Exploratory Data Analysis
1.3. EDA Techniques
1.3.3. Graphical Techniques: Alphabetic
18.104.22.168. Lag Plot
We can make the conclusions based on the above plot.
In the plot above for lag = 1, note how the points tend to cluster
(albeit noisily) along the diagonal. Such clustering
is the lag plot signature of moderate autocorrelation.
If the process were completely random, knowledge of a current observation (say Yi-1 = 0) would yield virtually no knowledge about the next observation Yi. If the process has moderate autocorrelation, as above, and if Yi-1 = 0, then the range of possible values for Yi is seen to be restricted to a smaller range (.01 to +.01). This suggests prediction is possible using an autoregressive model.
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Estimate the parameters for the autoregressive model:
The residual standard deviation for the autoregressive model will be much smaller than the residual standard deviation for the default model