Question #97 - Reading 2 Time-Series Analysis

Reading: Reading 2 Time-Series Analysis

PDF File: Reading 2 Time-Series Analysis.pdf

Page: 45

Status: Unattempted

Correct Answer: A

Shared Context

- Bert would also like to test for serial correlation in his AR(1) model. How could this be done? A) use the provided Durbin-Watson statistic and compare it to a critical value. B) determine if the series has a finite and constant covariance between leading and lagged terms of itself. C) use a t-test on the residual autocorrelations over several lags.

Question

When using the root mean squared error (RMSE) criterion to evaluate the predictive power of the model, which of the following is the most appropriate statement?

Answer Choices:

A. Use the model with the lowest RMSE calculated using the in-sample data

B. Use the model with the lowest RMSE calculated using the out-of-sample data

Explanation

RMSE, or root of the mean squared error, is a measure similar to the SEE from multiple regression. The lower, the better. It should be calculated on the out-of-sample data (i.e., the data not directly used in the development of the model) as this will be a better test of the relevance and predictive power of the model going forward. This measure thus indicates the predictive power of our model.

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