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Arima

The document discusses univariate autoregressive integrated moving average (ARIMA) models for time series forecasting. ARIMA models try to identify and account for underlying patterns like trends or seasonality in a time series. The modeling process involves identifying the correct ARIMA(p,d,q) model structure based on autocorrelation and partial autocorrelation functions, estimating model parameters, checking that the model residuals are white noise via diagnostic tests, and forecasting future values. Stationarity may be needed by differencing the data, with the degree of differencing represented by the order of integration d.

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78 views

Arima

The document discusses univariate autoregressive integrated moving average (ARIMA) models for time series forecasting. ARIMA models try to identify and account for underlying patterns like trends or seasonality in a time series. The modeling process involves identifying the correct ARIMA(p,d,q) model structure based on autocorrelation and partial autocorrelation functions, estimating model parameters, checking that the model residuals are white noise via diagnostic tests, and forecasting future values. Stationarity may be needed by differencing the data, with the degree of differencing represented by the order of integration d.

Uploaded by

dondan123
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
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UNIVARIATE ARIMA

MODELS
AUTOREGRESSIVE INTEGRATED
MOVING AVERAGE MODELS

BOX JENKINS MODEL
A technique that tries to model the
underlying process (stochastic) of the
time series

Forecasting by concentrating only on
the past patterns of the time series

Find a model that accurately represents
the past and future patterns of a time
series
Y
t
= Pattern + e
t



The pattern can be random, seasonal,
trend, cyclical or a combination of
patterns





MODEL
Similar to a machine that takes the
observed time series and turns them into
forecasts and white noise errors

Actual series Machine (Black Box)
Accurate Forecast and White Noise
residuals

AIM OF ARIMA = DESIGN THE RIGHT
MACHINE (IDENTIFY THE RIGHT
PATTERN)
CONFIRMATION THAT CORRECT
PATTERN HAS BEEN IDENTIFIED
REQUIRES WHITE NOISE RESIDUALS
Meaning:
ERRORS ~ normally and independently
distributed (NID)
Errors have no pattern cannot be
predicted using past values
Errors have zero mean

Steps in ARIMA modeling

1. Model Identification:
Use graphs, statistics, ACF, PACF, etc. to
identify pattern and model
components

2. Parameter Estimation
Determine model coefficients through
software applications

3. Model Diagnostics
Use graphs, statistics, ACF, PACF of
residuals to determine if the model is
valid.
If valid, then use the model. If not, repeat 1,
2 and 3 again

4. Forecast
Breaking Down ARIMA

Model 1
AUTOREGRESSIVE MODEL AR(p)

The time series is predicted using its
own previous values previous values

Y
t
=
1
Y
t-1
+
2
Y
t-2
+ ..+
p
Y
t-p
+ e
t

AR(p) = Autoregressive of order p
i.e. using p past periods to forecast

AR(1)
Y
t
=
1
Y
t-1
+ e
t

How do we determine p?

Check ACF and PACF


ACF should decline rapidly to
insignificant values (tend to decrease
toward zero)


The number of statistically significant
spikes in PACF is your p (order of
autoregression)
MOVING AVERAGE MODEL MA(q)

Model that predict time series based on
past forecast errors.

Y
t
= e
t
+
1
e
t-1
+
2
Y
t-2
+ ..+
q
Y
t-q
+ e
t


Similar to weighted average model

q = order of MA

How do you determine q?

If PACF gradually declines to zero, then
the number of significant spikes in ACF
= q



AUTOREGRESSIVE MOVING AVERAGE
MODELS ARMA(p,q)

Predicting time series using past
values of the series and past values of
the forecast errors
Mixed model

Y
t
=
1
Y
t-1
+
2
Y
t-2
+ ..+
p
Y
t-p
+
1
e
t-1
+

2
Y
t-2
+ ..+
q
Y
t-q
+ e
t



To define an ARMA model, Check ACF
and PACF

Both ACF and PACF should gradually
fall to Zero

Count the number of AR and MA terms
significantly different from zero
For AR count PACF, for MA count ACF
STATIONARITY

Autocorrelations pattern dominate non-
stationary series.
So to determine the correct model and
pattern, wed have to stationarize the data

One of the ways to achieve stationarity is
differencing


1
'


t t t
y y Y
Sometimes wed have to find 2
nd

differences to stationarize

Number of differences = order of
Integration = d
When we use differencing to achieve
stationarity the resulting model =
ARIMA(p,d,q)

Seasonal differencing ARIMA(p,d,q)
(p,d,q)
DIAGNOSTIC CHECK OF MODEL
To check if model is adequate (valid), check
if the errors generated by the model are
white noise by

1. Create ACF for the residuals and check
if they have any significant spikes. If white
noise no significant spikes
2. Check the Ljung-Box Q-statistics.

This is a chi-square test on the residuals
with m-p-q degrees of freedom
m = number of time lags to be tested

Calculated Q-statistics is compared to chi-
square value from tables.

If calculated Q is less than table value
errors are white noise
If ACF plot of residual or Q-statistics
shows that the errors are not white noise
model must be redefined.


If two models yield white noise errors, pick
one with the lowest AIC or BIC
AIC = Akaike Information Criterion
BIC= Bayesian Information Criterion
AIC = n ln(SSE) + 2k

K = #of parameters that are fitted in the
model
SSE =sum of the squared errors
n = number of observations in series

BIC = n ln(SSE) + k ln(n)

You cannot compare the AIC or BIC of
one series with another series


You cannot compare AIC to BIC

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