b 007 and 0.02 level Tin because te mulpcatve ses atoregresie (SAR) term does not sdegnay cape the mona pastor. A SAR ter pes tcreressive dy fom prods imo pesiog =| In Piel () of Figure 28 te vate myn ay ams» 5 Aas as usar some ie) Gar (ewer) 220 oar zaa7 foo)fy i-0.28 bat ino eo, A sc, a muipcatve esol moving average (MA) ser sore appropriate Mode 3 propel caps he easel ptr, ba he MAC) oon doe ot egret args dey resent atest gs Other \dagrost mett, icing siting the supe, meet ta ede! pop "The ovto-apeforeant re shown in Figue 39. To creas the one ous ‘wehestepateod forecant, mocel | wit esd ever the fl sample prod 196193 ~ 200201. The etinated mele = 0:529m5 + 6)=075854 ew) ‘Given thm mngny = 0.00795 andthe resol fer 2001-02 was 99119 (ie ag = 010119) the fess of m2 0.00190. Now, thi foxecat nd ths value of Zang to foreast my You can contin in thi fathion so sto obaa ‘he onto sample fren fort Ym) segunce: Alou you do hot have the ‘residuals for prods Hoyo 200201, you sua snp set oecsted ales of ‘eo. The vik to forecasting ature ales of MI fom th fm stauene ito sam ‘he changes andthe seasna changes sas to obo te logarithm othe eect ‘ales of MI. Since m= (1-—£Xt = Ll flo that he vl of) an be baie fom m+ My) nth) Inyo fit 1 oe fae ested values ar plowed in Figure 2.9, “The procedures ilstted inthis example of iting & mode to highly sesons! tae pc many oer ees. With hl seasonal da cesar 0p Dement he Boe-lentine mein 1. Inthe idenitcton sage, its wully necessary to semonallydiference the daa alto check the ACF ofthe renallan series Ofte, the Sonalyciferened data wl nthe stony nsoh instance, the data ‘may aso need tobe ia iforence 2. Use the ACF and PACF io ientity penal modes Try to extmate mod le with low-order nonsatonl ARMIA cote Cans oth adv nd mlipicatve sean Allow the appropriate fra estat a I deamnined bythe varios diagnose stat i] ‘A compact notation has ben developed tht slows fr he fice represent im of inate models. As in previous sets then iernce of ie fe Sopot by A Hence, B= Abi rad) somber ee ‘A sesonadiferece i denoted by, where «the period ofthe dla. The ‘a sch seasonal diference ie 8° For ecampia, ie wat the Second aetna Ah = B6,-9i-2) ny 4% Sena ~Opsa ~via) Brant Hae Combining the two spe of dfrencing ye A482. Mukiptcive models ae wren in he fers ARIMA gs sO There p and he nonsssonal ARMA coe {1 number of noncaina direc ‘P= numberof multiplicative asnepessvecofcens = number ofsesznadiferences (0 numberof mulicatve moving rage coon = sesonl pid ‘Using this notation, we can ny tha the ited mde PP san ARIMAL, 1 (0,1, mode, Moreover the value of mean be wien as my= AY nh) Ty ‘plied wrk the ARIMA 1, Of, 1), ne ARIMA(D 1,0 1, Dy des ‘seers rutnl: the ater ie calle the iin od! ever since Bo an Sein (0976 used tis model analyze atin vel da 12. SUMMARY AND CONCLUSIONS ‘Toe feeso te B-Jein(197) appr ie tion sion gr Ihe enon age he sare plod adh sep scone eps seoccin cee Nitra ec cn pg cnr teeny a For ey persed Ce om me Chute rem sn ode cute ado a nce “hem morn trio oh oy dase ‘nia compared veteran sea Awol ute ee spo ‘rons has ofc py sat nd vc se SeWe) he esi hat oposite white nie rcs 6) fas ofc ht do me i et elon es . oe fsample fre esi id yoursel? resing he Iwi one. of oseons sen aka te Hansa shel Gn Inia te amd thogh epee. The seca me sd of hs spe me {gnednpie you toaph he Spr of ac oul ecoume mourn eee QUESTIONS AND EXERCISES 1. nthe contig ump of Sto | yor sveage Wings cn es a (eam donted 1. Pat ar Find tn) conden of 6.2 Find eovtny whem al Cov 2 Subine (210 nt j= oy Show ah reign an dey, Fina por slain pen at ay |= Sw toon (210 by nadine enor a pasos Fae Liar, BE Bhbgea mento) Covina) wh ep eons dy amd ds ‘nthe sane ~ Determine he fre tie: Fay The aero te difeece ‘ewe jy aE, Deine ne toa te oe) sequen Find eh tefl at Beef fr) 0) 2 Find the ine pcb dsason oe andy ea en pbs = y= 9), pokes yrs) grader toy 0) 1 Plc tie lone Enh By Oe =), B= vars ~ nd) Comer eto fies wy = yl Fd lym) a Be, oS 1 Find eve fel ios tht ete (eqns nny, © Given your ane pt, tbe conga fr ey seen utsnonsanoeemeaes 101 rent wots Co Fin By, Bt i 08 Ets esd i, ote 10 slr eas A pes ein ‘Sian 7. Ue ths ero pv te wt ess Nobu iene ‘handing md adie, or ones cl oy pyre se oe): 12” Pe tye ir es Ds hots aren eaten 1 eniy tthe 1 cote oth AT ant PACK lon ime-Box 0 Sui: 8) = 17.58 Qt) = 19784, 00 = 20.28. eth antsy th ren given Tbe 22 Stnderd Err _1Suate_Probiiy ‘geo OSes OW = SDT QUG)= TSH Bs) B0aeN3 Estos testi tan ARMA, 1) paces wot en