Exploring Data Patterns With

Autocorrelation Analysis

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 Seasonal Data

If a series is seasonal, a pattern related to the

calendar repeats itself over a particular interval of
time (usually a year).

Observations in the same position for different

seasonal periods tend to be related.

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 Seasonal Data (cont.)
If quarterly data with a seasonal pattern are analyzed, first
quarters tend to look alike, second quarters tend to look
alike and so forth, and a significant autocorrelation
coefficient will appear at time lag 4.

If monthly data with a seasonal pattern are analyzed, a

significant autocorrelation coefficient will appear at time lag
12.

That is, January will correlated with other

Januarys, February will correlate with other
Februarys and so forth.
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 Example 1

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 Figure 1 : Example 1

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 Figure 2 :
Example 1

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 Figure 3 : Example 1
First quarters tend to
look alike, second
quarters tend to look
alike and so forth, and a
significant
autocorrelation
coefficient will appear at
time lag 4.

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 Box-Jenkins Methodology

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 Box-Jenkins Approach
Using historical data to
1 Tentative Identification identify an appropriate Box-
Jenkins model

2 Estimation Estimate the

parameters

3 Diagnostic Checking Various diagnostics are

used to check the
adequacy of the
tentatively identified
4 Forecasting model
The final model obtained
is used to forecast future
time series values

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4/24/2018 STQS 2233 Statistical Modelling 10
 Introduction
Stationary
Non-seasonal Differencing
Box-Jenkins
NonStationary
models
Use the behavior of
these functions
Sample Sample partial
autocorrelation autocorrelation
function, SAC function, SPAC
AR Identify an appropriate model
MA and forecasting future time
series values
AR & MA
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 Stationary & Non Stationary
Time Series

Determine
Transform the series
If it is not whether the
into a series of time series
we wish to forecast is
stationary time series STATIONARY

A time series is stationary if the

statistical properties : mean and
variance of the time series are
essentially constant through time

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 Remember…

Nobel Prize for Economics in 2003 awarded to Rob

Engle and Clive Granger, who highlighted the
importance of stationarity in time series data.

There are substantial implications for empirical

modeling with time series data which is not stationary.

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 Properties of Stationary
Time Series
Xt is stationary if

1 the series exhibits mean reversion

2 Xt has finite variance which is not

dependent upon time.

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 Properties of Stationary
Time Series (cont.)

3 Covariance between two values of Xt depends

only on the difference apart in time.

E(Xt) = μ
Var(Xt) = σ2
Cov(Xt ,Xt+k) = χ(k)

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 Property 3 of Stationary
Time Series

Covariance between two values of Xt depends only on the

difference apart in time for stationary series.
Cov(Xt ,Xt+k) = χ(k) (covariance is constant in t)

(A) Correlation for 1980 and 1985 is the same as for

1990 and 1995. (i.e. t = 1980 and 1990, k = 5)
(B) Correlation for 1980 and 1987 is the same as for
1990 and 1997. (i.e. t = 1980 and 1990, k = 7)
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 An Example of Stationary and
Non-Stationary Time Series
White Noise Process: Example of Stationary Series.

Random Walk: Example of Non-stationary Series.

Economic time series are typically non-stationary

(i) Share Prices
(ii) Exchange Rate
(iii) Income
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 Example 2 :
Stationary Time Series
WHITE NOISE PROCESS

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 Example 3 :
Stationary Time Series

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 Example 3 :
Non-Stationary Time Series

Share Price
Exchange Rate

Income

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 Properties of Non-
Stationary Time Series
In contrast a non-stationary time series has the following
characteristics.
(1) Does not have a long run mean which the series
returns
(2) Variance is dependent upon time and goes to infinity
as the sample period approaches infinity
(3) Correlogram does not die out - long memory

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Example 4 : Non-Stationary
Time Series UK GDP (Y ) t

The level of GDP

(Y) is
______________
and the mean
increases over
time. Hence the
level of GDP is
an example of a
______________

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 Property 1 of Non-
Stationary Time Series
RANDOM WALK : Xt = Xt-1 + ut ut ~ IID(0, σ2 )
Mean: E(Xt) = E(Xt-1) (mean is constant in t)
X1 = X0 + u1 (take initial value X0)
X2 = X1 + u2 = (X0 + u1 ) + u2
…
Xt = X0 + u1 + u2 +…+ ut
E(Xt) = E(X0 + u1 + u2 +…+ ut) (take expectations)

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 Property 2 of Non-
Stationary Time Series
RANDOM WALK : Xt = Xt-1 + ut , ut ~ IID(0, σ2 )

Xt = X0 + u1 + u2 +…+ ut

Variance: Var(Xt) = Var(X0) + Var(u1) +…+ Var(ut)

= 0 + σ2 +…+ σ2
= t σ2

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 Example 5 :
Non-Stationary Time Series

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Example 6 : Non-
Stationary Time Series
UK GDP (Yt) – correlogram
(Check Example 4)

For non-stationary
series, the
Autocorrelation
Function (ACF)
_________________
_________________
________________.

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Example 9.1
Table 9.1 Example 7 Variables : y

Graphs Sequence

120 weeks

The time series is nonstationary

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 Continue…
A plot of n time Transform the series Taking
series indicates the into a series of the
values are non- stationary time first
stationary difference
series

The first differences of the time

series values y1, y2, …, yn are :

The second differences of the time

series values y1, y2, …, yn are :

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Example 9.1 Next…

The first difference is stationary

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 Or…

120 weeks

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 The Sample Autocorrelation
Function (SAC) Example 9.2
&
Example 9.3

The SAC at lag k, rk is

Box-Jenkins forecasting
models are tentatively
identified by examining
the behavior of the sample
autocorrelation function
(SAC) and the sample
partial autocorrelation
function (SPAC) for the
values of a
_______________________
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_______________________
 Using The SAC To Find A
Stationary Time Series
Figure 9.5,
page 412

If the SAC of the time series values zb, zb+1, …, zn either

cuts off fairly quickly of dies down fairly quickly, then
the time series values should be considered
___________
If the SAC of the time series values zb, zb+1, …, zn dies
down extremely slowly, then the time series values
should be considered ____________________________

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Data From
Table 9.1 Example 2 Autocorrelations

Graphs Time Series

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 Continue…

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 The Sample Partial
Autocorrelation Function (SPAC)

Check the
formulas in the
textbook, page
416

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 Data From
Example 3 Table 9.1

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 The Sample Partial
Autocorrelation Function (cont.)
It is beyond the scope of this text to give a precise
interpretation of the sample partial autocorrelation
at lag k.

However, this quantity may intuitively be thought of

as the SPAC of time series observations separated by
a lag of k time units with the effects of the intervening
observations _______________.

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 The Sample Partial
Autocorrelation Function (cont.)

Again, in order to employ the Box-Jenkins

methodology, we must examine and attempt to
classify the behavior of the SPAC.

The SPAC, like the SAC, can display a variety of

different behaviors.

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 The Sample Partial
Autocorrelation Function (cont.)
First, the SPAC for a nonseasonal time series can cut
off.

We say that _________ at lag k exists in the SPAC if

rkk, the SPAC at lag k, is statistically __________.

Read more about the SPAC

from your textbook,
page 417

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 Questions?

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