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Results of Autocorrelation Analysis

Using Eviews, plot the term spread with a line chart and draw a horizontal line at value zero on the graph. Explain why the term spread typically takes a negative value
Hint: to draw the horizontal line, from a graph object, click the Line/Shadeà Type: Line; Orientation: Horizontal –left axis; Position: Data Value 0.
(2) Compute the sample ACF and the sample PACF for this series for the first 12 lags using Eviews. Comment on the pattern of the correlogram. (3) Consider three models
(i) select the best model using AIC and BIC.
Hint: Sample sizes need to be the same when comparing models with AIC or BIC. That is, use the sample period starting from 1957m04 to 2015m03 for the estimation of all three models.
(ii) Using Eviews, compute the ACF and PACF (the first 12 lags) of the residual of the preferred model, estimated from the sample running from 1957m04 to 2015m03.
(iii) Conduct Ljung-Box Q(5) tests for the residual of the preferred model at the 5% significance level.
Hint: Calculate the Ljung-Box Q-statistics by hand (i.e., use the sample ACF obtained from Eviews and show all your working) and show the decision rules used.


Compare the forecasting performance of the ARMA(1,1) and AR(3) models. The insample estimation period is 957M01 to 2012M12 and the out-of-sample forecast period is 2013M01 to 2015M03.
0 11 11
0 11 2 2
0 11 2 2 33
Model 1: y
Model 2: y
Model 3: y
a a be e
aa a e
aa a a e
- -
- -
-- -
=+ + +
=+ + +
=+ + + +
t t tt
t t tt
t t t tt

(4) What are the similarities and differences between a static and a rolling window one-step-ahead forecast
(5) What are the similarities and differences between a one-step-ahead static and a dynamic forecast
(6) Estimate the ARMA(1,1) and AR(3) models over the period 1957M01 to 2012M12.
(7) Use the estimation results of each model in (6) to provide a dynamic forecast for the rest of the sample period.
(i) What are the RMSEs Which model would you select based on the RMSEs of this forecasting method? Attach the Eviews forecast evaluation results.


(ii) For the preferred model, plot the original time series, your forecasts and prediction intervals for this period (see tutorial week 10 for an example of the graph) and comment on the forecasting results.
(8) Conduct rolling window forecasts based on the ARMA(1,1) and AR(3) models. Specifically, estimate each model over the period 1957m04 to 2012m12; obtain the one-step-ahead forecast and the one-step-ahead forecast error; continue to update the estimate period so as to obtain the 27 one-stepahead forecast and forecast error.


Hint: you could obtain the rolling window one-step-ahead forecasts and forecast errors by revising the Eviews program rolling_forecasting.prg described in Lecture week 9.
(i) What are the RMSEs Which model would you select based on the RMSEs of this forecasting method Attach the programs in an appendix (at the end of the assignment) and highlight the changes you made to the code.
(ii) For the preferred model, plot the original time series, your forecasts and prediction intervals for this period and comment on the forecasting results.

  • Calculating the ACF and the PFC of the data set

Date: 10/25/18   Time: 22:48

Sample: 1957M01 2015M03

Included observations: 699

Autocorrelation

Partial Correlation

AC 

 PAC

 Q-Stat

 Prob

       .|*******

       .|*******

1

0.957

0.957

643.11

0.000

       .|******|

      **|.     |

2

0.894

-0.267

1204.6

0.000

       .|******|

       .|*     |

3

0.841

0.158

1702.0

0.000

       .|******|

       *|.     |

4

0.788

-0.111

2139.5

0.000

       .|***** |

       .|.     |

5

0.739

0.071

2525.0

0.000

       .|***** |

       .|.     |

6

0.697

0.002

2868.0

0.000

       .|***** |

       .|*     |

7

0.664

0.092

3179.9

0.000

       .|***** |

       .|.     |

8

0.635

-0.025

3465.6

0.000

       .|****  |

       *|.     |

9

0.599

-0.092

3720.0

0.000

       .|****  |

       *|.     |

10

0.550

-0.133

3935.2

0.000

       .|****  |

       .|.     |

11

0.502

0.033

4114.6

0.000

       .|***   |

       .|.     |

12

0.458

-0.012

4264.3

0.000

Model selection

First Model

Automatic ARIMA Forecasting

Selected dependent variable: SPREAD

Date: 10/26/18   Time: 09:28

Sample: 1957M01 2015M03

Included observations: 696

Forecast length: 0

Number of estimated ARMA models: 2

Number of non-converged estimations: 0

Selected ARMA model: (1,0)(0,0)

AIC value: 0.75597960146


Second Model

Automatic ARIMA Forecasting

Selected dependent variable: SPREAD

Date: 10/26/18   Time: 09:29

Sample: 1957M01 2015M03

Included observations: 696

Forecast length: 0

Number of estimated ARMA models: 3

Number of non-converged estimations: 0

Selected ARMA model: (2,0)(0,0)

AIC value: 0.683346733664


Third Model

Automatic ARIMA Forecasting

Selected dependent variable: SPREAD

Date: 10/26/18   Time: 09:30

Sample: 1957M01 2015M03

Included observations: 696

Forecast length: 0

Number of estimated ARMA models: 4

Number of non-converged estimations: 0

Selected ARMA model: (3,0)(0,0)

AIC value: 0.660012693068

On the basis of the results from the above table, the AIC is lowest for the third model with three lags. So the best model is the third model.

