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Itsm - Help PDF

The document provides information on how to get started using the ITSM2000 time series analysis software. It describes how to create and open projects to analyze univariate or multivariate time series data, specifying models, saving data and projects, importing and exporting files, and using the project editor to manage multiple simultaneous projects. Projects can contain up to 10 time series, and the project editor allows transferring series between projects and activating/deactivating components in multivariate projects.

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0% found this document useful (0 votes)

398 views120 pages

Itsm - Help PDF

Uploaded by

Amit

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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ITSM2000

GETTING STARTED
ACF/PACF
ARAR Forecasts
ARMA Forecasts
Autofit
Box-Cox Transformation
Classical Decomposition
Color Customization
Constrained MLE
Cross-correlations
Cross-spectrum
Data sets
Data transfer
Differencing
Exponential smoothing
Fisher's Test
GARCH models
Graphs
Holt-Winters Forecasts
Holt-Winters Seasonal Forecasts
Intervention Analysis
Long Memory Models
Maximum Likelihood Estimation
Model Representations
Model Specification
Model Spectral Density
Moving Average Smoothing
Multivariate Autoregression
Periodogram
Preliminary Estimation
Project Editor
Regression with ARMA or ARFIMA Errors
Residual Plots
Residual Tests
Simulation
Spectral Smoothing (FFT)
Subsequence
Subtract Mean
Transfer Function Modelling
TSM Files
GETTING STARTED: CREATING, EDITING AND SAVING PROJECTS

Example: Use the options File>Project>Open>Multivariate to open the project LS2.TSM,

specifying 2 for the number of columns in the data. Then use File>Project>Open>Univariate to
open the project LEAD.TSM, which happens to be the first component of LS2.TSM. Then
press the Project Editor button, click on the plus signs beside each project and you will see the
following window.

Renaming a series. The names of the series in each project can be changed by clicking on the
current name to highlight it, then clicking again and typing the new name in the box surrounding
the old title. When you are satisfied with the names press OK and the window will close.
Changing the above names to reflect the contents of the series gives

When you are satisfied with the names press OK and the window will close. Either of the two
projects can now be analyzed in ITSM. If the window labelled C:\ITSM2000\LEAD.TSM is
highlighted, you will see the univariate toolbar at the top of the ITSM screen and all the ITSM
univariate functions (transformations, model-fitting etc.) can then be applied to the univariate
data set LEAD.TSM. On the other hand, if the window labelled C:\ITSM2000\LS2.TSM is
highlighted, then the multivariate toolbar will appear at the top or the ITSM screen and the
ITSM multivariate functions (transformations, AR-Model, etc.) can then be applied to the
multivariate data set LS2.TSM.
Transferring series into a multivariate project: A series in any univariate or multivariate
project can be transferred to a multivariate project with the aid of the project editor. Open the
project editor, click on the plus signs beside each project, click on the series to be transferred and
drag it to the top line of the project to which it is to be added. You will then be asked to confirm
the data transfer. Applying this to our current example, we can move the univariate series
LEAD into the project LS2 to get a trivariate project (with two identical copies of the LEAD
series). The project editor window then appears as follows.

Click OK and you will see that the project LEAD.TSM now contains no data. This project (or
any other project) can be closed by clicking on the X in the top right corner of the project
window.

Tansferring a Component of a Multivariate Series to a Univariate Project. From an m

-variate project, a univariate project with any component series as data can be created as
follows. Select File>Project>New, check the option Univariate and click on OK.
Open the project editor and click on the plus sign to the left of the multivariate project. Click on
the component to be transferred and drag it to the line labeled New Univariate Project.
You will then be asked to confirm the data transfer.. Once you have done this, a graph of the
component series will appear in the New Univariate Project window and the univariate tool bar
will appear at the top of the ITSM window.

Activating and Deactivating Series. In an m-variate project the maximum value of m for
which cross-correlations can be plotted or to which a multivariate autoregression can be fitted is
5. If a multivariate series with more than 5 components is imported to ITSM, then it is necessary
to ensure that only five components are activated. Selection of the five to be activated is carried
out with the Project Editor.

Example. Use File>Project>Open>Multivariate to open the project STOCK7.TSM. (This file

contains the daily returns, 100ln[P(t)/P(t-1)] for seven stock indices, Australian, Dow-Jones
Industrial, Hang Seng, Indonesia, Malaysia, Nikkei 225 and South Korea for the period April 27,
98 – April 9, 99). In the multivariate dialog box highlight the default number of columns, 2, and
replace it by 7. Click OK and you will see the following graphs of the component series.
Australia Dow-J Ind Hang Seng
3. 6.

4. 8.
2.
2. 4.
1.
0.
0. 0.
-2.
-1. -4. -4.
-2. -6.
-8.
0 50 100 150 200 250 0 50 100 150 200 250 0 50 100 150 200 250

Indonesia Malaysia Nikkei 225

20. 20. 6.

10. 10.
2.

0. 0.

-10. -2.
-10.

-20.
-20. -6.

0 50 100 150 200 250 0 50 100 150 200 250 0 50 100 150 200 250

Sth Korea

10.

-2.

-6.

-10.
0 50 100 150 200 250

If now you press the Plot sample autocorrelations button you will be requested to deactivate
some of the components until there are at most five active components. This is done by pressing
the Project Editor button, clicking on the plus sign beside the project STOCK7.TSM, and then
right-clicking on the series to be deactivated. A menu will appear and repeated clicking on
Active will cause the series to alternate between the active and inactive states. Deactivating the
Series 4, 5 and 7, gives the following graphs
Australia Dow-J Ind
6.
3.

4.
2.
2.
1.
0.

0.
-2.

-1.
-4.

-2. -6.

0 50 100 150 200 250 0 50 100 150 200 250

Hang Seng Nikkei 225

10.
6.
8.

6. 4.

4.
2.
2.
0.
0.

-2. -2.

-4.
-4.
-6.
-6.
-8.
0 50 100 150 200 250 0 50 100 150 200 250

Now we can plot the cross-correlations, cross-spectra of the four active series and fit
multivariate autoregressions using either the Burg or Yule-Walker algorithms and the options
AR-Model>Estimation>Burg or AR-Model>Estimation>Yule-Walker.
ACF/PACF
See also Model Specification , Preliminary Estimation , Model Representations .
Refs: B&D (1991) pp.19, 24, 274. , B&D (2002) Sections 1.5,6.1.

The autocorrelation function (ACF) of the stationary time series {Xt}

is defined as
h) = Corr(Xt+h, Xt) for h = 0,  1 , … .
(Clearly h) = h) if Xt is real-valued, as we assume throughout.

The ACF is a measure of dependence between observations as a function

of their separation along the time axis. ITSM estimates this function by
computing the sample autocorrelation function, of the data, x1, …, xn
i.e.
ˆ (h)  ˆ (h) / ˆ (0) , 0  h  n,
where ˆ () is the sample autocovariance function,
n h
ˆ (h)  n 1  ( x j  h  x )( x j  x ), 0  h  n.
j 1

The autocorrelation function of an ARMA process decreases in absolute

value fairly rapidly with h. A sample ACF which is positive and very
slowly decreasing suggests that the data may have a trend. A sample ACF
with very slowly damped periodicity suggests the presence of a periodic
seasonal component. In either of these two cases you may need to
transform your data before proceeding.

Another useful diagnostic tool is the sample partial autocorrelation

function or sample PACF.

The partial autocorrelation function (PACF) of the stationary time series

{Xt} is defined to be one at lag 0 and at lag h>0 to be the correlation
between the residuals of Xt+h and Xt after linear regression on X1, … , Xt+h-1.
This is a measure of the dependence between Xt+h and Xt after removing the
effect of the intervening variables Xt+1, … , Xt+h-1. The sample PACF is found
from the data as described in B&D (1991), p.102 and B&D (1996), p.93.

The sample ACF and PACF graphs sometimes suggest an appropriate ARMA
model for the data. A sample ACF which is smaller in absolute value than
1.96 / n for lags greater than q suggests an MA model of order less than or
equal to q. A sample PACF which is smaller in absolute value than 1.96 / n
for lags greater than p suggests an AR model of order less than or equal to p.
Example: Opening the data set SUNSPOTS.TSM and selecting the options
ACF/PACF then Sample from the Statistics Menu gives the following sample
ACF/PACF graphs. The dotted horizontal lines are the bounds at  1.96 / n .
The graphs thus suggest an AR(2) model for this series. The fitting of such a
model is discussed under the heading Model Estimation, where we also discuss
more sophisticated techniques for selecting the most appropriate ARMA(p,q)
model for the data. The ACF and PACF of the current model can be compared
with the sample ACF and PACF by selecting the options ACF/PACF then
Sample/Model from the Statistics Menu.
ACF PACF
1.00 1.00

.80 .80

.60 .60

.40 .40

.20 .20

.00 .00

-.20 -.20

-.40 -.40

-.60 -.60

-.80 -.80

-1.00 -1.00
0 5 10 15 20 25 30 35 40 0 5 10 15 20 25 30 35 40
ARAR Forecasts
See also ARMA Forecasts , Holt-Winters Forecasts , Holt-Winters Seasonal Forecasts .
Refs: B&D (2002) Sec.9.1.

The ARAR algorithm is an adaptation of the ARARMA forecasting algorithm

of Parzen and Newton in which the idea is to apply automatically selected
'memory-shortening' transformations to the data and then to fit an ARMA
model to the transformed series. The ARAR algorithm is a version of this in
which the ARMA-fitting step is replaced by the fitting of a subset AR model to
the transformed data.

The algorithm is extremely simple to apply. After reading the data into ITSM
simply select the option ARAR from the Forecasting Menu and you will see a
dialogue box similar to the following:

The number of forecasts required must be entered in the first window. If the data
had been transformed (which is not the case in the above example), you would have
the option of removing the check mark beside Apply to original data, in which case
the current (transformed) series would be predicted instead of the original series.
Also in the upper half of the dialogue box you are provided with the option of
computing forecasts based on a specified subset of the series and of plotting
prediction bounds with any specified inclusion probability.

Clicking on the check mark at the bottom of the dialogue box will eliminate the
The number of forecasts required must be entered in the first window. If the data
had been transformed (which is not the case in the above example), you would have
the option of removing the check mark beside Apply to original data, in which case
the current (transformed) series would be predicted instead of the original series.
Also in the upper half of the dialogue box you are provided with the option of
computing forecasts based on a specified subset of the series and of plotting
prediction bounds with any specified inclusion probability.

Clicking on the check mark at the bottom of the dialogue box will eliminate the
memory-shortening step.. This allows the fitting of a subset AR model to a series for
which a stationary model seems appropriate.

Yule-Walker equations are used to fit a subset AR model to the mean-corrected

(possibly memory-shortened) series. The subset AR has four terms with lags 1, l1,
l2 and l3, where the lags l1, l2 and l3 are chosen either to minimize the Yule-Walker
estimate of white noise variance or to maximize the Gaussian likelihood, with the
maximum lag constrained to be either 13 or 26. The choice of criterion is made by
marking the appropriate window.

Example: Read the data in the file AIRPASS.TSM into ITSM, and select the option
ARAR from the Forecast Menu. Completing the dialogue box as shown above and
pressing the OK button will produce the graph shown below of 24 ARAR forecasts and
the 95% prediction bounds. With the ARAR Forecasts window highlighted, press the
INFO button on the toolbar at the top of the ITSM window and you will see the
parameters of the memory-shortening filter, the lags and estimated coefficients of the
subset autoregression and the numerical values of the forecasts. The mean square prediction
errors are found as described in B&D (2002), Section 9.1.3.

800.

700.

600.

500.

400.

300.

200.

100.

0 20 40 60 80 100 120 140 160

ARMA Forecasts
See also ARAR Forecasts , Holt-Winters Forecasts , Holt-Winters Seasonal Forecasts .
Refs: B&D (1991) Sec.9.5, B&D (2002) Sec.6.4.

One of the main purposes of time series analysis is the prediction of future
observations. To make predictions with ITSM based on the current model
select the Forecast Menu followed by the option ARMA. You will then see
a dialogue box similar to the following:

The number of forecasts required must be entered in the first window. The
remaining windows provide the option of forecasting either the transformed
or the original data. The settings shown above will produce forecasts of the
original data together with corresponding 95% prediction bounds. Removing
the first two check marks by clicking on them will produce forecasts of the
transformed data. (In the above example the original series was differenced
and mean-corrected before an ARMA model was fitted.)

Note: It is important to realize that when we difference the original series and
fit an ARMA model to the transformed data, we are effectively fitting an
ARIMA model (see B&D (1991), Sec.9.1 or B&D (1996), Sec.6.4) to the
undifferenced data so that the forecasts generated by the program are ARIMA
forecasts for the undifferenced data.

Given the current (possibly transformed) data X1 , X2 , …, Xn, and assuming

that the current model is appropriate,the forecast of the future value Xn+h , is
the linear combination Pn(Xn+h) of X1 , X2 , …, Xn , which minimizes the mean
2
squared error E(Xn+h - Pn(Xn+h)) .

Example: Read the data in the file DEATHS.TSM into ITSM, and use the
options under the Transform Menu to difference the data at lags 12 and 1 and
subtract the mean. Use the option Model-Specify to enter the model,
X t  Z t  .596 Z t 1  .407 Z t 6  .685Z t 12  .460Z t 13 , {Z t } ~ WN (0,71240).
Example: Read the data in the file DEATHS.TSM into ITSM, and use the
options under the Transform Menu to difference the data at lags 12 and 1 and
subtract the mean. Use the option Model-Specify to enter the model,
X t  Z t  .596 Z t 1  .407 Z t 6  .685Z t 12  .460Z t 13 , {Z t } ~ WN (0,71240).

You will then see the dialogue box shown above. (Notice that the white noise
variance has been replaced by the estimate, (Residual Sum of Squares)/n. If
you wish, you can reenter any desired value.) Making sure that the Plot
Prediction Bounds box is checked, click the OK button and you will see the 10
forecasts plotted in the ARMA Forecasts window together with the corresponding
95% prediction bounds. With this window highlighted, press the INFO button
to see the numerical values of the forecasts and bounds. The latter are calculated
on the assumption that the current model is valid and that the white noise in the
ARMA model for the transformed data is Gaussian. As expected, the prediction
bounds corresponding to Pn(Xn+h) become more widely separated as the lead time
h of the forecast increases.
12000.

11000.

10000.

9000.

8000.

7000.

0 10 20 30 40 50 60 70 80
Autofit
Ref: B&D (2002)., Appendix D.3.1.

Once the univariate data file in ITSM is judged to be representable by a stationary time series
model, a search for a suitable model, based on minimizing the AICC criterion can be carried out
as follows.
Select Model>Estimation>Autofit. A dialog box will appear in which you must specify upper
and lower limits for the autoregressive and moving average orders p and q. Once these limits
have been specified click on Start and the search will begin.
You can watch the progress of the search in the dialog box which continually updates the values
of p and q and records the best model found so far.
Once the search has been completed, click on Close and the current model for the data will be
the one selected by Autofit.
This option does not consider models in which the coefficients are required to satisfy
constraints(other than causality) and consequently does not always lead to the optimal
representation of the data.
Since the number of maximum-likelihood models to be fitted is the product of the number of p-
values and the number of q values, some care should be exercised (depending on the speed of
your computer) in specifying the ranges. The maximum values for p and q are 27.
Box-Cox Transformations
See also Classical Decomposition , Differencing ,
Refs: B&D (1991) p.284. , B&D (2002) Section 6.2.

These transformations can be applied to the data by selecting the

option Box-Cox from the Transform Menu. If the original data are
Y1, Y2 ,…, the Box-Cox transformation f converts them to f(Y1 ),
f(Y2 ),…, where
 y 1

f  ( y )    ,   0,
 log( y ),   0.

Such a transformation is useful when the variability of the data increases

or decreases with the level. By suitable choice of  , the variability can
often be made nearly constant. In particular for positive data whose
standard deviation increases linearly with level, the variability can be
stabilized by choosing  = 0.

The choice of  can be made visually by clicking on the pointer in the

dialogue box shown below and dragging it in either direction along the
scale. As the pointer is moved, the graph of the data will be seen to change
with  . Once you are satisfied that the variability has been satisfactorily
stabilized, leave the pointer at the chosen point on the scale and click OK.
Once the transformation has been made, it can be undone using the Undo
suboption of the Transform Menu. Very often it will be found that no
transformation is needed or that the choice  = 0 is satisfactory.
.

Example: Read the data file AIRPASS.TSM into ITSM. The variability
of the data will be seen to increase with level. After selecting the Box-Cox
suboption of the Transform Menu, you will see the Box-Cox dialogue box.
Clicking on the pointer and dragging it along the scale, you will find that
the amplitude of the variability appears to stabilize for  = 0. The dialogue
box and the transformed data will then appear as follows.

