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ARIMA Modeling:: B-J Procedure

The document discusses ARIMA modeling, which involves identifying, estimating, diagnosing, and forecasting with autoregressive integrated moving average (ARIMA) models. Key steps include identifying the orders of differencing, autoregression, and moving average terms by examining time series plots and autocorrelation functions. Parameters are estimated using least squares or maximum likelihood. The estimated model is then diagnosed through residual analysis and model selection criteria. Forecasting involves using the estimated linear prediction equation.

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Harsh Khemka
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364 views26 pages

ARIMA Modeling:: B-J Procedure

The document discusses ARIMA modeling, which involves identifying, estimating, diagnosing, and forecasting with autoregressive integrated moving average (ARIMA) models. Key steps include identifying the orders of differencing, autoregression, and moving average terms by examining time series plots and autocorrelation functions. Parameters are estimated using least squares or maximum likelihood. The estimated model is then diagnosed through residual analysis and model selection criteria. Forecasting involves using the estimated linear prediction equation.

Uploaded by

Harsh Khemka
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPT, PDF, TXT or read online on Scribd
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ARIMA Modeling:

B-J Procedure

A k Chauhan
[email protected]
9811216905
Structural models  multivariate in nature, and

Y = F (movements in current or past values of other (explanatory)


variables).

Univariate time series models

Yt = F (own past values, Current & past values of an error term)

 useful when a structural model is inappropriate.


 when other variables are not observable or not measurable
 Explanatory variables are measured at a lower frequency of
observation than yt. For eg, yt might be a series of daily stock returns,
where possible explanatory variables could be macroeconomic
indicators that are available monthly.
Moving average processes:

Let ut be a white noise process with zero mean & constant variance σ2.
Then

yt = µ + ut + θ1ut-1 + θ 2 ut-2 + . . . + θq ut-q


 
is a MA(q) model.
Autoregressive processes:

An AR model is one where the current value of a variable y, depends


upon only the values that the variable took in previous periods plus
an error term. An AR model of order p, denoted as AR(p), can be
expressed as

Yt = u + Φ1 yt-1 + Φ2 yt-2 + …….. + Φp yt-p + ut  

• where ut is a white noise disturbance term. The expression of AR(p)


model can be written more compactly using sigma notation
ARMA (p,q) processes
 obtained by combining the AR(p) & MA(q) models.

 States that the current value of some series y depends linearly on its
own previous values plus a combination of current and previous
values of a white noise error term.

 The model could be written

Yt = u + Φ1 yt-1 + Φ2 yt-2 + ……..+ Φp yt-p +


θ1 ut-1 + θ2 ut-2 + …..+ θq ut-q + ut
Is a ARMA (p, q)m model
 An AR process has:
● a geometrically decaying ACF
● a number of non-zero points of PACF = AR order.

 A MA process has:
● number of non-zero points of ACF = MA order
● a geometrically decaying PACF.

 A combination ARMA process has:


● a geometrically decaying ACF
● a geometrically decaying PACF.
Process of ARIMA Modeling
• Identification Stage
• Estimation Stage
• Diagnostic Checking
• Forecasting
Identification

• First identify the order of integration on the basis of


visual inspection of time series plot, correlogram and
formal unit root testing.
• Detrend and Differentiate the series if required to obtain a
stationary series.
• Identify the undrlaying AR (p) and MA (q) processes in the
stationary series based on the behaviour of the
correlogram.
• In order to achieve parsimony keep the number of AR
and MA lag orders, p and q as small as possible; provided
the model still satisfactorily forecast the series.
• It is better to used mixed ARMA (p, q) model rather than
pure AR (p) or MA (q) model.
Estimation

involves estimation of parameters of model specified in


step 1.

 This can be done using least squares or another technique,


known as Max likelihood, depending on the model.
Model checking

 determining whether the model specified and estimated is


adequate.
 Suggested methods are:

Overfitting -- fitting a larger model than that required. If the


model specified at step 1 is adequate, any extra terms
added to ARMA model would be insignificant.

Residual diagnostics. Residual should be a white noise series.

Information Criteria: SBIC, AIC HQ should have least values.


Negative MA Coeff
Negative MA Coeff
Estimation Stage
• A pure AR model can be estimated using OLS
estimator but if the model also includes MA
terms ML estimator is used.
Diagnostic Checking
How good the model fits the data? How
reliable will be the prediction based on it?

• Use some indicators of goodness of fit such as R2


and ANOVA.
Is the model sufficiently specified or it requires
including some more AR or MA terms?

Examine the residuals. Their correlogram can


give a clue if residuals are pure white noise or
at least free from serial correlation. Q and LB
statistics of residuals is useful for detecting
serial correlation. Use LR test for AR in
residuals.
Does the model include some unnecessary parameters
(AR or MA terms) which can be dropped out without a
significant loss in predictive efficiency of the model?

• t-statistic of individual coefficient can give an


initial (but not conclusive) clue.
.
Forecasting
• In ARMA (p, q) the prediction equation is simply
a linear equation that refers to past values of
original time series and past values of the
errors.
• In an ARIMA (p,d,q) model where d>0, the
forecasting can be made at two different levels
-
– at the level of differenced stationary time series,
and
– at original integrated time series.

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