Plotting the ACF and PCF for the Preferred Model

Date: 10/26/18   Time: 09:31

Sample: 1957M01 2015M03

Included observations: 696

Autocorrelation

Partial Correlation

AC 

 PAC

 Q-Stat

 Prob

       .|*******

       .|*******

1

0.957

0.957

640.22

0.000

       .|******|

      **|.     |

2

0.894

-0.265

1199.3

0.000

       .|******|

       .|*     |

3

0.840

0.155

1694.5

0.000

       .|******|

       *|.     |

4

0.788

-0.106

2130.3

0.000

       .|***** |

       .|.     |

5

0.739

0.063

2514.1

0.000

       .|***** |

       .|.     |

6

0.696

0.005

2855.3

0.000

       .|***** |

       .|*     |

7

0.663

0.085

3165.0

0.000

       .|***** |

       .|.     |

8

0.633

-0.017

3448.4

0.000

       .|****  |

       *|.     |

9

0.597

-0.099

3700.3

0.000

       .|****  |

       *|.     |

10

0.549

-0.122

3913.4

0.000

       .|****  |

       .|.     |

11

0.501

0.038

4091.7

0.000

       .|***   |

       .|.     |

12

0.459

-0.006

4241.5

0.000

To calculate the Ljung-Box for the residuals we have to use the chi square test. The Q statistics is used to test following null hypothesis:

Null hypothesis:

There is no autocorrelation up to order k:

On the basis of the results from the ACF and PACF, all the p values are less than 0.05. So, the null hypothesis can be rejected. So There is autocorrelation in the order 5 as mentioned.

  • The similarity between the static forecasting and the rolling window forecasting is that in both the model the previous data is used to forecast the future values. Based on the historical data the forecasting is done. However the major differences arise on the basis of the values is taken into consideration for forecasting. In case of the static forecasting only a fixed period data is used for forecasting. On the other hand, in case of the rolling window first the rolling window is selected and then to forecast the future values, the window in the previous period is used. For example, in rolling window, a sample rolling window a data for one quarter can be taken and based on that the value for next quarter can be forecasted. The rolling window keeps changing.
  • In case of the one step ahead forecasting and the dynamic forecasting also, the forecasting process is same, i.e taking the previous value to forecast the values in future. However in case of the one step ahead static forecasting only the actual values are used for forecasting. On the other hand for the dynamic forecasting can take into consideration the previously forecasted values for further forecasting.
  • Forecasting

Automatic ARIMA Forecasting

Selected dependent variable: SPREAD

Date: 10/26/18   Time: 07:50

Sample: 1957M01 2012M12

Included observations: 672

Forecast length: 0

Number of estimated ARMA models: 4

Number of non-converged estimations: 0

Selected ARMA model: (1,1)(0,0)

AIC value: 0.677963363957

Model Selection Criteria Table

Dependent Variable: SPREAD

Date: 10/26/18   Time: 07:50

Sample: 1957M01 2012M12

Included observations: 672

Model

LogL

AIC*

BIC

HQ

(1,1)(0,0)

-223.795690

 0.677963

 0.704810

 0.688361

(1,0)(0,0)

-260.215708

 0.783380

 0.803515

 0.791178

(0,1)(0,0)

-699.965715

 2.092160

 2.112295

 2.099958

(0,0)(0,0)

-1091.533293

 3.254563

 3.267987

 3.259762


The results from the AR (1,1) models is shown in the table above

Automatic ARIMA Forecasting

Selected dependent variable: SPREAD

Date: 10/26/18   Time: 07:59

Sample: 1957M01 2015M03

Included observations: 696

Forecast length: 0

Number of estimated ARMA models: 4

Number of non-converged estimations: 0

Selected ARMA model: (3,0)(0,0)

AIC value: 0.660012693068

Model Selection Criteria Table

Dependent Variable: SPREAD

Date: 10/26/18   Time: 07:59

Sample: 1957M01 2015M03

Included observations: 696

Model

LogL

AIC*

BIC

HQ

(3,0)(0,0)

-224.684417

 0.660013

 0.692666

 0.672638

(2,0)(0,0)

-233.804663

 0.683347

 0.709469

 0.693447

(1,0)(0,0)

-260.080901

 0.755980

 0.775572

 0.763555

(0,0)(0,0)