6.60

6.40

6.20

6.00
6.60

6.40

6.20

6.00

5.80

5.60

5.40

5.20

5.00

4.80

4.60

0 20 40 60 80 100 120 140

Burg Model
See also Yule-Walker Model, Preliminary Estimation
Refs: R.H. Jones in Applied Time Series Analysis, ed. D.F.Findley, Academic Press, 1978, B&D
(2002) Section 7.6.

The multivariate Burg algorithm (see Jones (1978)) fits a (stationary) multivariate autoregression
(VAR(p)) of any order p up to 20 to an m-variate series {X(t)} (where m<6). It can also
automatically choose the value of p which minimizes the AICC statistic. Forecasting and
simulation with the fitted model can be carried out.

The fitted model is

X (t )   (0)   1 X (t  1)    p X (t  p )  Z (t ),
where the first term on the right is an m x 1-vector, the coefficients  are m x m matrices and {Z(
t)}~ WN(0, ).

The data (which must be arranged in m columns, one for each component) is imported to ITSM
using the commands File>Project>Open>Multivariate OK and then selecting the name of the file
containing the data. Click on the Plot sample cross-correlations button to check the sample
autocorrelations of the component series and the cross-correlations between them. If the series
appears to be non-stationary, differencing can be carried out by selecting Transform>Difference
and specifying the required lag (or lags if more than one differencing operation is required). The
same differencing operations are applied to all components of the series. Transform>Subtract
Mean will subtract the mean vector from the series. If the mean is not subtracted it will be
estimated in the fitted model and the vector .in the fitted model will be non-zero. Whether
or not differencing operations and/or mean correction are applied to the series, forecasts can be
obtained for the original m-variate series.

Example: Import the bivariate series LS2.TSM by selecting

File>Project>Open>Multivariate,OK and then typing LS2.TSM, entering 2 for the number of
columns and clicking OK. You will see the graphs of the component series as below.
Series1 Series2

14.00

260.
13.50

13.00 250.

12.50
240.

12.00
230.
11.50

220.
11.00

10.50 210.

10.00
200.

9.50

0 20 40 60 80 100 120 140 0 20 40 60 80 100 120 140

These graphs strongly suggest the need for differencing. This is confirmed by inspection
of the cross-correlations below, which are obtained by pressing the yellow Plot sample
cross-correlations button.
Series1 Series1x Series2
1.00 1.00

.80 .80

.60 .60

.40 .40

.20 .20

.00 .00

-.20 -.20

-.40 -.40

-.60 -.60

-.80 -.80

-1.00 -1.00
0 2 4 6 8 10 12 14 16 18 20 0 2 4 6 8 10 12 14 16 18 20

Series2x Series1 Series2

1.00 1.00

.80 .80

.60 .60

.40 .40

.20 .20

.00 .00

-.20 -.20

-.40 -.40

-.60 -.60

-.80 -.80

-1.00 -1.00
0 2 4 6 8 10 12 14 16 18 20 0 2 4 6 8 10 12 14 16 18 20

The graphs on the diagonal are the sample ACF’s of Series 1 and Series 2, the top right graph
shows the sample cross-correlations between Series 1 at time t+h and Series 2 at time t, for h
=0,1,2,…, while the bottom left graph shows the sample cross-correlations between Series 2 at
time t+h and Series 1 at time t, for h=0,1,2,…,

If we difference once at lag one by selecting Transform>Difference and clicking OK, we get the
differenced buvariate series with corresponding rapidly decaying correlation functions as shown.
Series1 Series2

5.
.80

.60 4.

.40 3.

.20 2.

.00 1.

-.20 0.

-.40 -1.

-.60 -2.

-.80 -3.

0 20 40 60 80 100 120 140 0 20 40 60 80 100 120 140

Series1 Series1x Series2

1.00 1.00

.80 .80

.60 .60

.40 .40

.20 .20

.00 .00

-.20 -.20

-.40 -.40

-.60 -.60

-.80 -.80

-1.00 -1.00
0 2 4 6 8 10 12 14 16 18 20 0 2 4 6 8 10 12 14 16 18 20

Series2x Series1 Series2

1.00 1.00

.80 .80

.60 .60

.40 .40

.20 .20

.00 .00

-.20 -.20

-.40 -.40

-.60 -.60

-.80 -.80

-1.00 -1.00
0 2 4 6 8 10 12 14 16 18 20 0 2 4 6 8 10 12 14 16 18 20

Now that we have an apparently stationary bivariate series, we can fit an autoregression using
Burg’s algorithm by simply selecting AR Model>Estimation>Burg, placing a check mark in the
Minimum AICC box and clicking OK. The algorithm selects and prints out the following
VAR(8) model.

========================================
ITSM2000:(Multivariate Burg Estimates)
========================================

Optimal value of p = 8
PHI(0)
.029616
.033687

PHI(1)
-.506793 .104381
-.041950 -.496067

PHI(2)
-.166958 -.014231
.030987 -.201480

PHI(3)
-.067112 .059365
4.747760 -.096428

PHI(4)
-.410820 .078601
5.843367 -.054611

PHI(5)
-.253331 .048850
5.054576 .199001

PHI(6)
-.415584 -.128062
4.148542 .234237

PHI(7)
-.738879 -.015095
3.234497 -.005907

PHI(8)
-.683868 .025489
1.519817 .012280

Burg White Noise Covariance Matrix, V

.071670 -.001148
-.001148 .042355

AICC = 56.318690
Model Checking: The components of the bivariate residual series can be plotted by selecting
AR Model>Residual Analysis>Plot Residuals and their sample correlations by selecting AR
Model>Residual Analysis>Plot Cross-correlations. The latter gives the graphs,

Series1 Series1x Series2

1.00 1.00

.80 .80

.60 .60

.40 .40

.20 .20

.00 .00

-.20 -.20

-.40 -.40

-.60 -.60

-.80 -.80

-1.00 -1.00
0 2 4 6 8 10 12 14 16 18 20 0 2 4 6 8 10 12 14 16 18 20

Series2x Series1 Series2

1.00 1.00

.80 .80

.60 .60

.40 .40

.20 .20

.00 .00

-.20 -.20

-.40 -.40

-.60 -.60

-.80 -.80

-1.00 -1.00
0 2 4 6 8 10 12 14 16 18 20 0 2 4 6 8 10 12 14 16 18 20

showing that both the auto- and cross-correlations at lags greater than zero are negligible, as
they should be for a good model.

Prediction: To forecast 20 future values of the two series using the fitted model select
Forecasting>AR Model, then enter 20 for the number of forecasts, retain the default
Undifference Data and check the box for 95% prediction bounds. Click OK and you will then
see the following predictors and bounds.
S e r i e s1 S e r i e s2
300.
16.

15.
280.

14.

260.

13.

240.
12.

220.
11.

10.
200.

0 20 40 60 80 100 120 140 160 0 20 40 60 80 100 120 140 160

Further details on multivariate autoregression can be found in B&D (1991) p. 432 and B&D
(2002) Section 7.6.
Classical Decomposition
See also Box-Cox, Differencing .
Refs: B&D (1991) pp.14, 284. , B&D (2002) Sections 1.5,6.2.

Classical decomposition of the series {Xt} is based on the model,

X t  mt  s t  Yt ,
where Xt is the observation at time t , mt is a 'trend component', st , is a
'seasonal component' and Yt is a 'random noise component' which is
stationary with mean zero. The objective is to estimate the components mt
and st and subtract them from the data to generate a sequence of residuals
(or estimated noise) which can then be modelled as a stationary time series.

To carry out a classical decomposition of the data, select the option Classical
from the Transform Menu. You will then see the Classical Decomposition
Dialogue Box. In this box you must specify whether you wish to estimate
trend only, the seasonal component only or both simultaneously. Once the
required entries have been completed, click on Show Fit to check for the
goodness of the fit and then OK to complete the decomposition.

Example: Under the heading Box-Cox we showed how to stabilize the

variability of the series AIRPASS.TSM by taking logarithms. The resulting
transformed series has an apparent seasonal component of period 12
(correspoonding to the month of the year) and an approximately linear trend.
These can be removed by making the following entries in the Classical
Dialogue Box and then clicking Show Fit to see how the fitted trend and
Seasonal components match the data. They are plotted together in a window
labelled CLASSICAL FIT. If you are satisfied with the fit, press OK.

The effect is to transform the data to the residuals from the fitted trend and
seasonal components. These are plotted on the screen in the window labelled
The effect is to transform the data to the residuals from the fitted trend and
seasonal components. These are plotted on the screen in the window labelled
AIRPASS.TSM and show no obvious deviations from stationarity. It is now
reasonable to attempt to fit a stationary time series model to this series.
Information concerning the residual series (sample mean etc.) can be obtained
by pressing the INFO button on the toolbar at the top of the screen while the
window labelled AIRPASS.TSM is highlighted.

To see the estimated parameter values of the trend and seasonal components,
highlight the window labelled CLASSICAL FIT and press the INFO button on
the toolbar at the top of the screen.

Instead of fitting the most general seasonal component, it is also possible to

fit a polynomial trend plus a finite linear combination of sinusoidal
components by checking Harmonic Regression instead of Seasonal Fit in
the Classical Dialogue Box. For details see B&D(1996), pp. 12,13.
Color Customization

The colors of the displayed graphs can be chosen by right-clicking on a graph and selecting the
option Customize Colors. The following dialog box will then appear.

To select the graphs for which the color is to be assigned, select one of the numbers 1 through
25 and click on Choose Color. The following palette will then appear.
Select your color and click on OK. All of the graphs corresponding to the number you selected
in the Customize Colors dialog box will then be set to the chosen color. The graphs
corresponding to each of the numbers 1 through 25 are listed below.

Color Map:
Plot 1:
tsplot of data
qqplot
sample acf of time series
spectral estimates
estimated cumulative spectrum
histogram
original data in classical decomposition plot
Series 1 for multivariate projects
sample acf of transfer function residuals
Plot 2:
model acf
model spectrum
model cumulative spectrum
classical fit
predicted values
smoothed values
Series 2 for multivariate projects
Plot 3:
tsplot of residuals
qqplot of residuals
sample acf of residuals
histogram of residuals
sample acf of abs values of residuals
Series 3 for multivariate projects
Plot 4:
tsplot of stochastic volatility
qqplot of garch residuals
sample acf of abs values of garch residuals
Series 4 for multivariate projects
Plot 5:
sample pacf of time series
standardized spectral estimate
Series 5 for multivariate projects
Plot 6:
model pacf
prediction bounds
Series 6 for multivariate data
Plot 7:
sample pacf of residuals
sample acf of squared values of residuals
Series 7 for multivariate projects
Plot 8:
sample acf of squares of garch residuals
Series 8 for multivariate projects
Plot 9:
Series 9 for multivariate projects
Plot 10:
Series 10 for multivariate projects
Plot 11:
Series 11 for multivariate projects
Plot 12:
Series 12 for multivariate projects
Plot 13:
Series 13 for multivariate projects
Plot 14:
Series 14 for multivariate projects
Plot 15:
Series 15 for multivariate projects
Plot 16:
Series 16 for multivariate projects
Plot 17:
Series 17 for multivariate projects
Plot 18:
Series 18 for multivariate projects
Plot 19:
Series 19 for multivariate projects
Plot 20:
Series 20 for multivariate projects
Plot 21:
Series 21 for multivariate projects
Plot 22:
Series 22 for multivariate projects
Plot 23:
Series 23 for multivariate projects
Plot 24:
Series 24 for multivariate projects
Plot 25:
Series 25 for multivariate projects
Constrained MLE
See also Maximum Likelihood Estimation , Preliminary Estimation ,
Refs: B&D (1991) p.324 , B&D (2002) Section 6.5.

The time series models fitted to data frequently have coefficients which are
subject to constraints. For example the multiplicative seasonal ARMA model,
s)Xt = sZt ,
where and are polynomials of orders p, q, P and Q respectively,
can be expressed as an ARMA(u, v) model where
u = p + sP and v = q + sQ
(see B&D (1991), p.323 or B&D (1996), p.201). However the coefficients
in the ARMA(u,v) model satisfy a number of multiplicative constraints
determined by the multiplicative form of the autoregressive and moving average
polynomials. Another important class of constrained models are those in which
particular ARMA coefficients are constrained to be zero (or some other value).
Such constraints are handled by ITSM using the option Model-Estimation-Max
Likelihood see (Maximum Likelihood Estimation) and pressing the Constrain
Optimization Button. You will then see the dialogue box of the following form
which will be explained with reference to the following example.

Example: The data in the file DEATHS.TSM were differenced at lags 12 and 1 to
remove trend and seasonality and then mean-corrected. The sample ACF of the
resulting series has large autocorrelations at lags 1 and 12 and small ones (compared)
-1/2
with 1.96n ) at other lags. This suggests two possible models, an MA(12) of the
form,
(1) Xt = Zt +Zt -12 ,
or a multiplicative MA(13) of the form,
(2) Xt = (1 +  + 12) = Zt +Zt -12+
where, in the latter model the coefficients satisfy the multiplicative constraint,
(3) 13 = 12
remove trend and seasonality and then mean-corrected. The sample ACF of the
resulting series has large autocorrelations at lags 1 and 12 and small ones (compared)
-1/2
with 1.96n ) at other lags. This suggests two possible models, an MA(12) of the
form,
(1) Xt = Zt +Zt -12 ,
or a multiplicative MA(13) of the form,
(2) Xt = (1 +  + 12) = Zt +Zt -12+
where, in the latter model the coefficients satisfy the multiplicative constraint,
(3) 13 = 12

To investigate these two potential models we first fit a preliminary MA(13) model
by selecting the option Model-Estimation-Preliminary-Innovations with the AR order
set to 0 and the MA order set to 13. Then selecting Model-Estimation-Max Likelihood
and pressing the Constrain Optimization button we obtain precisely the dialogue box
shown above.

To fit Model (1), highlight each of the coefficients  , … ,and , and press the
button Set to Zero. You will see these coefficients revert to zero in the dialogue box.
Then press OK and you will return to the Maximum Likelihood Estimation Dialogue
Box. Press OK again and you will see the fitted model, with AICC value 856.04.

To fit Model (2), again starting from the dialogue box shown above, set the
coefficients with subscripts from 2 to 11 equal to zero as in (2). Then enter 1 in the
window labelled Number of Relations and on the line below,
1 x 12 = 13
to indicate the constraint (3). Check also that MA is indicated. Then press OK and
you will return to the Maximum Likelihood Dialogue Box. Press OK again and you
will see the fitted model, with AICC value 857.36.
Cross-correlations
See also Cross-spectrum, Burg Model, Yule-Walker Model and Transfer Function Modelling
Refs: B&D (1991) p.406, B&D (2002) Section 7.2.

The sample cross-correlation functions of the component series,

{Y1 (t )},{Y2 (t )}, {Ym (t )}
of an m-variate time series observed at times t=1,…,n, are defined as follows:
 i , j (h)   i , j (h)[ i ,i (0) j , j (0)]1 / 2 , | h | n,
where
n h
 i , j (h)  n 1 t 1 [Yi (t  h)  Yi ][Y j (t )  Y j ], h  0,
and
n
 i , j (h)  n 1 t  h1[Yi (t  h)  Yi ][Y j (t )  Y j ], h  0.
Observe that
 i , j (h)   j ,i (h).

Example: The time series DJAO2.TSM consists of 251 successive daily closing prices of the
Dow-Jones Industrial Average (Series 1) and the Australian All-ordinaries Index (Series 2).
Import the bivariate series into ITSM by selecting File>Project>Open>Multivariate, then click
OK, type DJAO2.TSM and specify 2 columns in the dialog box which appears. Choose
Transform>Difference and select lag 1 to get the bivariate series whose components are plotted
below.

Series1 Series2
60.

80.

40.
60.

40.
20.

20.

0. 0.

-20.
-20.
-40.

-60.
-40.

-80.

-60.
-100.

