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(a) * 0.6
(b) 0.3
(c) 0.0
(d) 0.4
(a) 0.2
(b) * 0.23
(c) 0.5
(d) There is insufficient information given in the question to form more than a one step
ahead forecast.
(a) 0.4
(b) 0.0
(c) * 0.07
(d) 0.1
6. Which of the following conditions must hold for the autoregressive part of an ARMA
model to be stationary?
(a) * All roots of the characteristic equation must lie outside the unit circle
(b) All roots of the characteristic equation must lie inside the unit circle
(c) All roots must be smaller than unity
(d) At least one of the roots must be bigger than one in absolute value.
8. If a series, yt, follows a random walk (with no drift), what is the optimal 1-step ahead
forecast for y?
(a) * The current value of y.
(b) Zero.
(c) The historical unweighted average of y.
(d) An exponentially weighted average of previous values of y.
9. Consider a series that follows an MA(1) with zero mean and a moving average
coefficient of 0.4. What is the value of the autocorrelation function at lag 1?
(a) 0.4
(b) 1
(c) *0.34
(d) It is not possible to determine the value of the autocovariances without knowing the
disturbance variance.
11. Consider the following picture and suggest the model from the following list that best
characterises the process:
(a) An AR(1)
(b) An AR(2)
(c) * An ARMA(1,1)
(d) An MA(3)
The acf is clearly declining very slowly in this case, which is consistent with their being
an autoregressive part to the appropriate model. The pacf is clearly significant for lags
one and two, but the question is does it them become insignificant for lags 2 and 4,
indicating an AR(2) process, or does it remain significant, which would be more
consistent with a mixed ARMA process? Well, given the huge size of the sample that
gave rise to this acf and pacf, even a pacf value of 0.001 would still be statistically
significant. Thus an ARMA process is the most likely candidate, although note that it
would not be possible to tell from the acf and pacf which model from the ARMA family
was more appropriate. The DGP for the data that generated this plot was y_t = 0.9 y_(t-1)
0.3 u_(t-1) + u_t.
12. Which of the following models can be estimated using ordinary least squares?
(i) An AR(1)
(ii) An ARMA(2,0)
(iii) An MA(1)
(iv) An ARMA(1,1)
13. If a series, y, is described as mean-reverting, which model from the following list is
likely to produce the best long-term forecasts for that series y?
(a) A random walk
(b) * The long term mean of the series
(c) A model from the ARMA family
(d) A random walk with drift
14. Consider the following AR(2) model. What is the optimal 2-step ahead forecast for y
if all information available is up to and including time t, if the values of y at time t, t-1
and t-2 are 0.3, 0.4 and 0.1 respectively, and the value of u at time t-1 is 0.3?
yt = -0.1 + 0.75yt-1 - 0.125yt-2 + ut
(a) -0.1
(b) 0.27
(c) * -0.34
(d) 0.30
15. What is the optimal three-step ahead forecast from the AR(2) model given in question
14?
(a) -0.1
(b) 0.27
(c) -0.34
(d) * -0.31
16. Suppose you had to guess at the most likely value of a one hundred step-ahead
forecast for the AR(2) model given in question 14 what would your forecast be?
(a) -0.1
(b) 0.7
(c) * 0.27
(d) 0.75