et You ube: Content Extn Stanard Errore Probab [ARDMACT 1) pce ed Seon 7 Ths i ened YU ste oe Golan Steins rte ACH induc PACPeceescuoes Vo102 cuarrens sumonanrrnesenesmones rig erent in aie, ine he procs nga pre MAG) mo. Yu shal CoucetFnate Standard Fiver +Sttnc_Probabiti ‘Way ae npr DS ar (46) 284771, Sian ee 0007538 (Bie) = 3 ac Sigieanes evel on (2t)= eb Space el Otenom0 4: Conpae be MA) whe ARMAC 1 9 Thethinteatnm in fle SIM 2XLS conte 100 vals ofthe sed AR) [resin Te ea i pero sSulacy epson bo ccd he) 1 Pot ee sequence sant, Very the ACP andthe PACE cece pated InSacion?Conyre te spl ACF and PACT tote how of thao [ARG pece ‘Erte a an AR pres, Yusha dt ima AR) naa ea Why pan ARG) made agua? Goi ARMA psn eerie one AC PAE ad ‘ize ang-Box Sanne ow ag ARNT od sng (4 siete see aan ARQ) proces veri th repr ne we not spraset ie {c) aera te of th Carved) tere If Wo 04 fb ‘ute thesolon for no the formula forthe log ketone obtain {S-01» J no=EmamZme $1 [Now tt weave exressd fin tems ofthe cbuerable (sre t's pos etn select vals of and that mime he ae of L,Ulibe OLS, 08 ‘ctl ke te patial eivaive of awa pect to Pande! yon wl ot ba Pleated in higher-reer MA) proves. Neves, computes can we Diet [teva sxc alginate values of and ht mania APPENDIX 2.2: MODEL SELECTION CRITERIA ‘poten etig sno paralry wel sted to testing ton nated model. For ‘ample, fou waned io chore eaten an AR() and ap MACH you sold extinatefn ARMA(I, 2) and then uy to test the MA(2) coins wept zeo ‘Aieronively, you sould ty. to reatit the ARG) coefiint tol 200 ‘Nevers, the method isan becuse i ecesatesextimating the Over ‘mcaiaed ARMA(I 3) noel ted, model sleson eri uch the ATC nd the SBC, can heared ta choose between alternative model Sach Movel Ses ‘Son eres can be vewed as measures of goodnet ff ha include a cs. oF ‘ely, fr ech parameter esimate, “Onereaon oro enable to have an ovepurancterized mols tht forest ‘ovr wave near ea reste aria fom parameter extiration Inter ‘tons smal ml to hve beter ours pcormance tar large mos ‘2b'Stppe ta the actual date genrting process (OUP) the ARC) mode! a isknow, the ove sepahas feet of 1 y= Hen te ean cuore eect re eth Homever, when a esimated ‘om he t,he one-eyed orcas i lence, th mean squared Fran or edition, eee MSPE = £3 dy?" = Bln, ay) © eP® Sine ended of 3 andy follows ha Fala ayP +0" Enea) Alaa oy? +08 Since £40 ~ 2 ay postive armeter vnceraiy combs 0 fre ester var in tesa rca eer xe The pot that ‘Som punter extatoncotite to fiers evr variance. Moreover, the ‘oe pam exits, reser the parte nce ea) how (Garte probln a parcuay acne nal campes Sir arg) 22/2) inte ample vata) = Efe 1)F = (hw los Ailey? +08 ste Thao? 20 err “Ths, 6 Tinreass, the MSPE approaches ‘The Fis "0 Prediction Error (FPE) Criterion “The FPE cern scks to minimize the onesteprahend mean Squared prediction tire Now cose the ARG) proces you use the anuent inthe previous secon, the MSPE canbe shown to be slo use ‘We dont now the re variance However, an be replaced by i bi sed enimae SSRI -p) 0 Bet FPE=[1 > /mitsseirp) Selec so ato minimize FPE. We cn use log and ate ht a pT) a be spprximated by Hence, ie posabe to slot to mine (P+ WSSR) 07-9) ‘abi the same minimizing p+ TW(SsR) ~ Trp) inf pT te problem can be weten in tems of Selecting p Sie inp) p+ TwSSR) la +p TgSSR) +29 The AIC and the SBC ‘The more general AIC sls he (I+ p +9) parameters of an ARMA mod 30 a Imnimize he log ikelod urcten including penny fr ach pra tint ‘AIC™ 2 nmasimized value ofl iketnoad (1+ p+ 4) Fora gen alu of 7, selesting the vale fp og 04 minimize (AIC) Iseuivalee te selecting pa 0 ao minim te am Pin SSR) +241 pra) ‘Notice tha ig ~ 0 and there so tere ths teresu otaned sing te PE, Miniizing the value ofthe AIC pis hat each rite preter els ‘bev and cot Clay benefit of ding aater parumete sth he aloe SFSSR reduced The cont tht Spres of ecm re reduced ad ere aed rameter uncer Ts, adding dons parses wl decree (SSP) bat ‘wil increase (t» p* 9) Tie AI alows yu to a88 pratt the ria st (i the magia costs 2 foreach preter exited) gals Ie magia benefit he SBC inorperstes there pony (1+ p19) nl To ute SBC, Tin SSR) =(1 =p+¢) W(?) For any tesoable sample si, nF) > 219 tht te magia os of wig prantrs sing te SBC exes tht ofthe AIC Hee te SHC wil et a mare Farsmorious mode han the AC. Ase in he tent the SDC empire Empl prope, spout prove ht he SBC i eynpoialy concen ‘he AIC saad ward sles an overntercn mde Howeves Mets Cals "dies hve shown tht sal ape the Alcan work te ane SBC