0 50 100 150 200 250 0 50 100 150 200 250

Press the yellow Plot sample autocorrelations button and you will see the array of
autocorrelation and cross-correlation functions shown below
Note: The convention in plotting the array of cross-correlations is that the jth graph in the ith
row is the estimated correlation of the ith series at time t+h with the jth series at time t, for
h=0,1,2,…. For example the graphs below show that there is a significant correlation between
the differenced Series 2 (All-ordinaries Index) at time t+1 and the differenced Series 1
(Dow-Jones Index) at time t. This demonstrates a tendency of increments of the Australian
All-ordinaries Index to follow those of the Dow-Jones Index by one day.
Series1 Series1x Series2
1.00 1.00

.80 .80

.60 .60

.40 .40

.20 .20

.00 .00

-.20 -.20

-.40 -.40

-.60 -.60

-.80 -.80

-1.00 -1.00
0 2 4 6 8 10 12 14 16 18 20 0 2 4 6 8 10 12 14 16 18 20

Series2x Series1 Series2

1.00 1.00

.80 .80

.60 .60

.40 .40

.20 .20

.00 .00

-.20 -.20

-.40 -.40

-.60 -.60

-.80 -.80

-1.00 -1.00
0 2 4 6 8 10 12 14 16 18 20 0 2 4 6 8 10 12 14 16 18 20

Further details on cross-correlations can be found in B&D (1991) p.406 and B&D (2002)
Section 7.2.
Cross-correlations
See also Cross-spectrum, Burg Model, Yule-Walker Model and Transfer Function Modelling
Refs: B&D (1991) p.406, B&D (2002) Section 7.2.

The sample cross-correlation functions of the component series,

Series1 Series2
60.

80.

40.
60.

40.
20.

20.

0. 0.

-20.
-20.
-40.

-60.
-40.

-80.

-60.
-100.

0 50 100 150 200 250 0 50 100 150 200 250

.80 .80

.60 .60

.40 .40

.20 .20

.00 .00

-.20 -.20

-.40 -.40

-.60 -.60

-.80 -.80

-1.00 -1.00
0 2 4 6 8 10 12 14 16 18 20 0 2 4 6 8 10 12 14 16 18 20

Series2x Series1 Series2

1.00 1.00

.80 .80

.60 .60

.40 .40

.20 .20

.00 .00

-.20 -.20

-.40 -.40

-.60 -.60

-.80 -.80

-1.00 -1.00
0 2 4 6 8 10 12 14 16 18 20 0 2 4 6 8 10 12 14 16 18 20

Further details on cross-correlations can be found in B&D (1991) p.406 and B&D (2002)
Section 7.2.
Cross-spectrum
See also Cross-correlations , Burg Model and Yule-Walker Model .
Ref: B&D (1991) p.434.

The spectral density matrix of a multivariate stationary time series {X(t) , t = 0,  1, . . .}with
absolutely summable matrix covariance function  (in particular of a multivariate ARMA
process) can be expressed as

f ( )  (2 ) 1 k  (k ) e ik ,       ,

where =  1 . The spectral decomposition of {X(t)} breaks it into sinusoidal components; f(
) d is the contribution to the covariance matrix of X(t) from components with frequencies in (
dwhere  is measured in radians per unit time. The ith diagonal component of the
spectral density matrix is just the spectral density of the ith component series. The (i,j
)-component of the spectral density matrix is called the cross-spectral density of the ith and jth
component series and is complex when i and j are not equal.

The spectral density matrix can be estimated (but not consistently) by 1/() times the
multivariate periodogram, defined at the Fourier frequency 2j/n (where n is the number of
observation vectors) by
I ( j )  n 1  n
t 1
X (t )e
 it j
 n
t 1
X (t )e .
 it j *

The superscript * denotes complex conjugate transpose. If we have a multivariate project in

ITSM, then selecting the options Statistics>Cross Spectrum will produce an array of graphs.
The ith diagonal graph is the periodogram estimate of the spectral density of the ith component
series, i.e. the function,
I ii ( j ) /(2 ),0   j   .
The graph in the (i,j)-location above the diagonal is the corresponding estimate of the phase
spectrum i,j) and the graph in the (i,j)-location below the diagonal is the estimate of the
squared coherency |i,j)|2. See B&D (1991) p.436 for the definitions of these quantities.

As in the univariate case, good estimates of the spectral density, phase spectrum and squared
coherency can only be obtained by smoothing the multivariate periodogram defined in the
preceding paragraph. The smoothed periodogram estimate of the spectral density matrix at
the Fourier frequency j is
1 m
fˆ ( j )   W (k ) I ( j  k ),
2 k   m
where the weights W(k) are non-negative, add to 1 and satisfy W(k) = W(-k). They are chosen by
selecting Statistics>Smooth Spectrum. You will then see a dialog box. If you select, for
example, two Daniell filters, one of order 3 and the second of order 5, it will appears as follows:
The weights pictured in the dialog box are generated by the successive application of n(=2)
Daniell filters (filters with W(k) = 1/(2m+1), k= -m, . . . , m, where m is the order of the filter; 3
for the first and 5 for the second in the above example). Clicking OK will produce graphs of the
estimated spectral densities, phase spectra and squared coherencies based on the corresponding
smoothed periodogram estimate of the matrix spectral density function

Example: Import the project LS2.TSM by selecting File>Project>Open>Multivariate, OK and

then typing LS2.TSM, entering 2 for the number of columns and again clicking OK. Select
Transform>Difference and Lag 1 to generate a stationary-looking bivariate series.

Select Statistics>Cross-spectrum and you will see the following multivariate periodogram
estimates.
Periodogram:
Series1 Phase:Series1 x Series2

.140
3.

.120
2.
.100
1.
.080
0.
.060

-1.
.040

.020 -2.

.000 -3.

.0 .5 1.0 1.5 2.0 2.5 3.0 .0 .5 1.0 1.5 2.0 2.5 3.0

Sq.Coherence:
Series1 x Series2 Periodogram:
Series2
1.0E+00
4.00

3.50
1.0E+00

3.00
1.0E+00
2.50

2.00
1.0E+00

1.50
10.E+00
1.00

.50
10.E+00
.00
10.E+00
.0 .5 1.0 1.5 2.0 2.5 3.0 .0 .5 1.0 1.5 2.0 2.5 3.0

Select Statistics>Smooth spectrum ,complete the dialog box as above, click OK and you will see
the improved estimates,
Periodogram:
Series1 Phase:Series1 x Series2

.0450 3.

.0400
2.
.0350
1.
.0300

.0250 0.

.0200
-1.
.0150
-2.
.0100

.0050 -3.

.0000
.0 .5 1.0 1.5 2.0 2.5 3.0 .0 .5 1.0 1.5 2.0 2.5 3.0

Sq.Coherence:
Series1 x Series2 Periodogram:
Series2
.950

1.20
.900

1.00
.850

.80
.800

.60
.750

.40
.700

.650 .20

.0 .5 1.0 1.5 2.0 2.5 3.0 .0 .5 1.0 1.5 2.0 2.5 3.0

The diagonal graphs indicate that the differenced Leading Indicator series (Series 1) has a
predominance of high frequency components in its spectral decomposition while the differenced
Sales series has a predominance of low frequency components. The estimated squared
coherency (bottom left) indicates that the high-frequency components of the two series are more
strongly linearly related than the low frequency components. The estimated phase spectrum (top
right) has an approximately constant slope of three, indicating that all the frequency components
of the Leading Indicator series lead those of the Sales series by approximately three days. It is
interesting to compare this interpretation with the transfer-function model for the same bivariate
series.

Further details on cross-spectra can be found in B&D (1991) p.434.

DATA SETS
See also GETTING STARTED , TSM Files ,
Refs: B&D (1991), B&D (2002).

AIRPASS.TSM International airline passenger monthly totals (in thousands), Jan. 49 -- Dec. 60.
From Box and Jenkins (Time Series Analysis: Forecasting and Control, 1970). B&D (1991)
Example 9.2.2. B&D (2002) Example. 8.5.2

APPA.TSM Lake level of Lake Huron in feet (reduced by 570), 1875--1972. B&D (1991)
Appendix Series A. B&D (2002) Example 1.3.5

APPB.TSM Dow Jones Utilities Index, Aug.28--Dec.18, 1972. B&D (1991) Appendix Series
B. B&D (2002) Example 5.1.5

APPC.TSM Private Housing Units Started, U.S.A. (monthly). From the Makridakis
competition, series 922. B&D (1991) Appendix Series C.

APPD.TSM Industrial Production, Austria (quarterly). From the Makridakis competition, Series
337. B&D (1991) Appendix Series D.

APPE.TSM Industrial Production, Spain (monthly). From the Makridakis competition, Series
868. B&D (1991) Appendix Series E.

APPF.TSM General Index of Industrial Production (monthly). From the Makridakis

competition, Series 904. B&D (1991) Appendix, Series F.

APPG.TSM} Annual Canadian Lynx Trappings, 1821--1934. B&D (1991) Appendix Series G.

APPH.TSM Annual Mink Trappings, 1848--1911. B&D (1991) Appendix Series H.

APPI.TSM Annual Muskrat Trappings, 1848--1911. B&D (1991) Appendix Series I. B&D
(2002) Problem 7.8

APPJ.TSM Simulated input series for transfer function model. B&D (1991) Appendix Series J.
B&D (2002) Problem 7.7

APPK.TSM Simulated output series for transfer function model. B&D (1991) Appendix Series
K. . B&D (2002) Problem 7.7

APPJK2.TSM The two series APPJ and APPK (see above) in bivariate format. . B&D (2002)
Problem 7.7

ARCH.TSM 1000 simulated values of an ARCH(1) process. B&D (2002) Example 10.3.1.

BEER.TSM Australian monthly beer production in megalitres,including ale and stout and
excluding beverages with alcoholpercentage less than 1.15. January, 1956, through April, 1990
(Australian Bureau of Statistics). B&D (2002) Problem 6.10.

CHAOS.TSM The series x(t), t=1,…,200, defined by the logistic equation

x(t)=4x(t-1)[1-x(t-1)] with x(0)=/10. B&D (2002) Section 10.3.2.

CHOCS.TSM Australian monthly chocolate-based confectionery production in tonnes. July,

1957, through October, 1990 (Australian Bureau of Statistics).

DEATHS.TSM Monthly accidental deaths in the U.S.A., 1973— 1978 (National Safety
Council). B&D (1991) Example 1.1.6. B&D (2002) Example 1.1.3.

DJAO2.TSM Closing daily values of the Dow-Jones Industrial Index and of the Australian
All-ordinaries Stock Index for 251 successive trading days, ending August 26th, 1994 (stored in
bivariate format). B&D (2002) Example 7.1.1.

DJAOPC2.TSM Daily percentage changes (250 values) obtained from DJAOPC.TSM (stored in
bivariate format). B&D (2002) Example 7.1.1.

DJAOPCF2.TSM Observed daily values of the percentage changes in the Dow-Jones Industrial
Index and the Australian All-ordinaries Stock Index for the forty days following the data in
DJAOPC2.TSM (stored in bivariate format). B&D (2002) Example 7.6.3.

DOWJ.TSM Dow-Jones Utilities Index. Same as APPB.TSM above. B&D (2002) Example
5.1.5.

E1021.TSM Sinusoid plus simulated Gaussian white noise. B&D (1991) Example 10.2.1.

E1032.TSM Observed percentage daily returns on the Dow-Jones Industrial Index for the
period July 1st, 1997 through April 9th, 1999. B&D (2002) Example 10.3.2.

E1042.TSM 160 simulated values of an MA(1) process. B&D (1991) Example 10.4.2.

E1062.TSM 400 simulated values of an MA(1) process. B&D (1991) Example 10.6.2.

E1321.TSM 200 values of a simulated fractionally differenced MA(1) series.B&D (1991)

Example 13.2.1.

E1331.TSM 200 values of a simulated MA(1) series with standard Cauchy white noise.B&D
(1991) Example 13.3.2.

E1332.TSM 200 values of a simulated AR(1) series with standard Cauchy white noise.B&D
(1991) Example 13.3.2.

E334.TSM 10 simulated values of an ARMA(2,3) process. B&D (1991) Example 5.3.4, B&D
(2002)Example 3.3.4.

E611.TSM 200 simulated values of an ARIMA(1,1,0) process. B&D (1991) Example 9.1.1,
B&D (2002)Example 6.1.1.

E731A.TSM 200 simulated values of a bivariate series whose components are independent
AR(1) processes, each with coefficient 0.8 and white-noise variance 1. B&D (2002)Example
7.3.1.

E731B.TSM Bivariate residual series obtained after fitting AR(1) models to each of the
component series stored in the file E731A.TSM. B&D (2002)Example 7.3.1.

E732.TSM Bivariate residual series obtained after fitting the models (7.1.1) and (7.1.2)
respectively to the series {D(t,1)} and {D(t,2)} of Example 7.1.1. B&D (2002)Examples 7.1.1,
7.3.2..

E921.TSM 200 simulated values of an AR(2) process. B&D (1991) Example 9.2.1.

E923.TSM 200 simulated values of an ARMA(2,1) process. B&D (1991) Example 9.2.3.

E951.TSM 200 simulated values of an ARIMA(1,2,1) process. B&D (1991) Example 9.5.1.

ELEC.TSM Australian monthly electricity production in millions of kilowatt hours. January,

1956, through April, 1990 (Australian Bureau of Statistics).

FINSERV.TSM Australian expenditure on financial services in millions of dollars. September

quarter, 1969, through March quarter, 1990 (Australian Bureau of Statistics).

GNFP.TSM Australian gross non-farm product at average 1984/5 prices in millions of dollars.
September quarter, 1959, through March quarter, 1990 (Australian Bureau of Statistics).

GOALS.TSM Soccer goals scored by England in matches against Scotland at Hampden Park in
Glasgow, 1872-1987. B&D (2002)Example 8.8.7.

IMPORTS.TSM Australian imports of all goods and services in millions of Australian dollars at
average 1984/85 prices. September quarter, 1959, through December quarter, 1990 (Australian
Bureau of Statistics).

LAKE.TSM Lake level of Lake Huron in feet (reduced by 570), 1875--1972. B&D (1991)
Appendix Series A. B&D (2002) Example 1.3.5

LEAD.TSM Leading Indicator Series from Box and Jenkins (Time Series Analysis: Forecasting
and Control, 1970). B&D (1991) Example 11.2.2. B&D (2002)Example 10.1.1.

LRES.TSM Whitened Leading Indicator Series obtained by fitting an MA(1) to the

mean-corrected differenced series LEAD.TSM. B&D (1991) Section 13.1. B&D (2002)Example
10.1.1.

LS2.TSM The two series LEAD and SALES (see above) in bivariate format. B&D (2002)
Example 10.1.1.

LYNX.TSM Annual Canadian Lynx Trappings, 1821--1934. B&D (1991) Appendix Series G.

NILE.TSM Minimal yearly water levels of the Nile River as measured at the Roda gauge near
Cairo for the years 622—871. (Source: http://lib.stat.cmu.edu/S/beran.) B&D (2002) Example
10.5.1.

OSHORTS 57 consecutive daily overshorts from an undergraound gasoline tank at a filling

station in Colorado. B&D (2002)Example 3.2.8.

POLIO.TSM Monthly numbers of newly recorded polio cases in the U.S.A., 1970-1983. B&D
(2002)Example 8.8.3

SALES.TSM Sales Data from Box and Jenkins (Time Series Analysis: Forecasting and Control,
1970). B&D (1991) Example 11.2.2. B&D (2002)Example 10.1.1.

SBL.TSM The number of car drivers killed or seriously injured monthly in Great Britain for ten
years beginning in January 1975 B&D (2002) Examples 6.6.3 and 10.2.1.

SBLD.TSM The number of car drivers killed or seriously injured monthly in Great Britain for
ten years beginning in January 1975 after differencing at lag 12. B&D (2002) Examples 6.6.3 and
10.2.1.

SBLIN.TSM The step-function regressor, f(t)=0 for 0<t<99, and f(t)=1 for 98<t<121, to
account for seat-belt legislation in B&D (2002) Examples 6.6.3 and 10.2.1.

SBLIND.TSM The function g(t) obtained by differencing the function f(t) of SBLIN.TSM at lag
12. B&D (2002) Examples 6.6.3 and 10.2.1.

SBL2.TSM The bivariate series ose first components are the data in SBLIN.TSM and whose
second components are the data in SBL.TSM. B&D (2002) Example 10.2.1.

SIGNAL.TSM Simulated vales of the series X(t)=cos(t) +N(t), t=0.1,0.2,…,20.0, where N(t) is
WN(0,0.25). B&D (2002)Example 1.1.4.

SRES.TSM Residuals obtained from the mean-corrected and differenced SALES.TSM data
when the filter used for whitening the mean-corrected differenced LEAD.TSM series is applied.
B&D (1991) Section 13.1. B&D (2002)Example 10.1.1.

STOCK7.TSM Daily returns (100ln(P(t)/P(t-1))) based on closing prices P(t) of 7 stock indices
in multivariate format. The first return is for April 27, 1998, and the last is for April 9, 1999.
The indices are, in order: Australian All-ordinaries, Dow-Jones Industrial, Hang Seng, JSI
(Indonesia), KLSE (Malaysia), Nikkei 225, KOSTI (South Korea).

