Part 6/7 Likely Qs Flashcards
What classes of models are these examples of?
The first model
is a random walk model without drift.
The second model
Second is an autoregressive model of order 1 (AR(1)).
The third model
Third is a moving average model of order 1 (MA(1)).
What would the autocorrelation function for each of these processes look like?
For the random walk model, the ACF would be very slowly decreasing over time, indicating a high degree of persistence.
For the AR(1) model, the ACF would exhibit an exponential decay, decreasing rapidly at first and then more slowly at higher lags.
For the MA(1) model, the ACF would show a significant value at lag 1 and then drop to zero or become non-significant for higher lags
Calculating forecasts
Look in book
What issues arise when testing for a unit root if there is a structural break in the series under investigation?
Reduced Power of the Test: The presence of a structural break can reduce the power of traditional unit root tests, leading to a higher likelihood of incorrectly failing to reject the null hypothesis of a unit root when, in fact, the series is stationary around a break.
Bias in Test Results: Structural breaks can cause tests to be biased towards not rejecting the null hypothesis of a unit root, because the break can be mistaken for a unit root behavior, misleadingly suggesting persistence in the series that is actually due to the structural change.
