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3.1.1 The Three Stages of ARIMA Modelling

The document describes the three stages of the ARIMA modeling process: 1) Model identification and selection which involves checking for stationarity, identifying seasonality, and using autocorrelation plots to select autoregressive or moving average components. 2) Parameter estimation which uses algorithms to estimate coefficients that best fit the selected ARIMA model. 3) Model checking to ensure the residuals exhibit independence, constant mean and variance over time using tests like Ljung-Box. If inadequate, returning to stage one to improve the model. It then defines the Mean Absolute Percentage Error (MAPE) metric used to measure forecast accuracy as a percentage. The methodology section outlines the steps to forecast

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Snooky Benitez Quisil
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49 views3 pages

3.1.1 The Three Stages of ARIMA Modelling

The document describes the three stages of the ARIMA modeling process: 1) Model identification and selection which involves checking for stationarity, identifying seasonality, and using autocorrelation plots to select autoregressive or moving average components. 2) Parameter estimation which uses algorithms to estimate coefficients that best fit the selected ARIMA model. 3) Model checking to ensure the residuals exhibit independence, constant mean and variance over time using tests like Ljung-Box. If inadequate, returning to stage one to improve the model. It then defines the Mean Absolute Percentage Error (MAPE) metric used to measure forecast accuracy as a percentage. The methodology section outlines the steps to forecast

Uploaded by

Snooky Benitez Quisil
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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3.1.

1 The Three Stages of ARIMA Modelling

The Box-Jenkins model uses iterative three-stage modeling approach which is:

1. The Model Identification and Model Selection: making sure that the variables are

stationary, identifying seasonality in the dependent series (seasonally differencing it if necessary),

and using plots of the autocorrelation and partial autocorrelation functions of the dependent time

series to decide which (if any) autoregressive or moving average component should be used in the

model.

2. Parameter estimation: using computation algorithms to arrive at coefficients, which

best fit the selected ARIMA model. The most common methods use maximum likelihood

estimation or non-linear least-squares estimation.

3. Model checking: It estimated model conforms to the specifications of a stationary

univariate process. In particular, the residuals should be independent of each other and constant in

mean and variance over time (plotting the mean and variance of residuals over time and performing

a Ljung-Box test or plotting autocorrelation and partial autocorrelation of the residuals are helpful

to identify misspecification). If the estimation is inadequate, we have to return to step one and

attempt to build a better model.

3.1.2 MEAN ABSOLUTE PERCENTAGE ERROR (MAPE)

The mean absolute percentage error (MAPE) also known as mean absolute

percentage deviation (MAPD) is a measure of prediction accuracy of a forecasting method


in statistics, like in trend estimation it usually expresses accuracy as a percentage, and is

defined by the formula:

1 𝐴𝑡 −𝐹𝑡
M=𝑛 ∑𝑛𝑡=1 | | × 100
𝐴𝑡

Where 𝐴𝑡 is the actual value and 𝐹𝑡 is the forecast value.

The difference between 𝐴𝑡 and 𝐹𝑡 is divided by the actual value again. The absolute value

in this calculation is summed for every forecasted point in time and divided by the number

of fitted point’s n.

3.2 METHODOLOGY

3.2.1 FORECASTING WITH AUTOREGRESSIVE INTEGRATED MOVING

AVERAGE

1. Collect data of Cagayan de Oro City’s monthly water consumption from

Cagayan de Oro Water District (COWD) for the year 2009-2017.

The gathered data from Cagayan de Oro City will be used for conducting time series

model specifically the ARIMA model.


2. Test for Seasonality

It assures that the data did not possess any seasonal behavior. The test was also

conducted because the study was focused on non-seasonal ARIMA modelling.

3. Identify Presence of Stationarity

The time series plot of a data is used to discuss if the stationarity of the data exists.

If the time series varies about fixed level and has a constant mean and constant variance

then the data is said to be stationary.

4. Model for Forecasting

The model in Box-Jenkins framework was performed to try to identify potential

ARIMA processes which might provide a good fit to the data. Looking at the measure of

accuracy values had led to model selection tools using the MAPE.

5. Comparison of the Data

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