Time Series Analysis - Reading 6 Flashcards
What is a time series?
is a set of observations for a variable over successive periods of time
What is a linear trend and how to represent it?
A linear trend is time series pattern that can be graphed using a straight line. The simplest form of linear trend is represented by the following linear trend model :
y_t=b_0+b_1(t)+e_t
*via OLS
How can a time series that exhibit a exponential growth can be modeled?
y_t=e^[b_0+b_1(t)]
ln(y_t)=b_0+b_1(t)
Why should s linear trend should be used?
around the trend a time series that best modeled with a log linear trend model ratter than a linear trend model
What is the limitations of. trend models?
One of the assumptions underlying liner regression is that the residuals are uncorrelated with each other. A violation of this assumption is referred to as autocorrelation -> May be the case that even a log- linear model is not appropriate
in the presence of serial correlation. In this case, we will want to turn an autoregressive model (AR).
*DW to test for serial correlation
What is that will make statistical inferences valid about a time series model?
covariance stationary
What makes a time series covariance stationary?
- Constant and finite expected value
- Constant and finite variance
- Constant and finite covariance between values of any given lag
What happens when a AR model exhibit serial correlation?
The AR model is not correctly specified. When the error terms are correlated, standard errors are unreliable
and t- tests of individual coefficients can incorrectly show statistical significance or
insignificance
Steps for specyinfing an AR model?
- Estimate the AR model being evaluated using linear regression
- Calculate the autocorrelations of the model’s residuals
3, Test whether the autocorrelation are significantly different from zero
*standard error= 1/(T)^0,5
*t=autocorrelation/1/(T)^0,5 with N-2 df
What is a mean reverting level?
A time serie exhibls MEAN REVERSION if it has
a tendency to move toward is mean. In other words the time series has a tendency to decline when the current- value is above the mean and
rise when the current value is below the mean. If a time series is at its mean - reverting level, the model predicts that the next value of
the time series will be the same as its current value.
x_t = b_0/(1-b_1)
*all covariance stationary series have finite mean-reverting level, lag coefficient less than 1
What are in sample forecast?
In -sample forecasts are within the range of data used to estimate the model, which for a time series is known
as the sample or leak period. In-sample forecast errors are, where t is an observation. within the sample period.
What are out-of sample forecast?
Out-of-sample forecasts are made outside of the sample period. In other words, we compare how accurate
a model is in foresting the y variable value for a time period outside the period used lo develop the model. Out-of-sample forecasts are important because they provide a test whether the model adequately describes the time series and whether if has relevance in the real world.
For what is Root Mean Squared Error is used?
The Root Mean Squared Error criterion (RMSE) is used to compare the accuracy of auto regressive modals in fore
casting out-of-sampie values.
Tha model with the low RMSE for the out-of-sample data will have lower forecast error and will be expect to have better
predictive power in the future.
What is the tradeoff between shorter time periods and long time periods in financial data?
Models estimated with shorter time series are usually more stable than those with longer
time series because a longer time sample period increases the chance that the underlying process has changed
tradeoff between incremental statistical reliability
What is a random walk?
It a time series follows a random walk process the predicted value of the time series in one period is equal; to the value of the series in the previous period plus a random error term