On the distribution of the sample autocorrelation coefficients Raymond Kana,*, Xiaolu Wangb aJoseph L. Rotman School of Management, University of Toronto, Toronto, Ontario, Canada M5S 3E6 bJoseph L. Rotman School of Management, University of Toronto, Toronto, Ontario, Canada M5S 3E6 Abstract Sample autocorrelation coefficients are widely used to test the randomness of a time series. Despite its unsatisfactory performance, the asymptotic normal distribution is often used to approximate the distribution of the sample autocorrelation coefficients. This is mainly due to the lack of an efficient approach in obtaining the exact distribution of sample autocorre- lation coefficients. In this paper, we provide an efficient algorithm for evaluating the exact distribution of the sample autocorrelation coefficients. Under the multivariate elliptical dis- tribution assumption, the exact distribution as well as exact moments and joint moments of sample autocorrelation coefficients are presented. In addition, the exact mean and variance of various autocorrelation-based tests are provided. Actual size properties of the Box-Pierce and Ljung-Box tests are investigated, and they are shown to be poor when the number of lags is moderately large relative to the sample size. Using the exact mean and variance of the Box-Pierce test statistic, we propose an adjusted Box-Pierce test that has a far superior size property than the traditional Box-Pierce and Ljung-Box tests. JEL Classification: C13, C16 Keywords: Sample autocorrelation coefficient; Finite sample distribution; Rank one update *Corresponding author. Joseph L. Rotman School of Management, University of Toronto, Toronto, Ontario M5S 3E6, Canada, Phone: (416)978-4291, Fax: (416)978-5433. E-mail address:
[email protected] 1.