1. How could you determine whether the order you suggested for question 6 was in fact appropriate

1. How could you determine whether the order you suggested for question 6 was in fact appropriate?

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‘Given that the objective of any econometric modelling exercise is to find the model that most closely ‘fits’ the data, then adding more lags to an ARMA model will almost invariably lead to a better fit. Therefore a large model is best because it will fit the data more closely.’ Comment on the validity (or otherwise) of this statement.

2. (a) You obtain the following sample autocorrelations and partial autocorrelations for a sample of 100 observations from actual data:

Lag

1

2

3

4

5

6

7

8

acf

0.42

0.104

0.032

−0.206

0.138

0.042

0.018

0.074

pacf

0.632

0.381

0.268

0.199

0.205

0.101

0.096

0.082

Can you identify the most appropriate time series process for this data?

(b) Use the Ljung–Box Q∗ test to determine whether the first three autocorrelation coefficients taken together are jointly significantly different from zero.