# Generating correlation matrix for AR(1) model

February 7, 2020
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Assume that we are in the time series data setting, where we have data at equally-spaced times $1, 2, \dots$ which we denote by random variables $X_1, X_2, \dots$. The AR(1) model, commonly used in econometrics, assumes that the correlation between $X_i$ and $X_j$ is $\text{Cor}(X_i, X_j) = \rho^{|i-j|}$, where $\rho$ is some parameter that usually has to be estimated.

If we were writing out the full correlation matrix for $n$ consecutive data points $X_1, \dots, X_n$, it would look something like this:

$\begin{pmatrix} 1 & \rho & \rho^2 & \dots & \rho^{n-1} \\ \rho & 1 & \rho & \dots & \rho^{n-2} \\ \vdots & \vdots & \vdots & \ddots & \vdots \\ \rho^{n-1} & \rho^{n-2} & \rho^{n-3} &\dots & 1 \end{pmatrix}$

(Side note: This is an example of a correlation matrix which has Toeplitz structure.)

Given $\rho$, how can we generate this matrix quickly in R? The function below is my (current) best attempt:

ar1_cor <- function(n, rho) {
exponent <- abs(matrix(1:n - 1, nrow = n, ncol = n, byrow = TRUE) -
(1:n - 1))
rho^exponent
}


In the function above, n is the number of rows in the desired correlation matrix (which is the same as the number of columns), and rho is the $\rho$ parameter. The function makes use of the fact that when subtracting a vector from a matrix, R automatically recycles the vector to have the same number of elements as the matrix, and it does so in a column-wise fashion.

Here is an example of how the function can be used:

ar1_cor(4, 0.9)
#       [,1] [,2] [,3]  [,4]
# [1,] 1.000 0.90 0.81 0.729
# [2,] 0.900 1.00 0.90 0.810
# [3,] 0.810 0.90 1.00 0.900
# [4,] 0.729 0.81 0.90 1.000


Such a function might be useful when trying to generate data that has such a correlation structure. For example, it could be passed as the Sigma parameter for MASS::mvrnorm(), which generates samples from a multivariate normal distribution.

Can you think of other ways to generate this matrix?

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