## Autocorrelation and Partial Autocorrelation

### What Are Autocorrelation and Partial Autocorrelation?

*Autocorrelation* is the linear dependence of a variable with itself at two points in time. For stationary processes, autocorrelation between any two observations depends only on the time lag *h* between them. Define *Cov*(*y _{t}*,

*y*) =

_{t–h}*γ*. Lag-

_{h}*h*autocorrelation is given by

$${\rho}_{h}=Corr({y}_{t},{y}_{t-h})=\frac{{\gamma}_{h}}{{\gamma}_{0}}.$$

The denominator *γ*_{0} is the lag 0 covariance, that is, the unconditional variance of the process.

Correlation between two variables can result from a mutual linear dependence on other variables (confounding). *Partial autocorrelation* is the autocorrelation between *y _{t}* and

*y*after the removal of any linear dependence on

_{t–h}*y*

_{1},

*y*

_{2}, ...,

*y*

_{t–h+1}. The partial lag-

*h*autocorrelation is denoted $${\varphi}_{h,h}.$$

### Theoretical ACF and PACF

The autocorrelation function (ACF) for a time series *y _{t}*,

*t*= 1,...,

*N*, is the sequence $${\rho}_{h},$$

*h*= 1, 2,...,

*N*– 1. The partial autocorrelation function (PACF) is the sequence $${\varphi}_{h,h},$$

*h*= 1, 2,...,

*N*– 1.

The theoretical ACF and PACF for the AR, MA, and ARMA conditional mean models are known, and are different for each model. These differences among models are important to keep in mind when you select models.

Conditional Mean Model | ACF Behavior | PACF Behavior |
---|---|---|

AR(p) | Tails off gradually | Cuts off after p lags |

MA(q) | Cuts off after q lags | Tails off gradually |

ARMA(p,q) | Tails off gradually | Tails off gradually |

### Sample ACF and PACF

Sample autocorrelation and sample partial autocorrelation are statistics that estimate the theoretical autocorrelation and partial autocorrelation. Using these qualitative model selection tools, you can compare the sample ACF and PACF of your data against known theoretical autocorrelation functions [1].

For an observed series *y*_{1}, *y*_{2},...,*y _{T}*, denote the sample mean $$\overline{y}.$$ The sample lag-

*h*autocorrelation is given by

$${\widehat{\rho}}_{h}=\frac{{\displaystyle {\sum}_{t=h+1}^{T}({y}_{t}-\overline{y})({y}_{t-h}-\overline{y})}}{{\displaystyle {\sum}_{t=1}^{T}{({y}_{t}-\overline{y})}^{2}}}.$$

The standard error for testing the significance of a single lag-*h* autocorrelation, $${\widehat{\rho}}_{h}$$, is approximately

$$S{E}_{\rho}=\sqrt{(1+2{\displaystyle {\sum}_{i=1}^{h-1}{\widehat{\rho}}_{i}^{2}})/N}.$$

When you use `autocorr`

to plot the sample autocorrelation function (also known as the correlogram), approximate 95% confidence intervals are drawn at $$\pm 2SE\rho $$ by default. Optional input arguments let you modify the calculation of the confidence bounds.

The sample lag-*h* partial autocorrelation is the estimated lag-*h* coefficient in an AR model containing *h* lags, $${\widehat{\varphi}}_{h,h}.$$ The standard error for testing the significance of a single lag-*h* partial autocorrelation is approximately $$1/\sqrt{N}.$$ When you use `parcorr`

to plot the sample partial autocorrelation function, approximate 95% confidence intervals are drawn at $$\pm 2/\sqrt{N}$$ by default. Optional input arguments let you modify the calculation of the confidence bounds.

### Compute Sample ACF and PACF in MATLAB®

This example shows how to compute and plot the sample ACF and PACF of a time series by using the Econometrics Toolbox™ functions `autocorr`

and `parcorr`

, and the Econometric Modeler app.

**Generate Synthetic Time Series**

Simulate an MA(2) process ${\mathit{y}}_{\mathit{t}}$ by filtering a series of 1000 standard Gaussian deviates ${\epsilon}_{\mathit{t}}\text{\hspace{0.17em}}$through the difference equation

$${y}_{t}={\epsilon}_{t}-{\epsilon}_{t-1}+{\epsilon}_{t-2}.$$

rng('default') % For reproducibility e = randn(1000,1); y = filter([1 -1 1],1,e);

**Plot and Compute ACF**

Plot the sample ACF of ${\mathit{y}}_{\mathit{t}}$ by passing the simulated time series to `autocorr`

.

autocorr(y)

The sample autocorrelation of lags greater than 2 is insignificant.

Compute the sample ACF by calling `autocorr`

again. Return the first output argument.

acf = autocorr(y)

`acf = `*21×1*
1.0000
-0.6682
0.3618
-0.0208
0.0146
-0.0311
0.0611
-0.0828
0.0772
-0.0493
⋮

`acf(`

`j`

`)`

is the sample autocorrelation of ${\mathit{y}}_{\mathit{t}}$ at lag * j* – 1.

**Plot and Compute PACF**

Plot the sample PACF of ${\mathit{y}}_{\mathit{t}}$ by passing the simulated time series to `parcorr`

.

parcorr(y)

The sample PACF gradually decreases with increasing lag.

Compute the sample PACF by calling `parcorr`

again. Return the first output argument.

pacf = parcorr(y)

`pacf = `*21×1*
1.0000
-0.6697
-0.1541
0.2929
0.3421
0.0314
-0.1483
-0.2290
-0.0394
0.1419
⋮

`pacf(`

`j`

`)`

is the sample partial autocorrelation of ${\mathit{y}}_{\mathit{t}}$ at lag * j* – 1.

The sample ACF and PACF suggest that ${\mathit{y}}_{\mathit{t}}$ is an MA(2) process.

**Use Econometric Modeler**

Open the Econometric Modeler app by entering `econometricModeler`

at the command prompt.

econometricModeler

Load the simulated time series `y`

.

On the

**Econometric Modeler**tab, in the**Import**section, select**Import > Import From Workspace**.In the

**Import Data**dialog box, in the**Import?**column, select the check box for the`y`

variable.Click

**Import**.

The variable `y1`

appears in the **Data Browser**, and its time series plot appears in the **Time Series Plot(y1)** figure window.

Plot the sample ACF by clicking **ACF** on the **Plots** tab.

Plot the sample PACF by clicking **PACF** on the **Plots** tab. Position the PACF plot below the ACF plot by dragging the **PACF(y1)** tab to the lower half of the document.

## References

[1] Box, George E. P., Gwilym M. Jenkins, and Gregory C. Reinsel. *Time Series Analysis: Forecasting and Control*. 3rd ed. Englewood Cliffs, NJ: Prentice Hall, 1994.

## See Also

### Apps

### Functions

## Related Topics

- Detect Serial Correlation Using Econometric Modeler App
- Detect Autocorrelation
- Detect ARCH Effects Using Econometric Modeler App
- Detect ARCH Effects
- Select ARIMA Model for Time Series Using Box-Jenkins Methodology
- Ljung-Box Q-Test
- Autoregressive Model
- Moving Average Model
- Autoregressive Moving Average Model