Autoregressionmodels-uCoz.pptVIP

Autoregressive models Autogregressive Modeling Used for Forecasting Takes Advantage of Autocorrelation 1st order - correlation between consecutive values 2nd order - correlation between values 2 periods apart Autoregressive Model for pth order: Autoregressive Modeling Steps 1. Choose p: 2. Form a series of “lag predictor” variables Yi-1 , Yi-2 , … Yi-p 3. Use Excel to run regression model using all p variables 4. Test significance of Bp If null hypothesis rejected, this model is selected If null hypothesis not rejected, decrease p by 1 and repeat your calculations * * Another useful model is autoregressive model. Frequently, we find that the values of a series of financial data at particular points in time are highly correlated with the value which precede and succeed them. Autoregressive models Models with lagged variable Dependent variable is a function of itself at the previous moment of period or time. The creation of an autoregressive model generates a new predictor variable by using the Y variable lagged 1 or more periods. The most often seen form of the equation is a linear form: where: yt – the dependent variable values at the moment t, yt-i (i = 1, 2, ..., p) – the dependent variable values at the moment t-i, bo, bi (i=1,..., p) – regression coefficient, p – autoregression rank, et – disturbance term. A first-order autoregressive model is concerned with only the correlation between consecutive values in a series. A second-order autoregressive model considers the effect of relationship between consecutive values in a series as well as the correlation between values two periods apart. The selection of an appropriate autoregressive model is not an easy task. Once a model is selected and OLS method is used to obtain estimates of the parameters, the next step would be to eliminate those parameters which do not contribute significantly. (The highest-order parameter does not contribute to the prediction of Yt) (Th