MA653P: Computational Financial Modelling Lab

Assignment 1

Name: Prachi Sharma

Roll No.: V21078
Branch: MSc Applied Mathematics
Year: 1st

Following are the inferences I have made from the results obtained and are correct upto the best of
my knowledge.

Ques 1:

Xt1 denotes AR(2) simulation with parameters inside given triangle.

Xt2 denotes AR(2) simulation with parameters inside given triangle but close to boundary.

Xt3 denotes AR(2) simulation with parameters outside triangle.

The temporal variation in case of Xt1 is less than in the case of Xt2. The ACF of Xt1 is inside threshold
as compared to Xt2.

The temporal variation in case of Xt3 is minimal when compared to Xt1 and Xt2. The ACF of Xt1 is
inside threshold as compared to Xt2. The exponential decay in ACF of Xt 3 is also rapid.

The results are expected as the stationarity of AR(2) process depends on parameters ( 1,2).

When (1,2) lies inside the triangle bounded by

2+1<1, 2-1<1, -1<2<1

Absolute value of roots for characteristic equation of AR(2) process are greater than 1 which
results in stationary process.
From the time series plots, it can be inferred that,
(1) Xt1 is stationary
(2) Xt2 is a stationary but almost non-stationary process
(3) Xt2 is a non-stationary process.
Corresponding ACF plots reflects that:
(1) ACF of Xt1 is very much close to zero and with increasing time lag it is decreasing
very quickly.
(2) ACF of Xt2 is tails off slowly when compared to ACF of Xt1.
(3) The exponential decay of ACF of Xt3 happens rapidly.

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Ques 2:
Since, the ACF of process Z starts tailing off at lag 5 and PACF at lag 3 and checking for the
minimum AIC value among different models, I could predict Z is a ARMA(5,3) process. The
residual plot infers that it is a white noise plot.

Ques 3.
We need to do twice differencing to make the series stationary.
Yes, the ACF and PACF are very much close to zero and is inside threshold without many
significant cuts. Hence, the series can be said to be stationary.
The series may fit ARMA(25,3).

Ques 4.
We need to do single differencing to make the series stationary.
The ACF of original time series does not decay to 0 for many lags. While, the ACF of
differenced time series is sinusoidal.
The series may fit ARMA(5,1).

Ques 5.
We need to perform single differencing to make series stationary.
The sample ACF of differenced series is sinusoidal with few significant cuts (seen at lag 12).
The series may fit ARMA(12,1) model. The residuals are also following white noise with one
significant cut.
The data is non-seasonal.

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