Autocorrelation – What is the Purpose of Autocorrelation in Time Series Analysis?

autocorrelation

Why is autocorrelation so important? I've understood the principle of it (I guess..) but as there are also examples where no autocorrelation occurs I wonder: Isn't everything in nature somehow autocorrelated? The last aspect is more aiming at a general understanding of the autocorrelation itself because, as I mentioned, isn't every state in the universe dependent on the previous one?

Best Answer

Autocorrelation has several plain-language interpretations that signify in ways that non-autocorrelated processes and models do not:

  • An autocorrelated variable has memory of its previous values. Such variables have behavior that depends on what went before. Memory may be long or short relative to the period of observation; memory may be infinite; memory may be negative (i.e. may oscillate). If your guiding theories say the past (of a variable) remains with us, then autocorrelation is an expression of that. (See, for example Boef, S. D. (2001). Modeling equilibrium relationships: Error correction models with strongly autoregressive data. Political Analysis, 9(1), 78–94, and also de Boef, S., & Keele, L. (2008). Taking Time Seriously. American Journal of Political Science, 52(1), 184–200.)

  • An autocorrelated variable implies a dynamic system. The questions we ask and answer about the behavior of dynamic systems are different than those we ask about non-dynamic systems. For example, when causal effects enter a system, and how long effects from a perturbation at one point in time remain relevant are answered in the language of autocorrelated models. (See, for example, Levins, R. (1998). Dialectics and Systems Theory. Science & Society, 62(3), 375–399, but also the Pesaran citation below.)

  • An autocorrelated variable implies a need for time series modeling (if not dynamic systems modeling also). Time series methodologies are predicated on autoregressive behaviors (and moving average, which is a modeling assumption about the time-dependent structure of errors) attempting to capture salient details of the data generating process, and stand in marked contrast to, for example, so-called "longitudinal models" which simply incorporate some measure of time as a variable in an otherwise non-dynamic model without autocorrelation. See, for example, Pesaran, M. H. (2015) Time Series and Panel Data in Econometrics, New York, NY: Oxford University Press.

Caveat: I am using "autoregression" and "autoregressive" to imply any memory structure to a variable in general, regardless of short-term, long term, unit-root, explosive, etc. properties of that process.