STOCKLG7.TSM Longer version of STOCK7.TSM. The first return is for July 2, 1997, and
the last is for April 9, 1999.

STRIKES.TSM Strikes in the U.S.A., 1951--1980 (Bureau of Labor Statistics). B&D (1991)
Example 1.1.3. B&D (2002) Example 1.1.6.

SUNSPOTS.TSM The Annual sunspot numbers, 1770--1869. B&D (1991) Example 1.1.5.
B&D (2002) Example 3.2.9.

USPOP.TSM Population of United States at ten-year intervals, 1790--1980 (U.S.Bureau of the

Census). B&D (1991) Example 1.1.2. B&D (2002) Example 1.1.5.

WINE.TSM Monthly sales (in kilolitres) of red wine by Australian winemakers from January,
1980 through October 1991. (Australian Bureau of Statistics). B&D (2002) Example 1.1.5.
Data Transfer

Data files which can be read by ITSM are ASCII files in which univariate data are arranged in a
single column and m-variate data are arranged in m columns, separated by one or more
spaces,with the rows arranged in chronological order. Any ASCII text editor, e.g. Wordpad or
Notepad, can be used to create such a file.

Note: When a project is saved as a .TSM file by ITSM, coded model information is saved as well
as the data. Editing such files directly using a text editor is therefore not recommended.

The most convenient way to create, manipulate and transfer data to and from ITSM is to use the
program in conjunction with a spreadsheet such as Excel.

Example: The following simple example shows a set of 5 bivariate observations of a time series
stored in Excel..
0.101 0.421
0.352 0.768
0.807 -0.203
-0.911 -0.165
0.223 0.176

Importing data:
Here are two simple ways of importing this bivariate data set into ITSM

1. Copy and paste the two columns into an ASCII file and save it under a name such as
MYDATA.TSM in the ITSM2000 folder. The resulting file can then be opened using the option
File>Project>Open>Multivariate, selecting MYDATA.TSM, and specifying 2 for the
number of columns.

2. A more direct method is to highlight and copy the two columns in Excel, click on the New
Project button in ITSM (second from the left), select Multivariate, then File>Import
Clipboard, and you will see the following graph of the imported data:

Series 1 Series 2

.80
.80

.60
.60
.40

.20
.40

.00

-.20 .20

-.40

.00
-.60

-.80
-.20
-1.00

1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0
Exporting data:
The data in ITSM (and other quantities which have been calculated, such as spectra,
autocorrelation functions etc) can be exported either to a file or to the clipboard (and thence to a
spreadsheet) simply by clicking on the red EXP button and selecting the data to be exported and
the required destination.
If the data are exported to the clipboard and pasted into a spreadsheet, they can then be
manipulated or edited in the spreadsheed and read back into ITSM as described above.
Differencing
See also Box-Cox , Classical Decomposition .
Refs: B&D (1991) pp.19, 24, 274. , B&D (2002) Sections 1.5, 6.1, 6.2.

Differencing is a technique which (like Classical Decomposition) can be used

to remove seasonal components and trends. The idea is simply to consider
the differences between successive pairs of observations with appropriate time
separations. For example, to remove a seasonal component of period 12 from
the series {Xt} , we generate the transformed series,
Yt  X t  X t 12  (1  B 12 ) X t ,
where B is the backward shift operator (i.e. B j Xt = Xt-j ). It is clear that all
seasonal components of period 12 are eliminated by this transformation,
which is called differencing at lag 12. A linear trend can be eliminated by
differencing at lag 1, and a quadratic trend by differencing twice at lag 1 (i.e.
differencing once to get a new series, then differencing the new series to get a
second new series). Higher-order polynomials can be eliminated analogously.
It is worth noting that differencing at lag 12 not only eliminates seasonal
components with period 12 but also any linear trend.

Repeated differencing in PEST can be carried out using the option Difference
of the Transform Menu.

Example: Under the heading Box-Cox we showed how to stabilize the

variability of the series AIRPASS.TSM by taking logarithms. Assuming that
this has been done, the resulting transformed series has an apparent seasonal
component of period 12 (corresponding to the month of the year) and an
approximately linear trend. These can both be removed by differencing at lag
12. To do this select the option Difference from the Transform Menu, enter 12
in the highlighted window of the dialogue box shown below and click OK. The
graph of the differenced series will then appear in the window AIRPASS.TSM.

It shows no apparent seasonality, however there is a slight trend which suggests

the possibility of differencing again, this time at lag 1. To do this, select the
option Difference from the Transform Menu, specify a lag equal to 1 and click
the Ok button. The graph in the window AIRPASS.TSM will then show the
twice differenced series,

Yt  (1  B)(1  B12 ) X t  X t  X t 1  X t 12  X t 13 ,

where {Xt} is the series of logarithms of the original data. The series {Yt} shows
no apparent trend or seasonality, so it is reasonable to try and model it as a
stationary time series.
Exponential Smoothing
See also Moving Average Smoothing, Spectral Smoothing (FFT),
Holt-Winters Forecasts
Refs: B&D (1991) p.17, B&D (2002) Sections 1.5, 9.2.

After selecting the suboption Exponential Smooth from the

Smooth menu, a dialogbox will open requesting you to specify a
value for the parameter a in the smoothing recursions,
m1  X 1
mt  aX t  (1  a )mt 1 , t  2,..., n.
^ t = Xt , tn) while
The choice a=1 gives no smoothing (m
the choice a=0 gives maximum smoothing (m ^ t = X1 , tn).
Enter -1 if you would like the program to select a value for a
automatically. This option is particularly useful if you plan to use
the smoothed value m^ n as the predictor of the next observation
X n+1 . The automatic selection option determines the value of a
which minimizes the sum of squares,
n
 j 2
(m j  X j ) 2
^ j is used as the
of the prediction errors when each smoothed value m
predictor of the next observation Xj .

Once the parameter a has been entered (or automatically selected),

the program will graph the smoothed time series with the original
data and will display the root of the average squared deviation of
the smoothed values from the original observations defined by

n
SQRT(MSE)  n1 j 1(mj  X j ) 2
Fisher's Test
See also Periodogram , Cumulative Periodogram .
Refs: B&D (1991) p.337, 342.

Fisher's test enables you to test the null hypothesis that the data is
a realization of Gaussian white noise against the alternative that it
contains a hidden periodic component with unspecified frequency.
The test statistic is defined as
max 1i  q I ( i )
q  q
,
q 1 i 1 I ( i )
where q = [(n - 1)/2] and I(j is the periodogram at the Fourier
frequency j=j/n. f q is sufficiently large then the null hypothesis
is rejected. To apply the test, select the Fisher Test suboption from
the Spectrum Menu and the p-value of the test will be displayed. The
null hypothesis is rejected at level  if the p-value is less than .

Example: Applying the test to the series SUNSPOTS.TSM gives the

following result
GARCH Models
Ref: B&D (2002)., Section 10.3.5.

A GARCH(p,q) process {Zt } is a stationary solution of the equations,

Z t   t et ,
{et } ~ IID(0,1),
p q
2
ht   0   i Z t i    j ht  j ,
i 1 j 1

where
ht   t2
and (in ITSM and most practical applications)
et ~ N (0,1)
or

et ~ t
 2
(Student’s t-distribution with degrees of freedom)
To ensure stationarity, the coefficients are constrained to satisfy the sufficient conditions,
 0  0,
 1 ,..., p , 1 ,...,  q  0,
 1  ...   p   1  ...   q  1.
.
An ARCH(p) process is a GARCH(p,0) process.

ESTIMATION
To fit a GARCH model with N(0,1) noise:
Given a zero-mean or mean corrected data set {Zt } opened in ITSM (which may, for
example, consist of residuals from a regression or ARMA model), a GARCH(p,q) model with
N(0,1) noise, e(t), can be fitted as follows:
 Click on the red button labeled GAR.
 Specify the orders p and q, make sure that Use normal noise. is selected, and click on OK.
 Click on the red MLE button. In the dialog box which then appears, choose to subtract the
sample mean unless you wish to assume that the mean of the series is zero.
 The GARCH Maximum Likelihood Estimation dialog box will then open. Click on OK and
the program will minimize –2ln(L) with L as defined in (10.3.16) of B&D (2002). The
estimated parameters and the values of –2ln(L) and the AICC statistic will then appear in the
Garch ML estimates window.
 Repeat the previous two steps until the parameter estimates stabilize.
 For order selection repeat the steps above with a variety of values for p and q, and select the
model with smallest AICC value.
 Model checks can be performed (a) by selecting Garch>Garch
residuals>QQ-Plot(normal) (the resulting graph should be approximately a straight line
through the origin with slope 1), and (b) by clicking on the fifth red button which plots the
sample ACF of the absolute values and squares of the GARCH residuals (these should all be
close to zero since the GARCH residuals should resemble an iid sequence).

To fit a GARCH model with t-distributed noise:

Proceed exactly as above, but making sure that the option Use t-distribution for
noise is selected in each of the dialog boxes where it appears. For the GARCH model with t
-distributed noise, the conditional likelihood L is defined by (10.3.19) in B&D (2002).
It is frequently useful , before fitting a GARCH model with t-distributed noise, to fit a model
of the same order with N(0,1) noise. This has the effect of initializing the search with the
coefficients estimated for the Gaussian noise model. It is also advisable to try more than one set
of initial coefficients to minimize the risk of finding only a local minimum value of –2ln(L).
For financial data it is often found that a GARCH model with t-distributed noise provides a
substantially better fit (in terms of AICC and model-checking criteria) than does a GARCH
model with Gaussian noise.

To estimate the stochastic volatility:

Once a model has been fitted to the data set {Zt}, a graph of the estimated volatility, i.e. 
(t), is obtained by clicking on the red SV button.

SIMULATION
Once a GARCH model has been specified in ITSM, simulation from the model can be carried
out by selecting the option Model>Simulate.

Example 1: (Fitting a GARCH model to stock data.) Open the file E1032 in ITSM and
select {Transform>Subtract mean} to subtract the mean (.0608) from the data. You will then
see the following graph of the mean-corrected daily returns on the Dow-Jones Industrial Index
from July 1st 1997 through April 9th, 1999.
Series
6.

-2.

-4.

-6.

-8.

0 50 100 150 200 250 300 350 400 450

The graph suggests that there are periods of high variability followed by periods of low
volatility. The sample autocorrelation function of the data is not significantly different from zero
at lags greater than zero but the sample autocorrelations of the absolute values and squares
shown below are much more significant, suggesting that a GARCH model might be appropriate
for this data set.

Residual ACF: Abs values Residual ACF: Squares

1.00 1.00

.80 .80

.60 .60

.40 .40

.20 .20

.00 .00

-.20 -.20

-.40 -.40

-.60 -.60

-.80 -.80

-1.00 -1.00
0 5 10 15 20 25 30 35 40 0 5 10 15 20 25 30 35 40

Following the steps above for fitting a GARCH(1,1) model with N(0,1) noise we obtain the
following model for the mean-corrected series displayed in the Garch Maximum likelihood
estimates window.

========================================
ITSM::(Garch Maximum likelihood estimates)
========================================
ARMA Model:
X(t) = Z(t)

Garch Model for Z(t):

Z(t) = sqrt(h(t))e(t)
h(t) = .1302292 + .1266656 Z^2(t-1)
+ .7919689 h(t-1)
Alpha Coefficients
.130229 .126666
Standard Error of Alpha Coefficients
.048486 .019032
Beta Coefficients
.791969
Standard Error of Beta Coefficients
.040337

AICC(Garch) = .146902E+04
-2Log(Likelihood) = .145778E+04

Now starting from this model we can fit a GARCH(1,1) model with t-distributed noise by simply
clicking on the red MLE button again, selecting Use t-distribution as noise, and clicking
on OK. This gives the results,

========================================
ITSM::(Garch Maximum likelihood estimates)
========================================
ARMA Model:
X(t) = Z(t)

Garch Model for Z(t):

Z(t) = sqrt(h(t)) e(t)
h(t) = .1309970 + .06739304 Z^2(t-1)
+ .8406119 h(t-1)

Alpha Coefficients
.130997 .067393
Standard Error of Alpha Coefficients
.074217 .031923
Beta Coefficients
.840612
Standard Error of Beta Coefficients
.071770
Degrees of freedom for t-dist = 5.745331
Standard Error of degrees of freedom = 1.390426

AICC(Garch) = .143788E+04
-2Log(Likelihood) = .142467E+04

Note: The minimum is rather flat, so you may find small discrepancies in your estimated
coefficients from those given above. It is very clear however that in terms of AICC, the
GARCH(1,1) with t-distributed noise is very much superior to the GARCH(1,1) with Gaussian
noise. Checking alternative values for p and q indicates that the GARCH(1,1) with t-distributed
noise is the best model for the data of those in the categories considered. The sample
autocorrelation functions of the absolute values and squares of the GARCH residuals are
compatible with those of an iid series as required. The qq plot of the GARCH residuals based on
the t-distribution with 5.475 degrees of freedom is reasonably close to linear as required.

The graph of the estimated stochastic volatility, based on the GARCH(1,1) t-distributed noise
model, and obtained by clicking on the red SV button, is shown below. It clearly reflects the
changing variability apparent in the original data.
Garch
S t o c h a s tVi c
olatility

2. 40

2. 20

2. 00

1. 80

1. 60

1. 40

1. 20

1. 00

0 50 100 150 200 250 300 350 400 450

Example 2: (Fitting an ARMA model with GARCH noise) This is carried out in ITSM by
fitting a GARCH model as described above to the residuals from the maximum likelihood
ARMA model for the data. If we open the file SUNSPOTS.TSM, subtract the mean and use the
option Model>Estimation>Autofit with the default ranges for p and q, we obtain an
ARMA(3,4) model for the mean-corrected data. The sample ACF of the residuals is compatible
with iid noise. However the sample autocorrelation functions of the absolute values and squares
of the residuals (obtained by clicking on the third green button) indicate that the ARMA residuals
are not independent. To fit a GARCH(1,1) model with N(0,1) noise to the ARMA residuals,
click on the red GAR button, enter the value 1 for both p (the Alpha order) and q (the Beta
order) and click OK. Then click on the red MLE button, click OK in the dialog box, and the
GARCH ML Estimates window will open, showing the estimated parameter values. Repeat the
steps in the previous sentence two more times and the window will display the following results:

========================================
ITSM::(Garch Maximum likelihood estimates)
========================================
ARMA Model:
X(t) = 2.463 X(t-1) - 2.248 X(t-2) + .7565 X(t-3)
+ Z(t) - .9478 Z(t-1) - .2956 Z(t-2) + .3131 Z(t-3)
+ .1364 Z(t-4)

Garch Model for Z(t):

Z(t) = sqrt(h(t)) e(t)
h(t) = 31.15234 + .2227229 Z^2(t-1)
+ .5964657 h(t-1)
Alpha Coefficients
31.152344 .222723
Standard Error of Alpha Coefficients
33.391952 .132481
Beta Coefficients
.596466
Standard Error of Beta Coefficients
.242425
AICC(Garch) = .805124E+03
AICC = .821703E+03 (Adjusted for ARMA)
-2Log(Likelihood) = .788736E+03

Accuracy parameter = .000006400000

Number of iterations = 85
Number of function evaluations = 87
Uncertain minimum.

The AICC value for the GARCH fit (805.12) should be used for comparing alternative GARCH
models for the residuals. The AICC value adjusted for the ARMA fit (821.70) should be used
for comparison with alternative ARMA models (with or without GARCH noise).

Simulation using the fitted ARMA(3.4) model with GARCH(1,1) noise can be carried out by
selecting the option Model>Simulate. If you retain the default settings in the ARMA Simulation
dialog box and click OK, you will see a simulated realization of the model for the original data
in SUNSPOTS.TSM.
Graphs

This algorithm is designed to forecast future values from observations Y1,

Y2, … ,Yn, of a series with trend and noise but no seasonality. The
Holt-Winters h-step predictor is defined as
PnYn h  aˆ n  bˆn h , h  1,2, ,
where
aˆ n 1  Yn 1  (1   )(aˆ n  bˆn )
and
bˆn 1   (aˆ n1  aˆ n )  (1   )bˆn .
In order to solve these recursions, ITSM uses the initial conditions,
aˆ 2  Y2 , bˆ2  Y2  Y1 .
The coefficients and predictors can then all be computed recursively from
Y1, Y2, … ,Yn, provided the smoothing parameters, and  have been
specified. These can either be prescribed arbitrarily (with values between 0
and 1) or chosen in a more systematic way to minimize the sum of squares
of the one-step errors,
n
S  i 3 (Yi  Pi 1Yi ) 2 ,
obtained when the algorithm is applied to the already observed data.

