Financial Risk Manager Part 1

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The following sample autocorrelation estimates are obtained using 250 data points:

Lag	1	2	3
Coefficient	0.3	-0.15	-0.10

Compute the value of the Ljung Box Q statistic.

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TTanishq

Explanation:

Explanation

The Ljung Box statistic, also known as the modified Box Pierce statistic, is a function of the accumulated autocorrelations, $\rho_i$ , up to time lag $m$ . It's calculated as:

Q(m) = n(n + 2)\sum_{i=1}^{m} \left( \frac{\rho_i^2}{n - i} \right)

Given:

Sample size (n) = 250
Time lag (m) = 3
Autocorrelations: ρ₁ = 0.3, ρ₂ = -0.15, ρ₃ = -0.10

Calculation:

Q(3) = 250 \times 252 \left( \frac{0.3^2}{249} \right) + 250 \times 252 \left( \frac{(-0.15)^2}{248} \right) + 250 \times 252 \left( \frac{(-0.1)^2}{247} \right)

Breaking it down:

First term: $250 \times 252 \times \frac{0.09}{249} = 63,000 \times 0.0003614 = 22.77$
Second term: $250 \times 252 \times \frac{0.0225}{248} = 63,000 \times 0.0000907 = 5.71$
Third term: $250 \times 252 \times \frac{0.01}{247} = 63,000 \times 0.0000405 = 2.55$

Total: $22.77 + 5.71 + 2.55 = 31.03$

The Ljung Box Q statistic is approximately 31, which matches option B._

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