Workshop 4

A0092167B - GUO XIAOYANG

A0105772H - WANG SHENGHAO
A00829131E - YIN MINGJUN

Exercise (a)

(i) Series is not stationary as can be seen from the trend in plot. Autocorrelation in correlogram
does not tail off, indicating non-stationarity.
(ii) Null hypothesis is “Copper price has a unit root”.
As the p-value is not significant, null hypothesis cannot be rejected. This shows that series is
not stationary.
(iii)
a. As per the test result above, p-value is 0.0683, indicating the series is still not stationary
at 95% confidence level.
(iii) b. We started with fitting 4 lags for ADF test. Test result shows lag 2 to lag 4 are not
significant.
Correlogram of RESID does not show obvious autocorrelation.
By looking at the p-value and t-stat of the ADF test with trend, intercept and lag, we are still
unable to reject null hypothesis.
(iv) Plot of first differences appears stationary across time. Correlogram shows spike for first lag
only. ADF test has a p-value of 0.0000. We can reject the null hypothesis that first difference
series is stationary.

Exercise (b)
(i) Establishing Stationary
Correlogram of GOLD:

Judging by the Correlogram, the gold price is not stationary.

With Initial Data Points
Plotting DLOG(gold):
Correlogram of DLOG(GOLD):

Judging by the the graph plot and correlogram, the DLOG(gold) appears to be mean reverting
post 1980. There is instability and nose prior to 1980.
Removing initial unstable outliers

Plotting DLOG(GOLD):
Correlogram of DLOG(GOLD):

The DLOG(GOLD) appears mean reverting in the long run and thus stationary after removing
1960-1980 monthly data.
(iii) Estimation
Baseline model: ARIMA (0, 1) DLOG(gold) c MA(1)

(vi) Testing
ARMA(0, 1)
Residual plot of the baseline model ARIMA(0, 1)

The residuals look random, which indicates that the model manages to capture the
autocorrelation of the gold price data.
From the model statistics, it can be observed that the coefficient of MA(1) is significant. The
data is not very well fitted by the ARIMA(0, 1) model with a R-square around 0.023. The
Durbin-Watson index is between 1.5 and 2.5, which indicates low autocorrelation of historical
gold price data.
ARMA(1,0)
Model statistics of ARMA(1, 0)

Residual plot of ARMA(1, 0)

Correlogram of ARMA(1,0)

The lower R-square value shows that ARIMA(0, 1) gives a better fit compare to ARIMA(1, 0).
The coefficient of AR(1) is significant. The Durbin-Watson stat indicates low autocorrelation.
ARMA(2,0)
Model Statistics for ARMA(2,0)

ARMA(2,0) has better adjusted R-squared compared to previous model. Coefficients of AR(1)
and AR(2) are both significant. Durbin-Watson statistics indicates there is no autocorrelation.

Residual plot for ARMA(2,0)

Residual plot shows no pattern and looks random and stationary, indicating model fits. However
model does not captured majority of the variation and implying more factors can be incorporated
into the model for better fit.
Correlogram plot for ARMA(2,0)

Correlogram confirms there is no autocorrelation in residual. Model is a good fit.

ARMA(0,2)
Model statistics for ARMA(0,2) is as below.

This model is better than ARMA(0,1) but not better than ARMA(2,0). DW test shows there is no
autocorrelation. However, coefficient of MA(2) is not significant. This model appears inferior to
previous model.

Residual plot for ARMA(0,2)

Again, residual plot for ARMA(0,2) shows no obvious pattern. Indicating overall model is a good
fit.

Correlogram for ARMA(0,2)

Correlogram shows no autocorrelation among residuals. High p-values for each lag also
conforms to this conclusion.
ARMA(1,1)
Model statistics for ARMA(1,1):

This model has lower Adjusted R-squared and insignificant coefficient for AR(1). DW statistics
shows no obvious autocorrelation.

Residual plot for ARMA(1,1)

Residual plot shows no obvious pattern. However, model does not capture most of the variation
due to the low adjusted R. Meaning there could be other factors to be considered to include in
the model.

Correlogram for ARMA(1,1)

Correlogram also shows no autocorrelation in residual. High values of probabilities also confirm
on this point.

Model Adj R square AIC HQ SBC

ARIMA(0, 1) 0.0205 -3.8811 -3.8733 -3.8614
ARIMA(1, 0) 0.0161 -3.8765 -3.8688 -3.8569
ARIMA(2, 0) 0.0248 -3.8830 -3.8713 -3.8534
ARIMA(0, 2) 0.0246 -3.8828 -3.8711 -3.8533
ARIMA(1, 1) 0.0230 -3.8811 -3.8695 -3.8516
By comparing the statistics across all the 5 models, ARIMA(2, 0) results in a roughly higher
adjusted R square index and reasonable AIC, HQ, SBC values. Therefore, ARIMA(2, 0) gives
the best performance among all the models.

(v) Forecasting
MA(1) - Diagnosis
Correlogram:
Judging by the correlogram, the residuals are insignificant and the probability are all above 0.05.
The MA(1) model is reasonable.

Static Forecast:

Dynamic Forecast:
Plot of GOLDF against GOLD for static Forecast

The forecast looks inaccurate as prediction of gold price looks like replica of gold but with one
period lag.

Forecast of DLOG(GOLD)
Plot of DLOG(GOLD)F against GOLD for static forecast

The forecast looks reasonable. DLOG(GOLD) exhibits the same fluctuation trend with
DLOG(GOLD). The forecast of DLOG(GOLD) has a smaller bias proportion than forecast
DLOG(GOLD) and thus is a better prediction.

Following the static forecast for DLOG(GOLD), I would expect the oil price to go up following the
as the DLOG(GOLD) is positive, that is the rate of change is positive..
The risk is small as the bias proportion is as small as 2%.

The prediction interval for gold using static forecast for GOLD for Month 12 2018:
SE = 29.60928
t0.975(n-k-1) = t0.975 (12-1-1) = t0.975(10) = 2.22814
E(y) +/- 0.975SE(E(Y)) = 1225 +/- 2.22814 * 29.60928 = 1159.02 to 1290.97

Forecast of DLOG(gold) for 2019M1 - 2019M12

Forecast of gold price for 2019M1 - 2019M12
The static method cannot be applied here because the gold price data for 2019 is not available.
The actual price is only available until December 2018.