The algorithm is extremely simple to apply. After reading the data into ITSM
simply select the option Holt-Winters from the Forecasting Menu and you will
see a dialogue box similar to the following:
The number of forecasts required must be entered in the first window. If the data
had been transformed (which is not the case in the above example), you would have
the option of removing the check mark beside Apply to original data, in which case
the current (transformed) series would be predicted instead of the original series.
Also in the upper half of the dialogue box you are provided with the option of
computing forecasts based on a specified subset of the series and to plot 95%
prediction bounds.

Clicking on the check mark in the lower half of the dialogue box will eliminate the
optimization of the smoothing parameters and you will then need to specify values
for  and  or use the default values of .2. Normally these should be optimized.

Example: Read the data in the file DEATHS.TSM into ITSM, and select the option
Holt-Winters from the Forecast Menu. Complete the dialogue box as shown above
and press the OK button. The 10 requested forecasts together with the original series
and prediction bounds will then appear in the Holt-Winters Forecast window. With
this window highlighted, press the INFO button on the toolbar at the top of the screen and
you will see the numerical values of the forecasts together with the optimal and  and
the RMSE, i.e. the square root of the average of the squared one-step prediction errors
when the algorithm is applied to the observed data. It is clear from the graph that the
predictors have failed to reflect the seasonal variation in the data. A modification of the
Holt-Winters algorithm which accounts for seasonal variation is described under the heading
Holt-Winters Seasonal Forecasts .

18 00 0.

16 00 0.

14 00 0.

12 00 0.

10 00 0.

8 00 0.

6 00 0.

4 00 0.

2 00 0.

0 10 20 30 40 50 60 70 80
Holt-Winters Seasonal Forecasts
See also ARMA Forecasts , ARAR Forecasts , Holt-Winters Forecasts .
Refs: B&D (2002) Sec.9.3.

This algorithm extends the Holt-Winters algorithm to take account of seasonality

with known period, say d.. The seasonal Holt-Winters h-step predictor is
PnYn  h  aˆ n  bˆn h  cˆn  h , h  1,2, ,
where
aˆ n1   (Yn1  cˆn 1 d )  (1   )(aˆ n  bˆn ) ,
bˆ   (aˆ  aˆ )  (1   )bˆ ,
n 1 n 1 n n

cˆn1   (Yn 1  aˆ n 1 )  cˆn 1d ,

with initial conditions,
aˆ d 1  Yd 1 , bˆd 1  (Yd 1  Y1 ) / d , cˆi  Yi  (Y1  bˆd 1 (i  1)), i  1, , d .
The coefficients and predictors can then all be computed recursively from
Y1, Y2, … ,Yn, provided the smoothing parameters, and  have been
specified. These can either be prescribed arbitrarily (with values between 0
and 1) or chosen in a more systematic way to minimize the sum of squares
of the one-step errors,
n
S  i 3 (Yi  Pi 1Yi ) 2 ,
obtained when the algorithm is applied to the already observed data.

To apply the algorithm, simply select the option Seasonal Holt-Winters from the
Forecasting Menu and you will see a dialogue box similar to the following:

The number of forecasts required must be entered in the first window. If the data
had been transformed (which is not the case in the above example), you would have
The number of forecasts required must be entered in the first window. If the data
had been transformed (which is not the case in the above example), you would have
the option of removing the check mark beside Apply to original data, in which case
the current (transformed) series would be predicted instead of the original series.
Also in the upper half of the dialogue box you are provided with the option of
computing forecasts based on a specified subset of the series.

Clicking on the check mark in the lower half of the dialogue box will eliminate the
optimization of the smoothing parameters and you will then need to specify values
for  and  or use the default values of .2. Normally these should be optimized.

Example: Read the data in the file DEATHS.TSM into ITSM, and select Seasonal
Holt-Winters from the Forecast Menu. You will see the dialogue box shown above.
Press the OK button to accept the default settings. The 10 requested forecasts will then
be plotted in the Seasonal Holt-Winters Forecasts window. With this window
highlighted, press the INFO button to see the forecasts and the optimal and The
RMSE is the square root of the average of the squared errors of the one-step forecasts of
the observed data. As expected, Seasonal Holt-Winters reflects the seasonal behavior of
this data much more successfully than regular (non-seasonal) Holt-Winters Forecasts.

11000.

10000.

9000.

8000.

7000.

0 10 20 30 40 50 60 70 80
Intervention Analysis
See also Transfer Function Modelling

Outline: During the period for which a time series is observed, it is often the case
that a change occurs which affects the level of the series, e.g. a change in the tax laws
construction of a dam, an earthquake etc. A model to account for such phenomenona
is the intervention model proposed by Box and Tiao (1975), analogous to
Transfer Function Modelling but with deterministic input process {X(t)}. The
problem is to fit a model of the form,

Y (t )   j 0  ( j ) X (t  j )  N (t ),
where {N(t)} is an ARMA process uncorrelated with {X(t)},
 N ( B) N (t )   N ( B)W (t ),{W (t )} ~ WN (0,W2 ),
the transfer function, T(B), is assumed to have the form,
 j
B d (w0  w1 B  wq B q )
T ( B )   j 0  ( j ) B  ,
1  v1 B   v p B p
and the input process {X(t)} is a deterministic function (stored in a file), usually a
step- or impulse-function. The parameters in the last two equations are all to be
estimated from the given observations of Y(t). The steps are illustrated in the
following example.

Example: The bivariate series SBL2.TSM has as its first component the step function
I(t)=0, 0<t<99, and I(t)=1, 98<t<121,
and as its second component,
Y(t) = # of deaths and series injuries for month t.
A simple intervention model to account for the expected reduction in the mean of Y(t) from time
99 onwards (due to seat-belt legislation) is
Y(t)=a+bI(t)+M(t), t=1,…,120,
where {M(t)} is a zero-mean process which appears to have a substantial period-12 component.
In order to remove this seasonal component, we difference at lag 12. In terms of
X(t)=Y(t)-Y(t-12), the model becomes
X(t)=bg(t)+N(t)
where g(t)=I(t)-I(t-12) and N(t) is to be modeled as a suitable ARMA process. Our objective is
to use intervention analysis to estimate b and to find a suitable model for N(t).

Estimation:
Open the bivariate project SBL2.TSM and difference the series at lag 12. You will then
see the following graphs of g(t) (Series 1) and X(t) (Series 2).
Series 1 Series 2

4 00.
1.00

2 00.
.80

.60 0.

.40 -2 0 0 .

.20
-4 0 0 .

.00
-6 0 0 .

20 40 60 80 100 12 0 20 40 60 80 10 0 120

Select Transfer>Specify model and you will see that by default the input and noise
models are white noise, and the transfer function is of the form X(2,t)=bX(1,t). Since this is
exactly the type of transfer function we are trying to fit, click on OK, leaving all the settings as
they are. (The input model is irrelevant for intervention analysis and estimation with white noise
output will give the ordinary least squares estimate of b and corresponding residuals which are
estimates of N(t)).
Select Transfer>Estimation and click on OK. You will see the the estimated value –346.9 for b.
Press the red EXP button to export the residuals to a file and call it , say, NOISE.TSM.
Without closing the bivariate project open the univariate project NOISE.TSM. The sample
ACF and PACF suggest either an MA(13) or AR(13) model. Fitting AR and MA models of
orders up to 13 (with no mean-correction) using the option Model>Estimation>Autofit gives
an MA(12) as the minimum AICC model for the noise.
Return to the bivariate project by highlighting the window labeled SBL2.TSM and select
Transfer>Specify model. The transfer model will now show the estimated value –346.9 for
b. Click on the Residual Model tab , enter 12 for the MA order and click OK..
Select Transfer>Estimation, click on OK, and you will see the estimated parameters for both
the noise and transfer models printed on the screen. Repeating the minimization with decreasing
step-sizes .1, .01 and .001, gives the results,
========================================
ITSM::(Transfer Function Model Estimates)
========================================

X(t,2) = T(B) X(t,1) + N(t)

T(B) = B^0(-.3625E+03)

X(t,1) = Z(t)
{Z(t)} is WN(0,1.000000)

N(t) = W(t) + .2065 W(t-1) + .3110 W(t-2) + .1050 W(t-3)

+ .04000 W(t-4) + .1940 W(t-5) + .1000 W(t-6) + .2990 W(t-7)
+ .08000 W(t-8) + .1250 W(t-9) + .2100 W(t-10) + .1090 W(t-11)
- .5010 W(t-12)
{W(t)} is WN(0,.172890E+05)

AICC = .159088E+04

Accuracy Parameter .001000

WARNING: The AICC displayed should be ignored for intervention modeling. It is valid only
in the context of transfer-function modeling. The same applies to the option
Forecasting>Transfer-function.

Model checking:
Click on the red EXP button and export the residuals to a file, say RES.TSM. Open the
univariate project RES.TSM and apply the usual tests for randomness by selecting
Statistics>Residual Analysis. The tests are all passed. The sample ACF and PACF of the
residuals are shown below.
Sample ACF Sam ple PACF
1 .0 0 1 .00

.8 0 .80

.6 0 .60

.4 0 .40

.2 0 .20

.0 0 .00

-.2 0 -.20

-.4 0 -.40

-.6 0 -.60

-.8 0 -.80

-1 .0 0 -1 .00
0 5 10 15 20 25 30 35 40 0 5 10 15 20 25 30 35 40

Forecasting with the Fitted Model: To forecast 20 future values of X(t) using the fitted
model, we need to forecast the the noise N(t) and then add the corresponding extrapolated
intervention terms.
To save the values of N(t), select Transfer>Specify Model, click the Noise Model Tab and enter
zero for the AR and MA orders (the white noise variance is immaterial). Click OK and the
residuals will now be the same as the values of N(t). Press the Export button and export the
residuals to the Clipboard. Then select File>Project>New>Univariate, OK. This will open a
new univariate project with no data. To import {N(t)}, select File>Import Clipboard. We now
select Model>Specify, enter the MA(12) model found above and click OK. To compute the
noise forecasts select Forecast>ARMA, enter 20 for the number of forecasts, check the box to
plot 95% prediction bounds, click OK and you will see the following graph showing the
forecasts of N(t).

400.

300.

200.

100.

-100.

-200.

-300.

-400.
0 20 40 60 80 100 120

Right-clicking on the graph and selecting Info, you will also see the numerical values of the
predicted values and the upper and lower bounds shown below the graph.
Forecasts and prediction bounds for N(t):
====================
ITSM::(ARMA Forecast)
====================

Approximate 95 Percent
Prediction Bounds
Step Prediction sqrt(MSE) Lower Upper
1 29.93913 .12222E+03 -.20961E+03 .26949E+03
2 28.36070 .12221E+03 -.21117E+03 .26789E+03
3 29.12280 .12712E+03 -.22002E+03 .27827E+03
4 .11687E+03 .12775E+03 -.13352E+03 .36726E+03
5 43.78060 .12794E+03 -.20698E+03 .29454E+03
6 56.04640 .13010E+03 -.19895E+03 .31104E+03
7 34.40141 .13047E+03 -.22131E+03 .29012E+03
8 27.51935 .13527E+03 -.23761E+03 .29265E+03
9 21.04572 .13575E+03 -.24503E+03 .28712E+03
10 -2.38200 .13661E+03 -.27013E+03 .26536E+03
11 -76.04073 .13858E+03 -.34766E+03 .19558E+03
12 -32.65267 .13920E+03 -.30547E+03 .24017E+03
13 .00000 .15139E+03 -.29671E+03 .29671E+03
14 .00000 .15139E+03 -.29672E+03 .29672E+03
15 .00000 .15139E+03 -.29671E+03 .29671E+03
16 .00000 .15139E+03 -.29672E+03 .29672E+03
17 .00000 .15139E+03 -.29672E+03 .29672E+03
18 .00000 .15139E+03 -.29673E+03 .29673E+03
19 .00000 .15138E+03 -.29671E+03 .29671E+03
20 .00000 .15139E+03 -.29673E+03 .29673E+03

Forecasts and prediction bounds for X(t) are obtained simply by adding the extrapolated
deterministic intervention term, (0 in this case) to each of the predictors and bounds in the above
table. Forecasts of the original deaths and serious injuries series Y(t) are obtained from the
relation Y(t)=Y(t-12)+X(t).

Further details on intervention analysis can be found in B&D (2002) Section 10.2.
Long Memory Models
See also Model Specification, ARMA Forecasts .
Refs: B&D (1991) Sec.13.2, B&D (2002) Section 10.5.

The program ITSM allows you to simulate, estimate, predict and study properties
of long-memory models in the class of fractionally integrated ARMA(p,q) or
ARIMA(p,d,q) processes with -0.5<d<0.5 (frequently known as ARFIMA
processes). These are stationary solutions of difference equations of the form,
(1  B) d  ( B) X t   ( B) Z t ,
where zandzare polynomials of degree p and q respectively, which are
non-zero for all z such that |z| is less than or equal to 1., B is the backward shift
operator and {Zt} is a white noise sequence with mean 0 and constant variance.
The fractional differencing operator is defined by the binomial expansion,

(1  B) d    j B j ,
j 0

where
k 1  d
j  
0 k  j k
, j  0,1, .

The autocorrelation function of an ARIMA(p,d,q) process has the asymptotic

behaviour, for large h,
 (h) ~ Kh 2 d 1 .
This contrasts with the autocorrelation at lag h of an ARMA process, which is bounded
in absolute value by Cexp(-rh) for some r>0, and therefore converges to zero much faster.
This is why fractionally integrated ARMA processes are said to have long memory.

Note. If you have several thousand observations, the calculation of residuals from a
fractionally integrated model may take up to about a minute, depending on your
computer and the series length. If you wish to compute sample and model
autocorrelations, this delay can be avoided by ensuring that only the main project
window is open when you do the calculations.

Example.
To fit a fractionally integrated moving average model to the data set E1321.TSM,
open the file in ITSM by selecting File>Project>Open>Univariate then E1321.TSM.
The next step is to enter an ARIMA model of the order to be fitted by selecting the
options Model>Specify from the options at the top of the ITSM window. The model
specification dialog box will then appear, and you can enter the ARIMA(0,.3,1) model
with  = 0.2 and white noise varianceby completing the dialog box as shown below.
The parameter M determines the number of terms used in the approximation to the
model autocovariance function,
M M
 (h)   j 0 k 0 j k  (h  j  k ),
where  is the autocovariance function of fractionally integrated white noise with
d = 0.3 and variance 1 and

 j 0
 j z j   ( z ) /  ( z ), z  1
.
The rate of convergence of this series as M increases is determined by the closeness
of the zeros of (z) to the unit circle. If these are very close, the default value of
M=50 can be increased.
Parameter Estimation. Select the options Model>Estimation>Max Likelihood
and you will see a dialog box which allows calculation of likelihood without
maximization, maximization with the parameter d fixed, or, by default,
maximization of the likelihood with step-size 0.1. Click OK to accept the default
option and you will see the estimated MA coefficient 0.8 and the estimated value
0.4 for the parameter d. Also displayed is the corresponding value of
-2ln(Whittle likelihood) (the Whittle likelihood is the approximation to the
likelihood which is maximized by the program). To refine the parameter
estimates, again select Model>Estimation>Max Likelihood, but this time in the
dialog box set the step-size equal to 0.01. Then repeat with step-size .001 and
you will obtain the fitted model,

ARMA Model:
(1-B)^.3950 X(t) = Z(t) + .8115 Z(t-1)

WN Variance = .514471
MA Coefficient =.811500

AIC = 435.278031
-2Log(Likelihood) (Whittle) = 429.278031

Prediction. To predict 40 future values with the model just fitted, choose the
options Forecasting>ARMA, enter 20 as the number of predicted values required
in the dialog box, check the box indicating that you wish to plot 95% prediction
bounds and then click OK. You will then see the predictors and bounds as shown
In the following graph. To obtain numerical values, right click on the graph and
then click the Info option.

-1.

-2.

-3.

-4.
0 50 100 150 200

Simulation. To generate 200 data values from the model fitted above, select the
options Model>Simulate, click OK and a new univariate project with 200
simulated values will be opened and the data plotted in a new ITSM window.
The length of the series, the random number seed, the mean (if any) to be added to
the simulated series and the white noise variance can all be specified in the
simulation dialog box if so desired.

Model and Sample Properties. Model and sample properties can be found by
Simulation. To generate 200 data values from the model fitted above, select the
options Model>Simulate, click OK and a new univariate project with 200
simulated values will be opened and the data plotted in a new ITSM window.
The length of the series, the random number seed, the mean (if any) to be added to
the simulated series and the white noise variance can all be specified in the
simulation dialog box if so desired.

