Chapter 6 Problems and Complements

1. (Selecting an employment forecasting model with the AIC and SIC) Use the AIC and
SIC to assess the necessity and desirability of including trend and seasonal components in
a forecasting model for Canadian employment.
a. Display the AIC and SIC for a ariety of specifications of trend and
seasonality. !hich would you select using the AIC" SIC" Do the AIC
and SIC select the same model" If not# which do you prefer"
$ %emar&s# suggestions# hints# solutions' A ariety of answers are possible# depending
on the specific models fit# but the upshot is that trend and seasonality are not important
parts of the dynamics of Canadian employment.
b. Discuss the estimation results and residual plot from your preferred
model# and perform a correlogram analysis of the residuals. Discuss# in
particular# the patterns of the sample autocorrelations and partial
autocorrelations# and their statistical significance.
$ %emar&s# suggestions# hints# solutions' (ecause trend and seasonality don)t contribute
much to the ariation in Canadian employment# the residuals from trend*seasonal
regressions hae properties ery similar to the original series.
c. +ow# if at all# are your results different from those reported in the te,t"
Are the differences important" !hy or why not"
$ %emar&s# suggestions# hints# solutions' Any differences are li&ely unimportant.
-. (Simulating time series processes) .any cutting/edge estimation and forecasting
techni0ues inole simulation. .oreoer# simulation is often a good way to get a feel for
a model and its behaior. !hite noise can be simulated on a computer using random
number generators# which are aailable in most statistics# econometrics and forecasting
pac&ages.
a. Simulate a 1aussian white noise reali2ation of length -33. Call the
white noise
t

. Compute the correlogram. Discuss.

$ %emar&s# suggestions# hints# solutions' 4he correlogram should be flat# with most
sample autocorrelations inside the (artlett bands.
b. 5orm the distributed lag
t t t 1
y .6

= +
# t 7 -# 8# ...# -33. Compute
the sample autocorrelations and partial autocorrelations. Discuss.
$ %emar&s# suggestions# hints# solutions' 9either the sample autocorrelation nor the
sample partial autocorrelation function is flat. 5or now# the precise patterns are
unimportant: what)s important is that the distributed lag series is clearly not white noise.
4he illustrates the Sluts&y/;ule effect' distributed lags of white noise are serially
correlated.
c. <et
1
y 1 =
and
t t 1 t
y .6y

= +
# t 7 -# 8# ...# -33. Compute the sample
autocorrelations and partial autocorrelations. Discuss.
$ %emar&s# suggestions# hints# solutions' Ditto.
8. (Sample autocorrelation functions for trending series) A tell/tale sign of the slowly/
eoling nonstationarity associated with trend is a sample autocorrelation function that
damps e,tremely slowly.
a. 5ind three trending series# compute their sample autocorrelation
functions# and report your results. Discuss.
$ %emar&s# suggestions# hints# solutions' 4he sample autocorrelation functions will damp
ery slowly# if at all.
b. 5it appropriate trend models# obtain the model residuals# compute their
sample autocorrelation functions# and report your results. Discuss.
$ %emar&s# suggestions# hints# solutions' If the model now contains an appropriate trend#
the sample autocorrelations may damp more 0uic&ly. 9ote# howeer# that the data can
hae nonstationarities other than deterministic trend# such as unit roots# in which case the
residuals from the trend regression will hae sample autocorrelations that still fail to
damp.
=. (Sample autocorrelation functions for seasonal series) A tell/tale sign of seasonality is
a sample autocorrelation function with sharp pea&s at the seasonal displacements (=# >#
1-# etc. for 0uarterly data# 1-# -=# 8?# etc. for monthly data# and so on).
a. 5ind a series with both trend and seasonal ariation# and detrend it.
Discuss.
$ %emar&s# suggestions# hints# solutions' 4he detrended series will (hopefully@) not
display trend# but it will still be seasonal.
b. Compute the sample autocorrelation function of the detrended series.
Discuss.
$ %emar&s# suggestions# hints# solutions' 4he sample autocorrelation function will
probably damp but will hae sharp pea&s at the seasonal displacements.
c. Compute the sample autocorrelation function of the original# non/
detrended# series# and contrast it to that of the detrended series. Discuss.
$ %emar&s# suggestions# hints# solutions' 4he former will fail to damp# whereas he latter
will probably damp.
A. (Bolatility dynamics' correlograms of s0uares) In the Chapter 8 Croblems and
Complements# we suggested that a time series plot of a s0uared residual#
-
t
e # can reeal
serial correlation in s0uared residuals# which corresponds to non/constant olatility# or
heteros&edasticity# in the leels of the residuals. 5inancial asset returns often display
little systematic ariation# so instead of e,amining residuals from a model of returns# we
often e,amine returns directly. In what follows# we will continue to use the notation
t
e
#
but you should interpret
t
e
it as an obsered asset return.
a. 5ind a high fre0uency (e.g.# daily) financial asset return series#
t
e
# plot
it# and discuss your results.
$ %emar&s# suggestions# hints# solutions' A stoc& return or the percent change in an
e,change rate would be a good choice. It will probably loo& li&e random noise# perhaps
with occasional bursts of olatility.
b. Cerform a correlogram analysis of
t
e
# and discuss your results.
$ %emar&s# suggestions# hints# solutions' 4he correlogram will probably be flat# as most
asset returns are ery close to (wea&) white noise.
c. Clot
-
t
e # and discuss your results.
$ %emar&s# suggestions# hints# solutions' 4he s0uared return# in contrast to the return
itself# may well be serially correlated# indicating nonlinear dependence operatie through
the conditional ariance.
d. In addition to plotting
-
t
e # e,amining the correlogram of
-
t
e often
proes informatie for assessing olatility persistence. !hy might that be
so" Cerform a correlogram analysis of
-
t
e and discuss your results.
$ %emar&s# suggestions# hints# solutions' Ditto.