Explanation:
In time series analysis using Partial Autocorrelation Function (PACF) plots:
Since the question mentions using a PACF plot to determine the best regression approach, and AR(2) is one of the options, this suggests the PACF plot likely shows significant spikes at lags 1 and 2, then cuts off to zero. This pattern is characteristic of an AR(2) model.
Key points:
Therefore, AR(2) is the best regression approach based on the PACF plot analysis.
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A risk manager would like to analyze and forecast a security performance and has obtained the historical time series for that security. Based on the Partial Autocorrelation Function (PACF) plot, which of the following is the best regression approach for the security?
A
AR(1)
B
MA(1)
C
AR(2)
D
MA(2)