Chapter 3.1 Flashcards
Formula for k-th order covariance
γ_{k} = E[(y_{t} - E(y_{t}) (y_{t-k} - E(y_{t-k})]
Formula for k-th order autocorrelation
ρ^{k} = γ^{k} / γ^_{0}
ρ_{0} = 1, ρ_{-k} = ρ_{k}
What is the empirical autocorrelation function?
The set of all autocorrelations ρ^_{k} for k = 1,2,…
What do non-zero autocorrelations imply?
That y_{t-k} may be a useful variable to include in the regression
What are the 3 properties of a white noise series?
- E(ε_{t}) = 0
- E(ε_{t}^2) = σ^2
- E(ε_{s}ε_{t}) = 0
Residuals being a while noise process is a minimum requirement for a time series model to qualify as “adequate”
How to rewrite AR(1) model in terms of shocks?
y_{t} = ϕ_{1}^t y_{0} + Σ{i=0, t-1} ϕ_{1}^i ε_{t-i}
The effect of the shock is determined by ϕ_{1}^i
What does the shock have a transitory effect? What is a transitory effect?
When |ϕ_{1}| < 1, ϕ_{1}^i -> 0 as i increases
Effect of shock decays and dissapears
What does the shock have an explosive effect? What is an explosive effect?
When |ϕ_{1}| > 1, the effect of shocks ε_{t-i} on y_{t} increases with i
Effect of shock grows with time - typically exclude explosive case in TSA
What is the effect of the shock when ϕ_{1} = 1?
AR model simplifies to y_{t} = y_{0} + Σ{i=0, t-1} ε_{t-i}
Shock ε_{t-i} has same impact on all observations y_{t-i+h}
Shock is said to have permanent effects
Conditional mean formula
E(y_{t} | Υ_{t-1})
What is a necessary and sufficient condition (<=>) for stationarity in the AR(1) model?
|ϕ_{1}| < 1
What are the correlations between y and ε? (Important in derivations)
- E(y_{t}ε_{t}) = σ^2
- E(y_{t}ε_{t+j}) = 0 (current observation not correlated with future shocks)
- E(y_{t}ε_{t-k}) ≠ 0 (current observation is correlated with past shocks)
What is a property of the unconditional variance in AR(1) models?
The unconditional variance is constant:
E[(y_{t} - E(y_{t})^2] = E[(y_{t-1} - E(y_{t-1})^2]
What is the conditional variance of an AR(1) model?
E(y_{t} | Y_{t-1}) = σ^2
What is the trend in the autocorrelations of an AR(1) model with |ϕ_{1}| < 1?
They decline exponentially towards zero