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Autoregressive (AR) Models

Autoregressive (AR) models are fundamental to time series analysis. They are estimated via regressing a variable on one or more of its lagged values. That is, AR models take the form: \(Y_t = c + \sum_{i = 1}^{p} \beta_i Y_{t-i} + \epsilon_t\) Where we say p is the order of our auto regression. Their estimation in statistical software packages is generally straightforward.

For additional information, see Wikipedia: Autoregressive model.

Keep In Mind

  • An AR model can be univariate (scalar) or multivariate (vector). This may be important to implementing an AR model in your statisical package of choice.
  • Data should be properly formatted before estimation. If not, non-time series objects (e.g., a date column) may be interpereted by software as a time series variable, leading to erroneous output.

Implementations

Following the instructions for creating and formatting Time Series Data, we will use quaterly GDP data downloaded from FRED as an example.

Python

In Python, the statsmodels package provides a range of tools to fit models using maximum likelihood estimation. In the example below, we will use the AutoReg function. This can fit models of the form:

\[y_t = \delta_0 + \delta_1 t + \phi_1 y_{t-1} + \ldots + \phi_p y_{t-p} + \sum_{i=1}^{s-1} \gamma_i d_i + \sum_{j=1}^{m} \kappa_j x_{t,j} + \epsilon_t.\]

where \(d_i\) are seasonal dummies, \(x_{t,j}\) are exogenous regressors, and the \(\phi_p\) are the coefficients of the auto-regressive components of the model.

Using GDP data, let’s fit an auto-regressive model of order 1, an AR(1), with AutoReg:

# Install pandas and statsmodels using 'pip install' or 'conda install' on the command line
import pandas as pd
from statsmodels.tsa.ar_model import AutoReg, ar_select_order

gdp = pd.read_csv("https://github.com/LOST-STATS/lost-stats.github.io/raw/source/Time_Series/Data/GDPC1.csv",
                    index_col=0)
ar1_model = AutoReg(gdp, 1)
results = ar1_model.fit()
print(results.summary())
##                             AutoReg Model Results                             
## ==============================================================================
## Dep. Variable:                  GDPC1   No. Observations:                  292
## Model:                     AutoReg(1)   Log Likelihood               -1625.980
## Method:               Conditional MLE   S.D. of innovations             64.626
## Date:                0000000000000000   AIC                              8.358
## Time:                        00:00:00   BIC                              8.396
## Sample:                    04-01-1947   HQIC                             8.373
##                          - 10-01-2019                                         
## ==============================================================================
##                  coef    std err          z      P>|z|      [0.025      0.975]
## ------------------------------------------------------------------------------
## intercept     21.8083      7.439      2.931      0.003       7.227      36.389
## GDPC1.L1       1.0043      0.001   1356.492      0.000       1.003       1.006
##                                     Roots                                    
## =============================================================================
##                   Real          Imaginary           Modulus         Frequency
## -----------------------------------------------------------------------------
## AR.1            0.9957           +0.0000j            0.9957            0.0000
## -----------------------------------------------------------------------------

Now let’s use the automatic option to choose how many lags to include (this uses the BIC criterion to choose, though over criteria are available):

select_model = ar_select_order(gdp, maxlag=10)
print(select_model.ar_lags)
## [1 2 3]

This tells us to include lags up to 3. We can pass the list of lags right back to the Auto_Reg function:

arp_model = AutoReg(gdp, select_model.ar_lags)
results_p = arp_model.fit()
print(results_p.summary())
##                             AutoReg Model Results                             
## ==============================================================================
## Dep. Variable:                  GDPC1   No. Observations:                  292
## Model:                     AutoReg(3)   Log Likelihood               -1593.285
## Method:               Conditional MLE   S.D. of innovations             59.989
## Date:                0000000000000000   AIC                              8.223
## Time:                        00:00:00   BIC                              8.286
## Sample:                    10-01-1947   HQIC                             8.248
##                          - 10-01-2019                                         
## ==============================================================================
##                  coef    std err          z      P>|z|      [0.025      0.975]
## ------------------------------------------------------------------------------
## intercept     13.3707      7.098      1.884      0.060      -0.541      27.282
## GDPC1.L1       1.2921      0.058     22.273      0.000       1.178       1.406
## GDPC1.L2      -0.1253      0.095     -1.315      0.189      -0.312       0.062
## GDPC1.L3      -0.1646      0.058     -2.826      0.005      -0.279      -0.050
##                                     Roots                                    
## =============================================================================
##                   Real          Imaginary           Modulus         Frequency
## -----------------------------------------------------------------------------
## AR.1            0.9960           +0.0000j            0.9960            0.0000
## AR.2            1.7430           +0.0000j            1.7430            0.0000
## AR.3           -3.5005           +0.0000j            3.5005            0.5000
## -----------------------------------------------------------------------------

R

#load data
gdp = read.csv("https://github.com/LOST-STATS/lost-stats.github.io/raw/source/Time_Series/Data/GDPC1.csv")

#estimation via ols: pay attention to the selection of the 'GDPC1' column. 
#if the column is not specified, the function call also interprets the date column as a time series variable!
ar_gdp = ar.ols(gdp$GDPC1)
ar_gdp

#lag order is automatically selected by minimizing AIC 
#disable this feature with the optional command 'aic = F'. Note: you will also likely wish to specify the argument 'order.max'.
#ar.ols() defaults to demeaning the data automatically. Also consider taking logs and first differencing for statistically meaningful results.

STATA

*load data
import delimited "https://github.com/LOST-STATS/lost-stats.github.io/raw/source/Time_Series/Data/GDPC1.csv", clear

*Generate the new date variable
*To generalize to a different set of data, replace '1947q1' with your own series' start date.
generate date_index = tq(1947q1) + _n-1

*Index the new variable format as quarter
format date_index %tq

*Convert a variable into time-series data
tsset date_index

*Specifiy and Run AR regression: this STATA method will not automatically select a lag order.
*The 'L.' operator indicates the lagged value of a variable in STATA, 'L2.' its second lag, and so on.
reg gdpc1 L.gdpc1 L2.gdpc1
*variables are not demeaned automatically by STATA. Also consider taking logs and first differencing for statistically meaningful results.