Term 2 lecture notes 2 autocorrelaton Flashcards
What is Autocorrelation?
It measures how today’s value of something is compared to t-1 or t-2 etc
What does the ACF do?
It plots correlation p(zt, zt-1) = cov(zt, zt-1) / sqrt v(zt) . v(zt-j)
gamma j / gamma 0
What is gamma j?
What is gamma 0
Cov(zt, zt-j) = gamma j
V(zt) = gamma 0
What allows p(zt, zt-j) = gamma j/ gamma 0
In reality this = cov(zt, zt-j) / sqrt v(zt) . v(zt-j)
as stationarity means v(zt) = sigma squared for all t
V(zt-j) = V(zt) so then denominator = V(Zt)^2
if this is squarerooted it is V(zt)
therefore it because gamma 0
What can p(zt, zt-j) also be written as?
what happens as j gets bigger?
What is p0?
= pj
as j gets bigger pj tends to 0
p0 = 1 as cov(zt,zt)
What does the autocorrelation function plot graphically?
Explain what this graph is showing?
x axis = j
y axis row j
At period 0, x axis is at 0 and y axis is at 1 as it is the correlation with zt and itself
At period 1 x axis is 1 and then next value
In words how can the autocorrelation function be remembered?
after a shock in period 0 how much of it is remembered j periods later
Gives a pictorial representation
What does it mean if in a graph a row j is negative?
it means it has a negative correlation with the shock but could be persistent
What is a white noise process?
What is the functional form and what are the assumptions?
A perfectly unforcastable process that has no information in it whatsoever.
zt = epsilont
assumptions
E(zt) = 0
V(epsilont) = sigma^2
Cov(zt, zt-j) = 0 j is not equaled to 0
Varies normally (0, sigma^2)
How do you graphically see a white noise process?
x axis j
y axis row j
cross at rowj = 1
Then all the j are 0
What can zt be?
Some series eg inflation
or some residuals
What is the set up of an AR(1) model?
What is the most important condition?
- Zt = phi . Zt-1 + epsilon t
assumptions
E(epsilon t) = 0
V(epsilon t) = sigma squared
Cov(et,et-j) = 0 for j not equal to 0
- abs value of phi less than 1 for it to be stationary (roots must lie within unit circle)
this implies zt is stationary so:
E(zt) = mew
V(zt) = sigma squared
Cov(zt, zt-j) = gamma j
Graphically what does the AR(1) model look like?
What does a negative phi pattern look like specifcially
What is pj in the AR(1)
with phi > 0 Smooth geometric decay to 0
with phi < 0 zig zag decay to 0
pj = phi^j
What does phi measure in AR(1)
What does it mean if phi = 0.9
0.5
What does it mean if phi is negative?
The persistence of a shock
shock is very persistent
effect of shock halves every period less persistent
if phi is negative it means the shock has a negative impact (negative relationship with lagged zt
What is a way in words to describe a AR(1)
When you have been shocked /shoved off equilibrium path how long does it take to get back on equilibrium path.