-1125.854148

 3.240960

 3.254022

 3.246011

Forecast Evaluation

Date: 10/26/18   Time: 08:02

Sample: 1957M01 2015M03

Included observations: 699

Evaluation sample: 1957M01 2015M03

Training sample: 1957M01 2012M12

Number of forecasts: 2

Combination tests

Null hypothesis: Forecast i includes all information contained in others

Forecast

F-stat   

F-prob 

SPREAD

NA

NA

Evaluation statistics

Forecast

RMSE

MAE

MAPE

SMAPE

Theil U1

Theil U2

SPREAD

 0.000000

 0.000000

 0.000000

 0.000000

 0.000000

 0.000000

MSE ranks

 0.000000

 0.000000

 0.000000

 0.000000

 0.000000

 0.000000

Dependent Variable: SPREAD

Method: ARMA Maximum Likelihood (OPG - BHHH)

Date: 10/26/18   Time: 08:51

Sample: 2013M01 2014M12

Included observations: 24

Failure to improve objective (non-zero gradients) after 106 iterations

Coefficient covariance computed using outer product of gradients

Variable

Coefficient

Std. Error

t-Statistic

Prob.  

C

-2.370419

0.141478

-16.75472

0.0000

AR(1)

0.233121

0.562167

0.414683

0.6851

AR(2)

1.137205

0.640238

1.776223

0.0991

AR(3)

0.190303

0.734960

0.258930

0.7997

AR(4)

-0.830724

0.628845

-1.321031

0.2093

MA(1)

0.572083

3.782041

0.151263

0.8821

MA(1)

0.577825

11.81595

0.048902

0.9617

MA(2)

-0.424238

8.292924

-0.051157

0.9600

MA(3)

-0.985814

17.48258

-0.056388

0.9559

MA(4)

-0.167773

3.705652

-0.045275

0.9646

SIGMASQ

0.013356

0.285408

0.046795

0.9634

R-squared

0.871241

    Mean dependent var

-2.410000

Adjusted R-squared

0.772195

    S.D. dependent var

0.328991

S.E. of regression

0.157024

    Akaike info criterion

-0.250678

Sum squared resid

0.320534

    Schwarz criterion

0.289263

Log likelihood

14.00814

    Hannan-Quinn criter.

-0.107432

F-statistic

8.796349

    Durbin-Watson stat

2.187936

Dynamic forecasting

Automatic ARIMA Forecasting

Selected dependent variable: SPREAD

Date: 10/26/18   Time: 09:15

Sample: 1957M01 2015M03

Included observations: 696

Forecast length: 0

Number of estimated ARMA models: 4

Number of non-converged estimations: 0

Selected ARMA model: (0,0)(0,0)

(0,0)(0,0)

Dependent Variable: SPREAD

Method: Least Squares

Date: 10/26/18   Time: 09:15

Sample (adjusted): 1957M01 2014M12

Included observations: 696 after adjustments

Variable

Coefficient

Std. Error

t-Statistic

Prob.  

C

-1.519009

0.046269

-32.83010

0.0000

R-squared

0.000000

    Mean dependent var

-1.519009

Adjusted R-squared

0.000000

    S.D. dependent var

1.220654

S.E. of regression

1.220654

    Akaike info criterion

3.238087

Sum squared resid

1035.548

    Schwarz criterion

3.244617

Log likelihood

-1125.854

    Hannan-Quinn criter.

3.240612

Durbin-Watson stat

0.084520

Model Selection Criteria Table

Dependent Variable: SPREAD

Date: 10/26/18   Time: 09:15

Sample: 1957M01 2015M03

Included observations: 696

Model

LogL

AIC

BIC

HQ

(0,0)(0,0)

-1125.854148

 3.240960

 3.254022

 3.246011

(0,1)(0,0)

-719.672654

 2.076646

 2.096238

 2.084221

(1,0)(0,0)

-260.080901

 0.755980

 0.775572

 0.763555

(1,1)(0,0)

-222.593793

 0.651132

 0.677254

 0.661232

Forecast Evaluation

Date: 10/26/18   Time: 09:18

Sample: 2013M01 2015M03

Included observations: 27

Evaluation sample: 2013M01 2015M03

Training sample: 1957M01 2012M12

Number of forecasts: 3

Combination tests

Null hypothesis: Forecast i includes all information contained in others

Forecast

F-stat   

F-prob 

SPREAD

NA

NA

Evaluation statistics

Forecast

RMSE

MAE

MAPE

SMAPE

Theil U1

Theil U2

SPREAD

 0.000000

 0.000000

 0.000000

 0.000000

 0.000000

 0.000000

Mean square error

 NA

 NA

 NA

 NA

 NA

 NA

MSE ranks

 0.000000

 0.000000

 0.000000

 0.000000

 0.000000

 0.000000

On the basis of results from the forecasting it can be said that the spread is going to decline for some time and then increase after 2014. In terms of the forecasting accuracy, the original series do not show any trend, however the results from forecasting is continuously declining after 1957.

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