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Lecture 22

Day 24

Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall Chap 16-1
Autoregressive Modeling
DCOVA
 Used for forecasting
 Takes advantage of autocorrelation
 1st order - correlation between consecutive values
 2nd order - correlation between values 2 periods
apart
 pth order Autoregressive model:
Yi  A 0  A1Yi-1  A 2 Yi-2    A p Yi-p  δi

Random
Error
Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall Chap 16-2
Autoregressive Model:
Example DCOVA
The Office Concept Corp. has acquired a number of office
units (in thousands of square feet) over the last eight years.
Develop the second order Autoregressive model.

Year Units
02 4
03 3
04 2
05 3
06 2
07 2
08 4
09 6

Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall Chap 16-3
Autoregressive Model:
Example Solution DCOVA

 Develop the 2nd order Year Yi Yi-1 Yi-2


table 02 4 -- --
03 3 4 --
 Use Excel to estimate a 04 2 3 4
regression model 05 3 2 3
Excel Output 06 2 3 2
Coefficients 07 2 2 3
I n te rc e p t 3.5 08 4 2 2
X V a ri a b l e 1 0.8125 09 6 4 2
X V a ri a b l e 2 -0 . 9 3 7 5

Ŷi  3.5  0.8125Yi1  0.9375Yi2


Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall Chap 16-4
Autoregressive Model
Example: Forecasting
DCOVA

Use the second-order equation to forecast


number of units for 2010:

Ŷi  3.5  0.8125Yi 1  0.9375Yi  2


Ŷ2010  3.5  0.8125(Y2009 )  0.9375(Y2008 )
 3.5  0.8125(6)  0.9375(4)
 4.625

Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall Chap 16-5
Autoregressive Modeling Steps
DCOVA
1.Choose p
2.Form a series of “lagged predictor” variables
Yi-1 , Yi-2 , … ,Yi-p
3.Use Excel or Minitab to run regression model
using all p variables
4.Test significance of Ap
 If null hypothesis rejected, this model is selected
 If null hypothesis not rejected, decrease p by 1 and
repeat

Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall Chap 16-6