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March 3, 2003
Elementary Problems
Q1. Rewrite the following time series models using the backward shift notation. Classify
each of them as an ARIMA(p, d, q) process (that is, determine p, d and q in each case).
State whether each is (i) stationary, (ii) invertible.
(i) Xt = 0.5Xt1 + Zt
(ii) Xt 0.5Xt1 = Zt 1.3Zt1 + 0.4Zt2
(iii) Xt 1.5Xt1 + 0.6Xt2 = Zt
(iv) (Xt 0.2) 1.2(Xt1 0.2) + 0.2(Xt2 0.2) = Zt 0.5Zt1
(i) Yt = Zt Zt1
(ii) Yt = (1 + 2.4B + 0.8B 2 )Zt
Q4. (i) Describe the key difference between the correlograms of a stationary AR process
and an MA process of the same order.
(ii) Derive the autocorrelation function for the stationary ARMA(1, 1) process:
(Xt ) (Xt1 ) = Zt Zt1 .
(iii) Comment on the correlogram of the ARMA(1, 1) process above.
Elementary problems should be attempted first. Past exam questions are included for exam practice and
could be attempted later. They are adapted from papers set by the Exam Board of the Institute and Faculty
of Actuaries. Papers set by the Exam Board, Faculty of Actuarial Science and Statistics, Cass Business School,
City University, are separately available.
Contact details: Cass Building Room 5071, extension 8478, iqbal@city.ac.uk.
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Q5. The AR(1) process Xt 0.4Xt1 = Zt is started arbitrarily at t = 0 with initial condition
X0 = x0 R. The sequence {Zt } is a set of independent and identically distributed
random variables with zero mean and variance Z2 .
Q6. (i) Show that {Wt } is (weakly) stationary if Wt = Xt + Yt and {Xt } and {Yt } are
independent and both are (weakly) stationary.
(ii) The logarithmic (or geometric) rate of inflation Xt is calculated from the consumer
prices index CPIt as follows: CPIt = CPIt1 exp(Xt ). It is frequently modelled as
follows: (Xt ) = (Xt1 ) + Zt .
Show that ln CPIt is then an ARIMA(1, 1, 0) process.
Xt = + et + 1 et1 ,
Xt = + 1 (Xt1 ) + 2 (Xt2 ) + et ,
(i) (a) Obtain an equation for 1 in terms of 0 and 2 by substituting for Xt in the
equation 1 = Cov [Xt , Xt1 ].
(b) Derive similar equations for 2 and 0 .
(c) State the autocorrelation function k of X for k = 0, 1, 2.
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(ii) Suppose that the equations derived in (i) for 1 and 2 are used as the basis of
an estimation procedure: estimates
1 and 2 are defined to be the solutions of
those equations when is replaced by a suitably-defined sample autocorrelation
function r.
Solve these equations.
(Exam Board of the Institute and Faculty of Actuaries)
Yt = + 0.8(Yt1 ) 0.4(Yt2 ) + et ,
(i) Calculate the autocorrelation function k , and the partial autocorrelation function
k of Y for k = 1 and 2.
(ii) State, without performing additional calculations, what you would expect to find
if you were to calculate k and k for larger values of k.
(Exam Board of the Institute and Faculty of Actuaries)
Q4. (i) State the purpose of each of the stages of identification, estimation and diagnosis
of an observed time series, according to the Box-Jenkins approach to time series
modelling.
(ii) Describe briefly three criteria you would use to determine the most appropriate
value for the parameter d, the order of integration.
(iii) In the context of fitting an ARIMA time series model, what is meant by the term
parsimony ?
(iv) Fitting an AR(1) model to the annual force of price inflation in the UK over the
period 19191997, the sample autocorrelations of the 78 model residuals for lags 1
to 10, denoted by r1 , r2 , . . . , r10 are found to be:
-0.07, 0.08, 0.09, 0.20, 0.07, 0.18, -0.01, 0.05, 0.13, 0.01.
Carry out a portmanteau test and state your conclusion.
(v) Also, the set of model residuals contains 48 turning points. Carry out another
goodness of fit test on the model and comment on your results.
(Exam Board, Faculty of Actuarial Science and Statistics, Cass Business School, City University)
Q5. The movements of a consumer price index are to be subjected to time series analysis
with the aim of forecasting future behaviour. The index is calculated monthly.
(i) Explain whether you would expect to fit a model which included (a) a trend term,
(b) a seasonal effect.
The values {xt : 1 t n} are the residuals which remain once any trend or seasonal
variations have been removed. An ARIMA(1, 1, 1) model is to be fitted to the {xt }.
(ii) (a) Assuming the ARIMA(1, 1, 1) model is correct, write down an equation for
Xn+1 in terms of the white noise process {et : 1 t n + 1} and the
observations {xt : 1 t n}.
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(b) State the parameters of the model.
(iii) The Box-Jenkins procedure defines the k-step-ahead forecast for X to be
x
n (k) = E [ Xn+k | xn , xn1 , . . . , x1 ] .
(a) Derive the 1-step-ahead and 2-step-ahead forecasts for X for the ARIMA(1,1,1)
model, assuming that the values of the parameters and the value of e0 are
known exactly.
(b) Evaluate the prediction variance Var(Xn+1 x n (1)), again assuming that the
values of the parameters are known.
(iv) The most elementary form of the technique known as exponential smoothing pro-
duces at time n a 1-step-ahead forecast xn defined by
xn = xn + (xn1 xn ).