AR(1) process

Let us start by simulating \(n=100\) observations from a Gaussian AR(1) process: \[ y_t = \alpha + \phi y_{t-1} + \epsilon_t \qquad \epsilon_t \sim N(0,\sigma^2), \] where the true values of the parameters are \(\alpha=0.1\), \(\phi=0.9\) and \(\sigma^2=0.1\). Notice that I actually sample \(2n\) observations and discard the first \(n\) ones.

set.seed(12345)
n = 100
alpha = 0.1
phit=0.9
sig2 = 0.1
y = rep(0,2*n)
for (t in 2:(2*n))
  y[t]=rnorm(1,alpha+phit*y[t-1],sqrt(sig2))

par(mfrow=c(1,2))
ts.plot(y)
abline(v=101,col=2,lty=3)
y = y[(n+1):(2*n)]
ts.plot(y)

We also plot the autocorrelation function and the partial autocorrelation function based on \(y_1,\ldots,y_n\).

par(mfrow=c(1,2))
acf(y)
pacf(y)

Likehood function

Assuming that \(\alpha\) and \(\sigma^2\) are known, we now compute the likelihood functions of \(\phi\) based on \(y_1\) alone and based on \(y_2,\ldots,y_n\). More precisely, when stationarity is assumed we know that \(|\phi|<1\) and the unconditional distribution of \(y_t\) (for any \(t\)) is \(N(\alpha/(1-\phi),\sigma^2/(1-\phi^2)\). On the other hand, when stationarity is not required and/or imposed, we can assume that i) \(y_1 \sim N(b,B)\) or that ii) \(y_0 \sim N(b,B)\) and, consequently, \(y_1|\phi \sim N(\alpha+\phi b, \phi^2 B + \sigma^2)\).

b = 0; B=1
N1 = 10000
phis1 = seq(-1,1,length=N1)
h = phis1[2]-phis1[1]
phis2 = seq(-3,3,by=h)
N2 = length(phis2)
like1 = rep(0,N1)
like2 = rep(0,N2)
like1n = rep(0,N1)
like2n = rep(0,N2)
for (i in 1:N1){
  like1[i] = dnorm(y[1],alpha/(1-phis1[i]),sqrt(sig2/(1-phis1[i]^2)))
  like1n[i] = prod(dnorm(y[2:n],phis1[i]*y[1:(n-1)],sqrt(sig2)))
}
for (i in 1:N2){
  like2[i] = dnorm(y[1],alpha+phis2[i]*b,sqrt(phis2[i]^2*B+sig2))
  like2n[i] = prod(dnorm(y[2:n],phis2[i]*y[1:(n-1)],sqrt(sig2)))
}
like1 = like1/sum(like1)/h
like2 = like2/sum(like2)/h
like1n = like1n/sum(like1n)/h
like2n = like2n/sum(like2n)/h
post1 = like1*like1n
post1 = post1/sum(post1)/h
post2 = like2*like2n
post2 = post2/sum(post2)/h

Here we show \(L(\phi|y_1)\) when \(y_1 | \phi \sim N(\alpha/(1-\phi),\sigma^2/(1-\phi^2)\). Notice that the observed value \(y_1=1.701\) makes the likelihood more picked in the neighborhood of \(\phi=1\).

plot(phis1,like1,type="l",xlab=expression(phi),ylab="Likelihood",ylim=range(like1,like2))
legend("topleft",legend=substitute(paste("True: ",alpha,"=",a," , ",phi,"=",b," , ",
      sigma^2," = ",s2," , ",y[1]," = ",m),list(a=alpha,b=phit,s2=sig2,m=round(y[1],3))))

Here we show \(L(\phi|y_1)\) when \(y_1 | \phi \sim N(\alpha+\phi b, \phi^2 B + \sigma^2)\). The likelihood is relatively flat in the real line.

plot(phis2,like2,type="l",xlab=expression(phi),ylab="Likelihood",ylim=range(like1,like2))
legend("topleft",legend=paste("Hyperparameters: b=",b,", B=",B,sep=""))