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Autocorrelation Function Introduction to Time Series Analysis. Lecture 3. Peter Bartlett 1. Review: Autocovariance, linear processes 2. Sample autocorrelation function 3. ACF and prediction 4. Properties of the ACF 1 Mean, Autocovariance, Stationarity A time series {Xt} has mean function µt = E[Xt] and autocovariance function γX (t + h, t)= Cov(Xt+h,Xt) = E[(Xt+h − µt+h)(Xt − µt)]. It is stationary if both are independent of t. Then we write γX (h)= γX (h, 0). The autocorrelation function (ACF) is γX (h) ρX (h)= = Corr(Xt+h,Xt). γX (0) 2 Linear Processes An important class of stationary time series: ∞ Xt = µ + ψj Wt−j j=X−∞ 2 where {Wt}∼ W N(0, σw) and µ, ψj are parameters satisfying ∞ |ψj| < ∞. j=X−∞ 3 Linear Processes ∞ Xt = µ + ψj Wt−j j=X−∞ Examples: • White noise: ψ0 = 1. • MA(1): ψ0 = 1, ψ1 = θ. 2 • AR(1): ψ0 = 1, ψ1 = φ, ψ2 = φ , ... 4 Estimating the ACF: Sample ACF Recall: Suppose that {Xt} is a stationary time series. Its mean is µ = E[Xt]. Its autocovariance function is γ(h)= Cov(Xt+h,Xt) = E[(Xt+h − µ)(Xt − µ)]. Its autocorrelation function is γ(h) ρ(h)= . γ(0) 5 Estimating the ACF: Sample ACF For observations x1,...,xn of a time series, 1 n the sample mean is x¯ = x . n t Xt=1 The sample autocovariance function is n−|h| 1 γˆ(h)= (x − x¯)(x − x¯), for −n<h<n. n t+|h| t Xt=1 The sample autocorrelation function is γˆ(h) ρˆ(h)= . γˆ(0) 6 Estimating the ACF: Sample ACF Sample autocovariance function: n−|h| 1 γˆ(h)= (x − x¯)(x − x¯). n t+|h| t Xt=1 ≈ the sample covariance of (x1, xh+1),..., (xn−h, xn), except that • we normalize by n instead of n − h, and • we subtract the full sample mean. 7 Sample ACF for white Gaussian (hence i.i.d.) noise 1.2 1 0.8 0.6 0.4 0.2 0 −0.2 −20 −15 −10 −5 0 5 10 15 20 Red lines=c.i. 8 Sample ACF We can recognize the sample autocorrelation functions of many non-white (even non-stationary) time series. Time series: Sample ACF: White zero Trend Slow decay Periodic Periodic MA(q) Zero for |h| >q AR(p) Decays to zero exponentially 9 Sample ACF: Trend 4 3 2 1 0 −1 −2 −3 −4 0 10 20 30 40 50 60 70 80 90 100 10 Sample ACF: Trend 1.2 1 0.8 0.6 0.4 0.2 0 −0.2 −60 −40 −20 0 20 40 60 (why?) 11 Sample ACF Time series: Sample ACF: White zero Trend Slow decay Periodic Periodic MA(q) Zero for |h| >q AR(p) Decays to zero exponentially 12 Sample ACF: Periodic 6 5 4 3 2 1 0 −1 −2 −3 −4 0 10 20 30 40 50 60 70 80 90 100 13 Sample ACF: Periodic 6 signal signal plus noise 5 4 3 2 1 0 −1 −2 −3 −4 0 10 20 30 40 50 60 70 80 90 100 14 Sample ACF: Periodic 1 0.8 0.6 0.4 0.2 0 −0.2 −0.4 −0.6 −0.8 −100 −80 −60 −40 −20 0 20 40 60 80 100 (why?) 15 Sample ACF Time series: Sample ACF: White zero Trend Slow decay Periodic Periodic MA(q) Zero for |h| >q AR(p) Decays to zero exponentially 16 ACF: MA(1) MA(1): X = Z + θ Z t t t−1 1 0.8 0.6 0.4 θ/(1+θ2) 0.2 0 −10 −8 −6 −4 −2 0 2 4 6 8 10 17 Sample ACF: MA(1) 1.2 ACF Sample ACF 1 0.8 0.6 0.4 0.2 0 −0.2 −10 −8 −6 −4 −2 0 2 4 6 8 10 18 Sample ACF Time series: Sample ACF: White zero Trend Slow decay Periodic Periodic MA(q) Zero for |h| >q AR(p) Decays to zero exponentially 19 ACF: AR(1) AR(1): X = φ X + Z t t−1 t 1 0.9 0.8 0.7 0.6 0.5 0.4 0.3 φ|h| 0.2 0.1 0 −10 −8 −6 −4 −2 0 2 4 6 8 10 20 Sample ACF: AR(1) 1.2 ACF Sample ACF 1 0.8 0.6 0.4 0.2 0 −0.2 −10 −8 −6 −4 −2 0 2 4 6 8 10 21 Introduction to Time Series Analysis. Lecture 3. 