Model and Sample Properties. Model and sample properties can be found by
clicking on the appropriate yellow buttons near the top of the main ITSM window
or by selecting the options Statistics>ACF/PACF, Statistics>Spectrum, etc.
Owing to the intrinsic high variability of the sample ACF for samples from long-
memory models, a good match between the sample ACF and the model ACF can
only be expected for long simulated series (of length at least 1000). It may take
minutes (depending on your computer) to simulate fractionally integrated series of
length more than a few thousand.

Further details on long-memory models may be found in B&D (1991) p. 520

or B&D (2002) Section 10.5.
Maximum Likelihood Estimation
See also Model Specification , Preliminary Estimation , Constrained MLE .
Refs: B&D (1991) Sec. 8.7 , B&D (2002) Sec 5.2.

For efficient estimation of the parameters of an ARMA model, maximum

likelihood (or more precisely maximum Gaussian likelihood) should be used
This is the second suboption of the option Estimation in the Model Menu. Its
function is to find the parameter values which maximize the likelihood, given
the orders p and q of the current model. These may have been specified
earlier using the Model-Specify option, but will more likely have been arrived
at using the Model-Estimation-Preliminary option. The Gaussian likelihood of
any ARMA model for the data is specified in B&D (1991), eqn (8.7.4) and
B&D (2002), Section 5.2.

On selection of the option Model-Estimation-Max. Likelihood, you will see

The following dialogue box:

To find the maximum likelihood model simply press the OK button. If you
wish to compute least squares estimators (see B&D (1991), p.257 or B&D
(2002), Sec. 5.2), click on the Least squares option and then press OK. If your
objective is to compute the likelihood of the current model without carrying
out any optimization, click on the No optimization option and press OK.

The optimization parameters, Accuracy parameter and Number of iterations,

can be adjusted. A smaller value of the accuracy parameter will give more
accurate optimization and a larger number of iterations will allow the program
to continue the search beyond the default limit of 50 iterations, should this be
necessary.

Example: A preliminary AR(8) model was fitted to the mean corrected data
objective is to compute the likelihood of the current model without carrying
out any optimization, click on the No optimization option and press OK.

The optimization parameters, Accuracy parameter and Number of iterations,

Example: A preliminary AR(8) model was fitted to the mean corrected data
SUNSPOTS.TSM, by selecting Model-Estimation-Preliminary, subtracting
the mean and clicking on Burg, Min AICC, then OK. At this stage we can
refine our AR(8) model by selecting Model-Estimation-Max Likelihood and
then pressing OK in the dialogue box illustrated above.The output from ITSM
is shown below.

Notice that the AICC statistic has been reduced from 831.88 (Burg) to 831.71,
a small reduction which nevertheless illustrates that for given p and q the AICC
statistic, -2ln L + 2(p + q + 1)n/(n - p - q - 2), is minimized by the maximum
likelihood model. The other model selection criteria, FPE and BIC are defined
in B&D (1991), Sec. 9.3, and B&D (2002), Sec. 5.5.2.

For information regarding maximum likelihood estimation subject to constraints on

the coefficients, see Constrained MLE
========================================
ITSM2000:(Maximum likelihood estimates)
========================================
Method: Maximum Likelihood

ARMA Model:
X(t) = 1.517 X(t-1) - 1.093 X(t-2) + .4827 X(t-3) - .1981 X(t-4)
+ .008476 X(t-5) + .09753 X(t-6) - .2099 X(t-7) + .2491 X(t-8)
+ Z(t)

WN Variance = 189.329180

AR Coefficients
1.517382 -1.092684 .482693 -.198053
.008476 .097526 -.209887 .249128
Standard Error of AR Coefficients
.096994 .183178 .223615 .239573
.248533 .244191 .206960 .108662

(Residual SS)/N = 189.329

AICC = 831.712334
BIC = 850.738226
FPE = 222.255994

-2Log(Likelihood) = 811.712334
Accuracy parameter = .00108000
Number of iterations = 2
Number of function evaluations = 75
Optimization stopped within accuracy level.
Model Representations
See also Model Specification .
Refs: B&D (1991) pp.89-91. , B&D (2002) Section 3.1.

If {Xt} is a causal ARMA process, then it has an MA Infinity

representation,
 
X t   j Z t  j , where | j |   and  0  1 .
j 0 j 0

Similarly if {Xt} is an invertible ARMA process, i.e. if the equation,

(1) 1  1 z    q z q  0 ,
has no roots with absolute value less than or equal to 1, then it has an
AR Infinity representation,
 
Z t   j X t j , where |  j |   and  0  1 .
j 0 j 0

For any specified causal invertible ARMA model you can determine the
coefficients in these expansions by selecting the option AR/MA Infinity
from the Model Menu. The coefficients  0 , , 49 , and  0 , , 49 , will
then be listed in two columns in the AR/MA Infinity window.

If the ARMA model is not invertible the AR Infinity expansion does not
exist and the corresponding column in the AR/MA Infinity window will
consist of asterisks with the heading Model Not Invertible. Provided
equation (1) above has no roots with absolute value exactly equal to 1, it is
then possible to convert the model to an invertible one by selecting the
option Switch to Invertible from the Model Menu.

Example: For the ARMA(1,1) model defined by the equations,

X t  0.61 X t 1  Z t  0.41 Z t 1, {Z t } ~ WN (0,1) ,
application of the above procedure shows that the model is invertible and
gives the coefficients (up to j = 5) as follows:

==========================
ITSM2000:(AR/MA Infinity)
==========================

ARMA Model:
X(t) = .6000 X(t-1)
+ Z(t) + .4000 Z(t-1)

AR/MA Infinity:
MA-Infinity AR-Infinity
0 1.00000 1.00000
1 1.00000 -1.00000
2 .60000 .40000
3 .36000 -.16000
4 .21600 .06400
5 .12960 -.02560
+ Z(t) + .4000 Z(t-1)

AR/MA Infinity:
MA-Infinity AR-Infinity
0 1.00000 1.00000
1 1.00000 -1.00000
2 .60000 .40000
3 .36000 -.16000
4 .21600 .06400
5 .12960 -.02560
Model Specification
See also ACF-PACF , Model Spectral Density , Model Representations ,
Refs: B&D (1991) Chap. 3B&D (2002) Chap. 3

Once you have opened (and possibly transformed) a data set in ITSM, you
will also need a model for the data. This may be estimated from the data or
alternatively it may be entered without reference to the data. The option
Specify in the Model Menu allows for the latter possibility. You can use it
to enter any causal ARMA(p,q) model you wish. If you do not estimate or
enter any model, ITSM will assume the default model,
X t  Zt
where {Zt} ~ WN(0,2) (i.e. {Zt} is an uncorrelated sequence of random
variables with mean 0 and variance 2, known as a white noise sequence.)

The term ARMA(p,q) model in this package always denotes a stationary process
satisfying difference equations of the form
X t  1 X t 1  ...   p X t  p  Z t   1 Z t 1  ...   q Z t  q ,
2
where {Zt} ~ WN(0, ). An ARMA model defined in this way must have mean
equal to zero.

To specify an ARMA model you must therefore specify the parameters

p, q, 1, … , p, 1, … , q, and 2..
These are all entered in the dialogue box which appears when the option Specify
is selected from the Model Menu. The specified model must be causal, i.e. the
equation,
1  1 z    p z p  0 ,
must have no roots with absolute value less than or equal to 1. The program will
not accept non-causal models. It will give you an error message and you must then
enter a new set of autoregressive coefficients, 1, … , p . (Entering sufficiently
small coefficients will ensure causality.)

Example: The following dialogue box shows the entries required to specify the
model,
X t  0.61 X t 1  Z t  0.41 Z t 1, {Z t } ~ WN (0,1).
Pressing the OK button will cause the model to be entered into ITSM.
Model Spectral Density
See also Periodogram , Smoothed Periodogram ,

Refs: B&D (1991) pp.117-125. , B&D (2002) Section 4.1.

The spectral density of a stationary time series {X t , t = 0, 1, . . .}

with absolutely summable autocovariance function  (in particular of
an ARMA process) can be expressed as

f ( )  (2 ) 1 k    (k ) e ik ,       ,
where =  1 . The spectral representation of {X t} decomposes the
sequence into sinusoidal components and f() d is the contribution
to the variance of X t from components with frequencies in the small
interval (dwhere  is measured in radians per unit time. For
real-valued series  f() = f(-) so it is necessary only to plot f() on
the interval [0,A peak in the spectral density function at frequency
 indicates a relatively large contribution to the variance from
frequencies near 

For example the maximum likelihood AR(2) model,

X t  1.407 X t 1  0.713 X t  2  Z t ,
for the mean-corrected series SUNSPOTS.TSM has a peak in its
spectral density at frequency 0.18 radians per year. This indicates
that a relatively large part of the variance of the series can be attributed
to sinusoidal components with period close to 2years.

Plot Resolution. The model spectral density is by default computed at

1024 equally spaced frequencies between 0 and You may need to
increase this number, particularly if you are interested in the size and
location of peaks in the spectral density. To increase the resolution,
choose the options Spectrum>Model>Specify plot resolution, and increase
the number 1024 to a more suitable value.

Example: Read the data file SUNSPOTS.TSM into ITSM. Fit an AR(2)
model to the mean-corrected data using the options Model-Estimation-
Preliminary followed by Model-Estimation-Maximum Likelihood to
obtain the model specified above. To compute the spectral density of
the fitted model select the menu options Spectrum-Model. To compare
the model spectral density with the periodogram estimate of the spectral
density select Spectrum-Model and Periodogram. The latter choice
gives the following graphs, the smoother of which is the model spectral
density.

2000.

1500.
density select Spectrum-Model and Periodogram. The latter choice
gives the following graphs, the smoother of which is the model spectral
density.

2000.

1500.

1000.

500.

.0 .5 1.0 1.5 2.0 2.5 3.0

Moving Average Smoothing
See also Exponential Smoothing, Spectral Smoothing (FFT),
Refs: B&D (1991) p.16, B&D (2002) Section 1.5.

This option allows you to smooth the data using a symmetric

moving average. After selecting the MA Smooth suboption from
the Smooth menu, a dialogbox opens requesting entry of the half-
length q and the coefficients W(0), W(1),. . . , W(q) of the desired
moving average,
q
mt  W ( j) X
j  q
t j , t  1,..., n,

where W(j)=W(-j), j=1,. . . ,q. The integer q can take any value
greater than or equal to zero and less than n/2.

You may enter any real numbers for the coefficients, W(j), j=0,
. . .,q. These will automatically be rescaled by the program so that
W(0)+2W(1)+ . . . +2W(q)=1. (This is achieved by dividing each
entered coefficient by the sum W(0)+2W(1)+ . . . +2W(q). The
program therefore prevents you from entering weights for which
this sum is zero.)

Once the parameters q, W(0),. . . ,W(q) have been entered, the

program will graph the smoothed time series with the original data.
Right-clicking on the graph and selecting the option Info will
display the square root of the average squared deviation of the
smoothed values from the original observations, i.e.

n
SQRT(MSE)  n1 j 1(mj  X j ) 2
Further details on moving average smoothing may be found in B&D (1991),
pp.16-19 or B&D (2002) Section 1.5.
Yule-Walker Model
See also Burg Model., Preliminary Estimation .
Refs: B&D (1991) p.432, B&D (2002) Section 7.6.

The multivariate Yule-Walker equations are solved using Whittle’s algorithm to fit a (stationary)
multivariate autoregression (VAR(p)) of any order p up to 20 to an m-variate series {X(t)}
(where m<6). It can also automatically choose the value of p which minimizes the AICC
statistic. Forecasting and simulation with the fitted model can be carried out.

The fitted model is

X (t )   (0)   1 X (t  1)    p X (t  p )  Z (t ),
where the first term on the right is an m x 1-vector, the coefficients  are m x m matrices and {Z(
t)}~ WN(0, V). The Yule-Walker equations for the coefficient matrices and V are
p
 j 1
 j (i  j )  (i), i  1,..., p,
and
p
V  (0)   j 1  j  ( j ),
where
( j )  cov( X (t  j ), X (t )).
Whittle’s multivariate version of the Durbin-Levinson algorithm is used to solve these equations
for the estimated VAR(p) coefficients, j and the white noise covariance matrix, V.

Example: Import the bivariate series LS2.TSM by selecting

File>Project>Open>Multivariate,OK and then typing LS2.TSM, entering 2 for the number of
columns and clicking OK. You will see the graphs of the component series as below.
Series1 Series2

14.00

260.
13.50

13.00 250.

12.50
240.

12.00
230.
11.50

220.
11.00

10.50 210.

10.00
200.

9.50

0 20 40 60 80 100 120 140 0 20 40 60 80 100 120 140

.80 .80

.60 .60

.40 .40

.20 .20

.00 .00

-.20 -.20

-.40 -.40

-.60 -.60

-.80 -.80

-1.00 -1.00
0 2 4 6 8 10 12 14 16 18 20 0 2 4 6 8 10 12 14 16 18 20

Series2x Series1 Series2

1.00 1.00

.80 .80

.60 .60

.40 .40

.20 .20

.00 .00

-.20 -.20

-.40 -.40

-.60 -.60

-.80 -.80

-1.00 -1.00
0 2 4 6 8 10 12 14 16 18 20 0 2 4 6 8 10 12 14 16 18 20

5.
.80

.60 4.

.40 3.

.20 2.

.00 1.

-.20 0.

-.40 -1.

-.60 -2.

-.80 -3.

0 20 40 60 80 100 120 140 0 20 40 60 80 100 120 140

Series1 Series1x Series2

1.00 1.00

.80 .80

.60 .60

.40 .40

.20 .20

.00 .00

-.20 -.20

-.40 -.40

-.60 -.60

-.80 -.80

-1.00 -1.00
0 2 4 6 8 10 12 14 16 18 20 0 2 4 6 8 10 12 14 16 18 20

Series2x Series1 Series2

1.00 1.00

.80 .80

.60 .60

.40 .40

.20 .20

.00 .00

-.20 -.20

-.40 -.40

-.60 -.60

-.80 -.80

-1.00 -1.00
0 2 4 6 8 10 12 14 16 18 20 0 2 4 6 8 10 12 14 16 18 20

Now that we have an apparently stationary bivariate series, we can fit a Yule-Walker
autoregression by simply selecting AR Model>Estimation>Yule-Walker, placing a check mark in
the Minimum AICC box and clicking OK. The algorithm selects and prints out the following
VAR(5) model.

========================================
ITSM2000:(Multivariate Yule-Walker Estimates)
========================================

Optimal value of p = 5
PHI(0)
.032758
.015589

PHI(1)
-.517043 .024092
-.019088 -.050631

PHI(2)
-.191955 -.017620
.046840 .249683

PHI(3)
-.073330 .010015
4.677751 .206465

PHI(4)
-.031763 -.008763
3.664358 .004439

PHI(5)
.021493 .011382
1.300113 .029280

Y-W White Noise Covariance Matrix, V

.075847 -.002570
-.002570 .095126

AICC = 109.491420

Model Checking: The components of the bivariate residual series can be plotted by selecting
AR Model>Residual Analysis>Plot Residuals and their sample correlations by selecting AR
Model>Residual Analysis>Plot Cross-correlations. The latter gives the graphs,
Series1 Series1 x Series2
1.00 1.00

.80 .80

.60 .60

.40 .40

.20 .20

.00 .00

-.20 -.20

-.40 -.40

-.60 -.60

-.80 -.80

-1.00 -1.00
0 2 4 6 8 10 12 14 16 18 20 0 2 4 6 8 10 12 14 16 18 20

Series2 x Series1 Series2

1.00 1.00

.80 .80

.60 .60

.40 .40

.20 .20

.00 .00

-.20 -.20

-.40 -.40

-.60 -.60

-.80 -.80

-1.00 -1.00
0 2 4 6 8 10 12 14 16 18 20 0 2 4 6 8 10 12 14 16 18 20

showing that both the auto- and cross-correlations at lags greater than zero are negligible, as
they should be for a good model. (The model is clearly not as good however as the Burg Model
for the same series.)

S e r i e s1 S e r i e s2
16.

15.
280.

14.

260.

13.

240.
12.

220.
11.

10.
200.

0 20 40 60 80 100 120 140 160 0 20 40 60 80 100 120 140 160

Burg Model
See also Yule-Walker Model, Preliminary Estimation
Refs: R.H. Jones in Applied Time Series Analysis, ed. D.F.Findley, Academic Press, 1978, B&D
(2002) Section 7.6.

The fitted model is

X (t )   (0)   1 X (t  1)    p X (t  p )  Z (t ),
where the first term on the right is an m x 1-vector, the coefficients  are m x m matrices and {Z(
t)}~ WN(0, ).

