ECON233 Economic Forecasting SMU Term 2 2012/13 Assignment 3 1. 2. Chapter 5, page 10 No. 1 Due 8.

30am 12 Mar 2013 (in class)

Find the best fitting ARMA model (perhaps including seasonal dummies) to the series log( RETAILSALES ) , available in the workfile retail.wf1, over the sample period 1990m1 to 2011m12.

Describe how you came to decide on the model you present (lag length choice, seasonal ARMA vs seasonal dummies, etc.). Present your answers to Qn 2 as a proper report, no more than three pages in length including figures, tables, etc. 3. The autocorrelation function at lag one for the MA(1) model

Yt 0 t 1 t 1
is corr (Yt , Yt 1 )

1 . What is the maximum value of this correlation? 1 12

4.

(This was part of a past year question)

It is known that a sum of two MA processes results in another MA process, i.e., if

Yt t 1 t 1

and

X t ut 2ut 1

then Yt X t is also an MA(1) process (because Yt X t and Yt 1 X t 1 contain overlapping noise terms and are therefore correlated, whereas Yt X t and Yt 2 X t 2 do not contain overlapping noise terms, and are therefore uncorrelated). Now suppose

Yt Yt 1 t and
Show that Yt X t is an ARMA(2,1) process.

X t X t 1 ut .

Hint: Write (1 L)Yt t . You can multiply both sides of this equation with (1 L) to get

(1 L)(1 L)Yt (1 L) t . Proceed similarly with X t .