Midterm 2022, Part-B

Time Series Analysis

Instructor: Prof. Wilima Wadhwa

Shashwat Jain

29th September, 2022

Table of Contents

1 Overview & Transformation of Time Series 1

2 Model Selection 2

3 Estimation 3

3.1 Regression Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

4 Model Testing 4
4.1 Test for serial correlation(Q Test) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
4.2 Breusch–Godfrey test . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

4.3 Normality test . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

4.4 Test for Heterskedasticity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

5 Structural/Trend Break 8

6 Conclusion 8

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1 Overview & Transformation of Time Series

I have used monthly Unemployment rate for women in US from May,1988 to March,2006, there
are 213 observations.

The series is not stationary; hence, we need to transform it to make it stationary. So I took log of
Unemployment rate but still it was not stationery.

Then I took first difference of log(unemployment rate) which looks stationary with constant mean
of 0 and seemingly constant variance throughout.

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The above looks like a stationary series and we will continue with it for our model building.

2 Model Selection

Using the correlogram of D(log(Unemployment rate),1) our first guess for the model is :

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PACF is significantly different from zero for lag 1 and 12, while ACF is significantly different from
zero for lags 1, 12 and 13. We know that the MA component ‘q’ can be observed from ACF and
AR component ’p’ can be observed from PACF, but for the simple model, we iterated upon models
where the maximum value of p is 5 and the max value of q is 2. (This is done since most of the
time series models for GDP in literature are at max ARIMA(2,2,2).So I guessed ARIMA(1,1,1).

3 Estimation

Upon iteration and checking for the residual to be white noise, I finalized the ARIMA(1,1,0)
model which is parsimonious.
yt = µ + ϕ1 yt−1 + ϵt (1)

where yt is our differenced log(unemployment rate) series.

3.1 Regression Results

We see that all the coefficients are significantly different from zero as well as based on F-statistic
the joint significance is also different from zero.

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4 Model Testing

For the ARIMA model, it is appropriate to test whether the residual sequence is white noise
sequence to determine if our model is appropriate. I will be conducting tests for serial correlation,
Normality and Heterosckedasticity here. I will also conduct chow breakpoint test to determine if
there are structural break in the series or not.

4.1 Test for serial correlation(Q Test)

We plot the Q statistics of residuals and from the correlogram, we see that it is insignificant for
all lags indicating no serial correlation between the residuals.

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4.2 Breusch–Godfrey test

This test is for the presence of serial correlation that has not been included in a proposed model
structure. As we can see all the coefficients are insignificant and also jointly insignificant based
on F- Statistics thus residuals do not have serial autocorrelation upto lag 10 based on the results
here.

4.3 Normality test

I used Jarque–Bera test for the normality and found these results:

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Since the probability is more than 0.05 we fail to reject the Null Hypothesis. Thus the results
indicate that the residuals are Normally Distributed.

4.4 Test for Heterskedasticity

I first performed ARCH test for the heteroscedasticity and found these results:

Since the test statistics are smaller than the threshold we failed to reject the Null Hypothesis of
residuals having No Heterescedasticity and thus this test implies that the residuals are Homo-
scedastic.

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I also performed White test for the heterosckedasticity and found these results:

Since the test statistics are larger than the threshold we reject the Null Hypothesis and this test
implies that the residuals are Heterosckedastic, unlike ARCH test.

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5 Structural/Trend Break

I performed a Chow test at 2 points(marked by vertical black lines where variance seemed large)
for the structural break and did not find any structural break.

These were the results of chow test where we found that the F stat is smaller than the critical
value and hence we cannot reject the null hypothesis that ‘there is no structural break’. Hence we
conclude that there are no structural break at the 2 points.

6 Conclusion

Selected Model is ARIMA(1,1,0) and we found out that the residuals have no serial auto-correlation
as can be seen from Q test and Breusch–Godfrey test, it is also seen to be Normal using Jarque–Bera
test, it is Homosckedastic based on ARCH test but coming out to be heterosckedastic with White
test. Thus we can say that the tests indicate that residuals are white noise and our series does not
have structural break in the specified sample period.