Example: Import the bivariate series LS2.TSM by selecting

File>Project>Open>Multivariate,OK and then typing LS2.TSM, entering 2 for the number of
columns and clicking OK. You will see the graphs of the component series as below.
Series1 Series2

14.00

260.
13.50

13.00 250.

12.50
240.

12.00
230.
11.50

220.
11.00

10.50 210.

10.00
200.

9.50

0 20 40 60 80 100 120 140 0 20 40 60 80 100 120 140

.80 .80

.60 .60

.40 .40

.20 .20

.00 .00

-.20 -.20

-.40 -.40

-.60 -.60

-.80 -.80

-1.00 -1.00
0 2 4 6 8 10 12 14 16 18 20 0 2 4 6 8 10 12 14 16 18 20

Series2x Series1 Series2

1.00 1.00

.80 .80

.60 .60

.40 .40

.20 .20

.00 .00

-.20 -.20

-.40 -.40

-.60 -.60

-.80 -.80

-1.00 -1.00
0 2 4 6 8 10 12 14 16 18 20 0 2 4 6 8 10 12 14 16 18 20

5.
.80

.60 4.

.40 3.

.20 2.

.00 1.

-.20 0.

-.40 -1.

-.60 -2.

-.80 -3.

0 20 40 60 80 100 120 140 0 20 40 60 80 100 120 140

Series1 Series1x Series2

1.00 1.00

.80 .80

.60 .60

.40 .40

.20 .20

.00 .00

-.20 -.20

-.40 -.40

-.60 -.60

-.80 -.80

-1.00 -1.00
0 2 4 6 8 10 12 14 16 18 20 0 2 4 6 8 10 12 14 16 18 20

Series2x Series1 Series2

1.00 1.00

.80 .80

.60 .60

.40 .40

.20 .20

.00 .00

-.20 -.20

-.40 -.40

-.60 -.60

-.80 -.80

-1.00 -1.00
0 2 4 6 8 10 12 14 16 18 20 0 2 4 6 8 10 12 14 16 18 20

========================================
ITSM2000:(Multivariate Burg Estimates)
========================================

Optimal value of p = 8
PHI(0)
.029616
.033687

PHI(1)
-.506793 .104381
-.041950 -.496067

PHI(2)
-.166958 -.014231
.030987 -.201480

PHI(3)
-.067112 .059365
4.747760 -.096428

PHI(4)
-.410820 .078601
5.843367 -.054611

PHI(5)
-.253331 .048850
5.054576 .199001

PHI(6)
-.415584 -.128062
4.148542 .234237

PHI(7)
-.738879 -.015095
3.234497 -.005907

PHI(8)
-.683868 .025489
1.519817 .012280

Burg White Noise Covariance Matrix, V

.071670 -.001148
-.001148 .042355

Series1 Series1x Series2

1.00 1.00

.80 .80

.60 .60

.40 .40

.20 .20

.00 .00

-.20 -.20

-.40 -.40

-.60 -.60

-.80 -.80

-1.00 -1.00
0 2 4 6 8 10 12 14 16 18 20 0 2 4 6 8 10 12 14 16 18 20

Series2x Series1 Series2

1.00 1.00

.80 .80

.60 .60

.40 .40

.20 .20

.00 .00

-.20 -.20

-.40 -.40

-.60 -.60

-.80 -.80

-1.00 -1.00
0 2 4 6 8 10 12 14 16 18 20 0 2 4 6 8 10 12 14 16 18 20

showing that both the auto- and cross-correlations at lags greater than zero are negligible, as
they should be for a good model.

15.
280.

14.

260.

13.

240.
12.

220.
11.

10.
200.

0 20 40 60 80 100 120 140 160 0 20 40 60 80 100 120 140 160

Further details on multivariate autoregression can be found in B&D (1991) p. 432 and B&D
(2002) Section 7.6.
Periodogram
See also Smoothed Periodogram , Cumulative Periodogram, Model-standardized Cumulative
Periodogram , Fisher’s Test , Model Spectral Density

Refs: B&D (1991) p.332. , B&D (2002) Section 4.2.

The periodogram of the data X1, . . . , Xn, is defined as

n  it j
I ( j )  n 1 | t 1 X t e |2 ,
where  j = 2j/n, j=0,1, . . . , [n/2] , are the Fourier frequencies
in [0,  and [n/2] is the integer part of n/2. The periodogram
estimate of the spectral density at frequency j is 
1
fˆ ( j )  I ( j ).
2
This function is plotted by selecting the Periodogram suboption of
the Spectrum Menu.
A large value of fˆ (j) suggests the presence of a sinusoidal
component in the data at frequency j. This hypothesis can be
tested as described in B&D (1991), Section 10.1. Alternatively one
can test for hidden periodicities (of unspecified frequency) by using
Fisher’s test or by applying the Kolmogorov-Smirnov test to the
cumulative periodogram.

Example: The periodogram estimate of the spectral density for the

series SUNSPOTS.TSM is obtained by opening the file in ITSM,
clicking on the Spectrum Menu and then on the suboption Periodogram.

2000.

1500.

1000.

500.

.0 .5 1.0 1.5 2.0 2.5 3.0

Cumulative Periodogram
See also Periodogram , Model-standardized Cumulative Periodogram , Smoothed Periodogram
,
Fisher’s Test

Ref: B&D (1991) p.341.

Select Spectrum>Cumulative Spectrum>Periodogram to plot the standardized

cumulative periodogram of X1, …,Xn ,defined as the distribution function
(assigning all of its mass to [0,
 0, x  1,

C (2x / n)   Yi , 1  x  i  1, i  1,..., q  1,
 1, x  q,

where q = [(n - 1)/2],
i

Yi 
 k 1
I ( k )
q
 k 1
I ( k )
and I(k) is the periodogram ordinate at the Fourier frequency k.
If { X t } is Gaussian white noise, then Y i , i=1,…,q-1 are distributed as
the order statistics from a sample of q-1 independent uniform (0,1) random
variables, and the standardized cumulative periodogram should be
approximately linear. The Kolmogorov-Smirnov test rejects the hypothesis
of Gaussian white noise at level .05 if C(2x/n) exits from the boundaries
x 1
y (2x / n)   1.36(q  1) 1 / 2 , 1  x  q.
q 1

Example: The standardized periodogram of the series SUNSPOTS.TSM is

obtained by opening the file in ITSM, and selecting Spectrum>Cumulative
Spectrum>Periodogram. It is clear from the graph below that the Kolmogorov-
Smirnov test rejects the hypothesis of Gaussian white noise at level .05.

1.00

.80

.60

.40

.20

.0 .5 1.0 1.5 2.0 2.5 3.0

.40

.20

.0 .5 1.0 1.5 2.0 2.5 3.0

To plot the Kolmogorav Smirnov bounds and carry out the test in a more general context
(i.e. to test whether or not the data is compatible with any specifed ARMA spectral density f),
use the options Spectrum>Cumulative Spectrum> Model-standardized .
Model-Standardized Cumulative Periodogram
See also Periodogram, Cumulative Periodogram.

Ref: B&D (1991) p. 342.

The model-standardized cumulative periodogram is defined as the distribution function (with

mass concentrated on [0,
 0, x  1,

C (2 x / n)   Yi , 1  x  i  1, i  1,..., q  1,
 1, x  q,

where q = [(n - 1)/2],
i

Yi 
k 1
I ( k ) / f ( k )
,
q
k 1
I ( k ) / f ( k )
I(k) is the periodogram ordinate and f(k the model spectral density at the Fourier frequency 
k.
If { Xt} is an ARMA process with the spectral density f , then Yi , i=1,…,q-1 are approximately
distributed as the order statistics of a sample of q-1 independent uniform (0,1) random variables,
and the model-standardized cumulative periodogram should be approximately linear. The
Kolmogorov-Smirnov test rejects the hypothesis that the data is a sample from an ARMA
process with the spectral density f at level .05 if C(2x/n) exits from the boundaries
x 1
y (2 x / n)   1.36(q  1) 1 / 2 , 1  x  q.
q 1
These bounds are automatically plotted with the model-standardized cumulative periodogram,
making it a trivial matter to test whether or not the data is compatible with the spectral density of
the current model. ITSM also plots the level .01 bounds which are more widely spaced, with the
constant 1.36 replaced by 1.63.

Example: Select the options File>Project>Open>Univariate, click OK and type SUNSPOTS to

import the sunspot series with its default model of white noise. To see the model-standardized
cumulative periodogram select Spectrum>Cumulative Spectrum>Model Standardized and you
will see the following graph. Since the graph exits very convincingly from both the level.05 and
level .01 Kolmogorov-Smirnov bounds, it is clear that white noise is an unsatisfactory model for
SUNSPOTS.
C D Fo f P e r i o d o g r a m
/ Mo d e l S p e c t r u ma n d K-S Bo u n d s

1 . 00

. 80

. 60

. 40

. 20

. 00

.0 .5 1.0 1.5 2.0 2.5 3.0

Select Window>Tile to rearrange the windows and then try fitting a better model for
SUNSPOTS. This can be done by choosing Model>Estimation>Preliminary, Yes (to subtract
the mean before ARMA fitting) and then selecting Burg , Find AR model with min AICC and
clicking OK. The model-standardized cumulative periodogram then changes automatically to
reflect the new fitted model (an AR(8)) and we see from the graph below that the new model is
an excellent fit insofaras the Kolmogorov-Smirnov bounds are concerned.

CDFo f P e r i o d o g r a m
/ Mo d e lS p e c t r u ma n d K-S Bo u n d s

1 . 00

. 80

. 60

. 40

. 20

. 00

.0 .5 1.0 1.5 2.0 2.5 3.0

Smoothed Periodogram
See also Periodogram , Cumulative Periodogram , Model Spectral Density

Refs: B&D (1991) p.446. , B&D (2002) Section 4.2.

The spectral density of a stationary process can be estimated

by smoothing the periodogram. The smoothed periodogram
estimate of the spectral density at the Fourier frequency j is
1 m
fˆ ( j )   W (k ) I ( j  k ),
2 k   m
where the weights W(k) are non-negative, add to 1 and satisfy
W(k) = W(-k). They are chosen by selecting the Smoothed
Periodogram suboption of the Spectrum Menu. You will then
see the following dialog box:

The weights are generated by the successive application of n

Daniell filters (filters with W(k) = 1/(2m+1), k= -m, . . . , m).
The required value of n is first entered in the highlighted window
shown in the box above. Then using the mouse or tab key, enter
the order m of each of the filters 1, . . . , n. Once this has been
done you will see the weights {W(j)} corresponding to the
successive application of the n filters shown in the bottom window
of the dialog box. Pressing the Apply button will then generate
the corresponding smoothed periodogram spectral density
estimate.

Example: To apply the filter obtained by successive application

of two Daniell filters with m=1 and m=3 we enter the value n=2,
then Order of Filter 1 = 1 and Order of Filter 2 = 3. The weights
shown in the bottom window of the dialog box will then be
W0 = W1 = W2 =1/7, W3 = 2/21 and W4 = 1/21.
Pressing the Apply button will cause the filter with these weights to
be applied to the periodogram of the data and the resulting smoothed
spectral density estimate will be plotted. Applying these weights to
the periodogram of the data in SUNSPOTS.TSM gives
1000.

800.

600.

400.

200.

.0 .5 1.0 1.5 2.0 2.5 3.0

Preliminary Estimation
See also ACF/PACF , Maximum Likelihood Estimation , Constrained MLE
Refs: B&D (1991) Secs 8.2, 8.3, 8.4 , B&D (2002) Sec. 5.1.

The option Estimation in the Model Menu has two suboptions, Preliminary
and Maximum Likelihood. The Preliminary methods are fast (but somewhat
rough) algorithms. They are useful for suggesting the most promising models
for the data, but they should be followed by the more refined maximum
likelihood method. Once you have fitted a preliminary model, the likelihood
maximization algorithm will use it as the starting point in the search for the
parameter values which maximize the (Gaussian) likelihood.

On selection of the Preliminary Estimation option, you will see the following
dialogue box:

To fit an AR(p) model, enter the value of p in the AR order window and then
select either the Yule-Walker or Burg algorithm. (The default, as shown in the
dialogue box above, is Yule-Walker. However the Burg estimates frequently
give larger Gaussian likelihoods.)

To fit an ARMA(p,q) model with q>0, the required values of p and q must be
entered in the AR order and MA order windows respectively. Once these have
been entered you will have a choice between the Hannan-Rissanen and
Innovations algorithms. The latter frequently gives larger likelihoods when
p=0 while Hannan-Rissanen has a greater tendency to give causal models as
required by the program when p>0. If the chosen preliminary estimation
algorithm gives a non-causal model then all coefficients will be set to .001 to
generate a causal model with the specified values of p and q. The parameter
Number of ACVF's appearing in the bottom right of the dialogue box is a
parameter of the Innovations algorithm (B&D (1991), Secs 8.3-8.4 or B&D
(1996), p.149) which will usually be set to the default value by entering zero.

Our ultimate objective is to find a model with as small an AICC value as

possible, where AICC (see B&D (1991), Sec. 9.3 or B&D (1996), Sec. 5.5.2)
p=0 while Hannan-Rissanen has a greater tendency to give causal models as
required by the program when p>0. If the chosen preliminary estimation
algorithm gives a non-causal model then all coefficients will be set to .001 to
generate a causal model with the specified values of p and q. The parameter
Number of ACVF's appearing in the bottom right of the dialogue box is a
parameter of the Innovations algorithm (B&D (1991), Secs 8.3-8.4 or B&D
(1996), p.149) which will usually be set to the default value by entering zero.

Our ultimate objective is to find a model with as small an AICC value as

possible, where AICC (see B&D (1991), Sec. 9.3 or B&D (1996), Sec. 5.5.2)
is defined as
AICC = -2ln L + 2(p + q + 1)n/(n - p - q - 2)
where L is the Gaussian likelihood (see B&D (1991), eqn (8.7.4) or B&D
(1996), eqn (5.2.9). Smallness of the AICC value computed under Preliminary
Estimation is indicative of a good model but should only be used as a rough
guide. Final decisions between models should be based on maximum likelihood
estimation, since for fixed p and q the values of the parameters which minimize
the AICC statistic are the maximum likelihood estimates, not the preliminary
estimates. It is possible to minimize the AICC of preliminary pure autoregressive
models (over the range p=0 to 26) by selecting either Burg or Yule-Walker and
checking the Find AR with min AICC box.

Example: The following output from ITSM was obtained by opening the data file
SUNSPOTS.TSM, selecting Model-Estimation-Preliminary, subtracting the mean
and clicking on Burg, Min AICC, then OK. The ratios of coefficients to 1.96 times
standard errors suggests the possibility of fitting a subset autoregression with 5 and
possibly  equal to zero. This can be done under maximum likelihood estimation.
=================================
ITSM2000:(Preliminary estimates)
=================================
Method: Burg (Minimum AICC)

ARMA Model:
X(t) = 1.512 X(t-1) - 1.095 X(t-2) + .4822 X(t-3) - .1963 X(t-4)
+ .01121 X(t-5) + .1013 X(t-6) - .2054 X(t-7) + .2502 X(t-8)
+ Z(t)

WN Variance = 189.609808

AR Coefficients
1.511890 -1.095235 .482203 -.196292
.011207 .101345 -.205432 .250184

Ratio of AR coeff. to 1.96 * (standard error)

8.663315 -3.734065 1.501416 -.611676
.034922 .315554 -.700395 1.433584

(Residual SS)/N = 189.610

WN variance estimate (Burg): 176.429

-2Log(Like) = 811.877882
AICC = 831.877882
Regression with ARMA or ARFIMA Errors
See also Model Specification, ARMA Forecasts .
Refs: B&D (1991) Sec.13.2, B&D (2002) Section 6.6.

Classical regression analysis is concerned with fitting a model of the form,

Yt  xt1  1  xtk  k  Wt , t  1, , n,
to observations of Y at times t=1,…,n, expressing them in terms of k explanatory
variables x and noise terms (or residuals) W , where the noise terms at times
t=1,…,n, are independent and identically distributed. Regression with ARMA
errors deals with the same problem except that W is assumed instead to be an
ARMA process whose parameters are to be estimated. In matrix notation, the
model is
Y = X W,
Where
Y  (Y1 , , Yn )'
,
X  [ xtj ]t 1,.., n; j 1,.., k
,
  ( 1 , ,  k )' ,
W  (W1 , ,Wn )'
and
 ( B )Wt   ( B) Z t ,{Z t } ~ WN (0,  2 ).
Particular cases which arise frequently in applications are
Linear Trend. :
xt1  1, x t 2  t
.
Harmonic Regression.
xt1  1, xt 2  cos(t ), xt 3  sin(t ).
Arbitrary Regressors. Any prespecified functions x1,…,xm , whose values for t=1,…,n, are
stored as m columns in an ASCII file (with .TSM suffix) can also be used as regressors. See also
Intervention Analysis
ARFIMA Errors. Regression with Long Memory Errors follows the same steps set out below
with
the obvious modification of the MLE step.