1. Sample autocorrelation function 2. ACF and prediction 3. Properties of the ACF 22 ACF and prediction 2 1 0 −1 white noise MA(1) −2 −3 0 2 4 6 8 10 12 14 16 18 20 1.2 ACF 1 Sample ACF 0.8 0.6 0.4 0.2 0 −0.2 −10 −8 −6 −4 −2 0 2 4 6 8 10 23 ACF of a MA(1) process 5 5 5 5 0 0 0 0 −5 −5 −5 −5 −5 0 5 −5 0 5 −5 0 5 −5 0 5 lag 0 lag 1 lag 2 lag 3 24 ACF and least squares prediction Best least squares estimate of Y is EY : min E(Y − c)2 = E(Y − EY )2. c Best least squares estimate of Y given X is E[Y |X]: min E(Y − f(X))2 = min E E[(Y − f(X))2|X] f f = E E[(Y − E[Y |X])2|X] = var[ Y |X]. Similarly, the best least squares estimate of Xn+h given Xn is f(Xn)= E[Xn+h|Xn]. 25 ACF and least squares prediction Suppose that X =(X1,...,Xn+h) is jointly Gaussian: 1 1 f (x)= exp − (x − µ)′Σ−1(x − µ) . X (2π)n/2|Σ|1/2 2 Then the joint distribution of (Xn,Xn+h) is 2 µn σ ρσnσn+h N , n , 2 µn+h ρσnσn+h σn+h and the conditional distribution of Xn+h given Xn is σn+h 2 2 N µn+h + ρ (xn − µn), σn+h(1 − ρ ) . σn 26 ACF and least squares prediction So for Gaussian and stationary {Xt}, the best estimate of Xn+h given Xn = xn is f(xn)= µ + ρ(h)(xn − µ), and the mean squared error is 2 2 2 E(Xn+h − f(Xn)) = σ (1 − ρ(h) ). Notice: • Prediction accuracy improves as |ρ(h)| → 1. • Predictor is linear: f(x)= µ(1 − ρ(h)) + ρ(h)x. 27 ACF and least squares linear prediction Consider a linear predictor of Xn+h given Xn = xn. Assume first that {Xt} is stationary with EXn = 0, and predict Xn+h with f(xn)= axn. The best linear predictor minimizes 2 2 2 2 E (Xn+h − aXn) = E Xn+h − E (2aXn+hXn)+ E a Xn = σ2− 2aγ(h)+ a2σ2, and this is minimized when a = ρ(h), that is, f(xn)= ρ(h)Xn. For this optimal linear predictor, the mean squared error is 2 2 2 2 E(Xn+h − f(Xn)) = σ − 2ρ(h)γ(h)+ ρ(h) σ = σ2(1 − ρ(h)2). 28 ACF and least squares linear prediction Consider the following linear predictor of Xn+h given Xn = xn, when {Xn} is stationary and EXn = µ: f(xn)= a(xn − µ)+ b. The linear predictor that minimizes 2 E (Xn+h − (a(Xn − µ)+ b)) has a = ρ(h), b = µ, that is, f(xn)= ρ(h)(Xn − µ)+ µ. For this optimal linear predictor, the mean squared error is again 2 2 2 E(Xn+h − f(Xn)) = σ (1 − ρ(h) ). 29 Least squares prediction of Xn+h given Xn f(Xn)= µ + ρ(h)(Xn − µ). 2 2 2 E(f(Xn) − Xn+h) = σ (1 − ρ(h) ). • If {Xt} is stationary, f is the optimal linear predictor. • If {Xt} is also Gaussian, f is the optimal predictor. • Linear prediction is optimal for Gaussian time series. • Over all stationary processes with that value of ρ(h) and σ2, the optimal mean squared error is maximized by the Gaussian process. • Linear prediction needs only second order statistics. • Extends to longer histories, (Xn,Xn − 1,...). 30 Introduction to Time Series Analysis. Lecture 3. 1. Sample autocorrelation function 2. ACF and prediction 3. Properties of the ACF 31 Properties of the autocovariance function For the autocovariance function γ of a stationary time series {Xt}, 1. γ(0) ≥ 0, (variance is non-negative) 2. |γ(h)|≤ γ(0), (from Cauchy-Schwarz) 3. γ(h)= γ(−h), (from stationarity) 4. γ is positive semidefinite. Furthermore, any function γ : Z → R that satisfies (3) and (4) is the autocovariance of some stationary time series. 32 Properties of the autocovariance function A function f : Z → R is positive semidefinite if for all n, the matrix Fn, with entries (Fn)i,j = f(i − j), is positive semidefinite. n×n n A matrix Fn ∈ R is positive semidefinite if, for all vectors a ∈ R , a′F a ≥ 0. To see that γ is psd, consider the variance of (X1,...,Xn)a. 33 Properties of the autocovariance function For the autocovariance function γ of a stationary time series {Xt}, 1. γ(0) ≥ 0, 2. |γ(h)|≤ γ(0), 3. γ(h)= γ(−h), 4. γ is positive semidefinite. Furthermore, any function γ : Z → R that satisfies (3) and (4) is the autocovariance of some stationary time series (in particular, a Gaussian process). e.g.: (1) and (2) follow from (4).
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