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Predictive Analytics: QM901.1x Prof U Dinesh Kumar, IIMB

The document discusses predictive analytics and the ARIMA model. It explains the components of ARIMA including autoregressive, integration, and moving average. It also covers differencing, identifying ARIMA orders, and the Box-Jenkins methodology for building ARIMA models.

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Shayan Sen Gupta
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97 views

Predictive Analytics: QM901.1x Prof U Dinesh Kumar, IIMB

The document discusses predictive analytics and the ARIMA model. It explains the components of ARIMA including autoregressive, integration, and moving average. It also covers differencing, identifying ARIMA orders, and the Box-Jenkins methodology for building ARIMA models.

Uploaded by

Shayan Sen Gupta
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Predictive Analytics : QM901.

1x
Prof U Dinesh Kumar, IIMB

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Predictive Analytics : QM901.1x

ARIMA
Prof U Dinesh Kumar, IIMB

ARIMA has the following three components:

• Auto-regressive component: Function of past values of the time series.

• Integration Component: Differencing the time series to make it a stationary process.

• Moving Average Component: Function of past error values.

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Predictive Analytics : QM901.1x

Integration (d)
Prof U Dinesh Kumar, IIMB

• Used when the process is non-stationary.

• Instead of observed values, differences between observed values are considered.

• When d=0, the observations are modelled directly. If d = 1, the differences


between consecutive observations are modelled. If d = 2, the differences of the
differences are modelled.

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Predictive Analytics : QM901.1x

ARIMA (p, d, q)
Prof U Dinesh Kumar, IIMB

• The q and p values are identified using auto-correlation function (ACF)


and Partial auto-correlation function (PACF) respectively. The value d
identifies the level of differencing.

• Usually p+q <= 4 and d <= 2.

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Predictive Analytics : QM901.1x

Differencing
Prof U Dinesh Kumar, IIMB

• Differencing is a process of making a non-stationary process into


stationary process.

• In differencing, we create a new process Xt, where Xt = Yt – Yt-1.

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Predictive Analytics : QM901.1x

ARIMA(p,1,q) Process
Prof U Dinesh Kumar, IIMB

X t   0  1 X t 1   2 X t  2  ...   p X t  p 
  0  1 t 1   2 t  2  ...   q t  q  t

Where Xt = Yt – Yt-1

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Ljung-Box Test
Predictive Analytics : QM901.1x
Prof U Dinesh Kumar, IIMB

• Ljung-Box is a test on the autocorrelations of residuals. The test statistic is:

rk2
m
Qm  n(n  2)
k 1 n  k
n = number of observations in the time series.
k = particular time lag checked
m = the number of time lags to be tested
rk = sample autocorrelation function of the kth residual term.

H0: The model does not exhibit lack of fit


HA: The model exhibits lack of fit

Q statistic is approximate chi-square distribution with m – p – q degrees of freedom if ARMA orders


are correctly specified.
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Predictive Analytics : QM901.1x

AR(2) Ljung-Box Test


Prof U Dinesh Kumar, IIMB

P-value is 0.740, thus the model doesn’t show


lack of fit

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Predictive Analytics : QM901.1x

Box-Jenkins Methodology
Prof U Dinesh Kumar, IIMB

• Identification: Identify the ARIMA model using ACF & PACF plots. This
would give the values of p, q and d.

• Estimation: Estimate the model parameters (using maximum likelihood)

• Diagnostics: Check the residual for any issue such as not providing White
Noise.

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