CM-
Thank you. I had forgotten that those equations were in there. I think I will try that, if it comes to it.
So, what made you want to try an AR(2) model? Did your AR(1) model just not fit right?
Did you check forecasts against actual data to decide which model was better, or what?
Just curious... you don't need to reply if you're busy.
Thanks again!
Jacob: How do we compare an AR(1) model with an AR(2) model? If the AR(2) model has a higher R2 and a lower sum of squared residuals, won’t its forecasts also be better?
Rachel: The AR(2) model will have the higher R2 and the lower sum of squared residuals. This must be the case, since the AR(2) model uses the same independent variables as the AR(1) model plus an additional variable. But its out-of-sample forecasts may be worse. For a perfect random walk, this will often be the case.