We illustrate below by fitting a linear trend with ARMA noise to LAKE.TSM and a
step-function regressor to the series CDID.TSM.

Example 1.
To fit a linear trend function with ARMA errors to LAKE.TSM, first import
the data into ITSM by selecting File>Project>Open>Univariate then LAKE.TSM.
Then click Regression>Specify and complete the regression dialog box as shown.
Then click OK and press the GLS button. Since the default model in ITSM is
white noise, the generalized least squares estimates of the coefficients in
Yt   1   2 t , t  1, ,98
will be the same as the ordinary least squares estimates at this first iteration.
These are shown in the Regression Estimates window.

Press the yellow Plot Sample ACF/PACF button to see the ACF/PACF of the
residuals, which appear to have the PACF of an AR(2) model. Selecting
Model>Estimation>Preliminary and choosing Burg estimation with the minimum
AICC option confirms this model. Then choose Model>Estimation>Max
Likelihood to obtain the maximum likelihood AR(2) model for the residuals.

GLS STEP. Press the GLS button again and the generalized least squares
estimates corresponding to the previously found AR(2) model for the residuals
will be shown in the Regression Estimates Window.
MLE STEP. Again choose Model>Estimation>Max Likelihood to obtain the
updated AR(2) model for the new residuals.

Alternate the GLS and MLE steps until the coefficient estimates stabilize. After
two iterations we find the model,
Method: Generalized Least Squares
Y(t) = M(t) + X(t)
Trend Function:
M(t) = 10.091444 t^0 - .021576732 t^1

ARMA Model:
X(t) = 1.008 X(t-1) - .2947 X(t-2) + Z(t)
WN Variance = .457128
Alternate the GLS and MLE steps until the coefficient estimates stabilize. After
two iterations we find the model,
Method: Generalized Least Squares
Y(t) = M(t) + X(t)
Trend Function:
M(t) = 10.091444 t^0 - .021576732 t^1

ARMA Model:
X(t) = 1.008 X(t-1) - .2947 X(t-2) + Z(t)
WN Variance = .457128

Coeff Value Std Error

0 10.09144424 .46226761
1 -.02157673 .00804851

X(t) = 1.005 X(t-1) - .2913 X(t-2) + Z(t)

WN Variance = .456614

Coeff Value Std Error

0 10.09139847 .46323630
1 -.02156431 .00806457

WARNING. If you are using a fractionally integrated model for the residuals with thousands of
observations, the iteration step may take minutes. If the Regression Estimates window is closed,
the iteration step will update the model for the residuals without updating the regression
coefficients. This is a much faster operation.

Example 2.
To estimate b and find a suitable ARMA model for {W(t)} in the regression model,
X(t)=bg(t)+W(t),
where {X(t)} is stored in the file SBLD.TSM (see Data sets , B&D (2002) Example 6.6.3) and {g
(t)} is stored in SBLDIN.TSM, proceed as in the preceding example, but in the Regression
Trend Function dialog box shown above uncheck the Polynomial Regression and Include
Intercept options and check the option Include Auxiliary Variables. When you have
done this, click on Browse, type SBLDIN and click on open. Specify 1 for the number of
columns (since there is only one regressor stored in SBLDIN.TSM) and click OK. Then click OK
in the Regression Trend Function dialog box and you are ready to begin the regression.

Press the blue GLS button and you will see the ordinary least squares regression model,
X(t)=-346.2g(t)+W(t),
displayed in the Regression Estimates window together with the assumed noise model (white
noise in this case). .Leaving this window open, press the yellow Plot Sample ACF/PACF
button to see the ACF/PACF of the residuals. The sample ACF and PACF suggests an MA(13)
or AR(13) model for {W(t)}. Fitting AR and MA models of orders up to 13 (with no mean
correction) using the option Model>Estimation>Autofit gives an MA(12) model as the
minimum AICC fit for the residuals. Once this model has been fitted, the model in the
Regression Estimates window is automatically updated to
X(t)=-328.45g(t)+W(t),
with the fitted MA(12) model for the residuals also displayed.

ITERATION. Pressing the MLE button again will cause both the regression estimates
and the ARMA model for the residuals to be updated.
Repeat the iteration step until the values in the Regression Estimate window stabilize.
This will take just a few iterations and give the results:

========================================
ITSM::(Regression estimates)
========================================
Method: Generalized Least Squares
Y(t) = M(t) + X(t)

Trend Function:
M(t) = - .32844534E+03 x(1)
ARMA Model:
X(t) = Z(t) + .2189 Z(t-1) + .09762 Z(t-2) + .03093 Z(t-3)
+ .06447 Z(t-4) + .06878 Z(t-5) + .1109 Z(t-6) + .08120 Z(t-7)
+ .05650 Z(t-8) + .09192 Z(t-9) - .02828 Z(t-10) + .1826 Z(t-11)
- .6267 Z(t-12)
WN Variance = .125805E+05

Coeff Value Std Error

1 -.32844534E+03 49.41040178

Note. This model is a little different from the one obtained by Intervention Analysis. The
intervention model is fitted by least squares. The difference between the estimated regression
coefficients is less than the standard error given above.

To see the fitted regression with the data, click on Regression>Show fit and you will see the
following graph:

400.

200.

-200.

-400.

-600.

0 20 40 60 80 1 00

Further details on regression with ARMA errors can be found in B&D (2002) Section 6.6.
Residual Plots
See also ACF-PACF , Residual Tests , Preliminary Estimation .
Refs: B&D (1991) Sec.9.4, B&D (1996) Sec.5.3.

The option Residual Analysis in the Statistics Menu provides four suboptions,
Plot, Histogram, ACF/PACF and Tests of Randomness. Each of these enables
you to examine properties of the residuals of the data from the current model
and hence to check whether or not the model provides a good representation
of the data.

The residuals are defined to be the rescaled one-step prediction errors,

Wˆ t  ( X t  Xˆ t ) / rt 1 ,
where X̂ t is the best linear mean-square predictor of Xt based on the data up to
time t - 1, is the white noise variance of the fitted model and
rt 1  E ( X t  Xˆ t ) 2 /  2 .

If the data were truly generated by the current ARMA(p, q) model with white
noise sequence {Zt }, then for large samples the properties of the residuals should
reflect those of {Zt } (see B&D (1991), Sec.9.4, or B&D (1996), Sec.5.3). To
check the appropriateness of the model we can therefore examine the residual
series and check that it resembles a white noise sequence.

The suboption Plot generates a time-series graph of the data which should be
checked for signs of trend, cycles, non-constant variance and any other apparent
deviations from white-noise behaviour.

The suboption Histogram generates a histogram of the residuals which should

have mean close to zero. If the fitted model is appropriate and the series is
Gaussian, this will be reflected in the shape of the histogram of the residuals
which should then resemble a normal density with mean zero and variance equal
to the white noise variance of the fitted model.

The suboption ACF/PACF plots the sample ACF and PACF of the residual
Series, both of which should lie between the bounds  1.96 / n for roughly
95% of the lags greater than 0. If substantially more than 5% lie outside these
limits, or if there are a few very large values, then we should look for a better-
fitting model. (More precise bounds, due to Box and Pierce, can be found in
B&D (1991), Sec.9.4.)

Example: Read the data SUNSPOTS.TSM into ITSM, subtract the mean and
then select the options Model-Estimation-Preliminary to fit the minimum AICC
Burg AR model to the mean-corrected series. This will be an AR(8). Then
select Statistics-Residual Analysis-Plot and Statistics-Residual Analysis-
ACF/PACF and you will see the first two graphs below. Neither graph shows
any apparent deviation from white noise behaviour, however examination of the
histogram of the residuals suggests that the assumption of Gaussian white noise
in this model may not be appropriate.
Example: Read the data SUNSPOTS.TSM into ITSM, subtract the mean and
then select the options Model-Estimation-Preliminary to fit the minimum AICC
Burg AR model to the mean-corrected series. This will be an AR(8). Then
select Statistics-Residual Analysis-Plot and Statistics-Residual Analysis-
ACF/PACF and you will see the first two graphs below. Neither graph shows
any apparent deviation from white noise behaviour, however examination of the
histogram of the residuals suggests that the assumption of Gaussian white noise
in this model may not be appropriate.

40.

30.

20.

10.

-10.

-20.

-30.

-40.
0 20 40 60 80 100

ResidualACF ResidualPACF
1.00 1.00

.80 .80

.60 .60

.40 .40

.20 .20

.00 .00

-.20 -.20

-.40 -.40

-.60 -.60

-.80 -.80

-1.00 -1.00
0 5 10 15 20 25 30 35 40 0 5 10 15 20 25 30 35 40
20.

18.

16.

14.

12.

10.

-30 -20 -10 0 10 20 30 40

Residual Tests
See also Residual Plots , Preliminary Estimation .
Refs: B&D (1991) Sec.9.4 , B&D (1996) Sec.5.3.

If the current ARMA model is appropriate for the current data set, then the
residuals (see Residual Plots) should have properties consistent with those of
a white noise sequence. This can be checked by looking at residual plots and
by carrying out the following randomness tests , described in detail in the
above references to B&D.

1. Ljung-Box portmanteau test

2. McLeod-Li portmanteau test
3. Turning point test
4. Difference-sign test
5. Rank test
6. Minimum-AICC AR order

The statistics, used in 1, 3, 4 and 5 have known large-sample distributions

under the hypothesis of independent and identically distributed random data.
These distributions are specified in the output of ITSM together with the
observed value of each sample statistic. The same is true for 2, except that
the additional hypothesis of normality is required. The p-value for each test
is also shown. This is the probability of obtaining a value of the test statistic
as extreme as, or more extreme than, the value observed, under the assumption
that the null hypothesis of iid random data is true. A p-value less than .05 (for
example) indicates rejection of the null hypothesis at significance level .05.

In test 6 the, Yule-Walker algorithm (see Preliminary Estimation) is applied to

the residuals and the AR model with minimum AICC (for orders p up to 26) is
determined. If the residuals are white noise, this value should be 0.

Example: Read the data AIRPASS.TSM into ITSM, and use the Transform
option of ITSM to take logarithms (Box Cox transformation with parameter zero),
difference at lags 12 and 1 and finally to subtract the mean of the transformed
series. Then select the options Model>Estimation>Preliminary to fit the minimum
AICC Burg AR model to the resulting series. This turns out to be an AR(12)
model. Then select Statistics>Residual Analysis>Tests of Randomness and you
will be asked to select the parameter h for the two portmanteau tests. Accepting the
default value of 32, you will see the test results below.

============================================
ITSM2000:(Tests of randomness on residuals)
============================================

Ljung - Box statistic = 29.993 Chi-Square ( 20 ), p-value = .06996

McLeod - Li statistic = 43.346 Chi-Square ( 32 ), p-value = .08696

# Turning points = 89.000~AN(86.000,sd = 4.7924), p-value = .53132

# Diff sign points = 68.000~AN(65.000,sd = 3.3166), p-value = .36571

ITSM2000:(Tests of randomness on residuals)
============================================

Ljung - Box statistic = 29.993 Chi-Square ( 20 ), p-value = .06996

McLeod - Li statistic = 43.346 Chi-Square ( 32 ), p-value = .08696

# Turning points = 89.000~AN(86.000,sd = 4.7924), p-value = .53132

# Diff sign points = 68.000~AN(65.000,sd = 3.3166), p-value = .36571

# Rank points = .41790E+04~AN(.42575E+04,sd = .25130E+03), p-value = .75476

Order of Min AICC YW Model for Residuals = 0

None of the tests rejects the hypothesis of iid residuals at level .05 and the
minimum-AICC Yule Walker AR model for the residuals is of order zero.
These observations, and inspection of the sample ACF of the residuals, all
support the adequacy of the fitted model.
Simulation
See also Classical Decomposition , Model Specification .
Refs: B&D (1991) p. 271.

ITSM can be used to generate realizations of a random time series defined by

the current ARMA model. To generate such a realization, select the Model Menu,
then the option Simulate and you will see a dialogue box like the following:

If you have applied transformations to the original series to arrive at the current
data set, then you will have the opportunity, by checking the appropriate choices
in the dialogue box, to apply the inverse transformations to the simulated ARMA
series in order to generate a simulated version of the original series. The default
white-noise distribution used for simulation is normal, however if you press the
Change noise distribution button, you will be given the choice of distributions
shown in the following dialogue box.
Example: Read the data AIRPASS.TSM into ITSM and, with the aid of the
Transform Menu, apply the Box-Cox transformation with parameter 0, and make
a Classical Decomposition of the resulting series into a seasonal component with
period 12 and a linear trend. The mean of the residuals is so close to zero that
there is no need to subtract the mean.

To fit a simple model to the transformed data select Model>Estimation>Preliminary

and determine the minimum AICC Burg AR model. This is an AR(2).

To use this model for the transformed data to simulate a realization of the original
data, select the Model Menu followed by the option Simulate. You should then see
the top dialogue box shown above. The default number of observations to be simulated
is the same as the number of original data. The seed is an integer of 10 or fewer
digits which initializes the random number generator. If at some time you wish to
generate an exact replica of the simulated realization, it can be done by ensuring that
the seed is set to the same value, which in this case is 102452. To generate another
independent realization, change the seed number while keeping all other parameters
the same. The white noise variance is that of the fitted model (1.214 x 0.001) and the
mean to be added to the simulated ARMA is zero since we did not subtract the mean
from the transformed data. The two check marks indicate that we wish to add the
estimated trend and seasonal components to the simulated ARMA and apply the
inverse Box-Cox transformation to the resulting series. In this way we should obtain
a simulated version of the original series. Eliminating these check marks by clicking
on them would lead to a realization of the AR(2) process fitted to the residual series.
The simulated realization of the original series (using normally distributed noise) is
shown below.
600.

500.

400.

300.

200.

100.

0 20 40 60 80 100 120 140

Spectral(FFT) Smoothing
See also Moving Average Smoothing, Exponential smoothing,

Ref: B&D (2002) Section 1.5.

Spectral smoothing is accomplished by removing the high frequency components from the series.
This involves three steps, first the FFT of the series is calculated second the Fourier coefficients
above a chosen cutoff frequency are set to zero, lastly, the inverse FFT is taken of the modified
spectrum resulting in the smoothed sequence.

After selecting the suboption FFT Smooth from the Smooth menu, a dialog box will open
requesting you to enter a smoothing parameter f betwen 0 and 1. The smaller the value of f
the more the series is smoothed with maximum smoothing ocurring when f=0.

Once the parameter f has been entered, the program will graph the smoothed time series with
the original data and will display the root of the average squared deviation of the smoothed
values from the original observations defined by

n
SQRT(MSE)  n1 j 1(mj  X j ) 2

Further details on spectral smoothing may be found in B&D (2002) p.19.

Subsequence

The option Subsequence of the Transform Menu allows us to analyze a

segment of the time series obtained by eliminating specified numbers of
data from the beginning and/or end of the series.

Example: Suppose we open the project SUNSPOTS.TSM which consists of

100 observations X1, … ,X100, but wish to analyze only the second half of the
series. This is achieved by selecting the Subsequence option of the Transform
Menu, at which point you will see the following Subsequence Dialogue Box.

To select the last half of the series, simply enter 51 in the window labelled Min
and leave the default entry 100 as it is in the Max window. Then press the OK
button and you will see that the data window labelled SUNSPOTS.TSM now
contains a graph of only the 50 last observations of the original series. If you had
already opened the ACF/PACF window for SUNSPOTS.TSM, this would also
change to reflect the change in the data set SUNSPOTS.TSM. If you wish to
recover the original series select the Undo option of the Transform Menu.
Transfer Function Modelling
See also Intervention Analysis.

Outline: Given observations of an ``input’’ series {U(t)} and ``output’’ series {V(t)},
The steps in setting up a transfer function model relating V(t) to U(t) and U(s), s<t,
begin with differencing and mean correction to generate transformed input and output
series {X(t)}and {Y(t)} respectively, which can be modelled as zero-mean stationary
processes. The objective then is to fit a transfer function model of the form,

Y (t )   j 0  ( j ) X (t  j )  N (t ),
where {N(t)} is an ARMA process uncorrelated with {X(t)},
 N ( B) N (t )   N ( B)W (t ),{W (t )} ~ WN (0,W2 ),
the transfer function, T(B), is assumed to have the form,
 j
B d (w0  w1 B  wq B q )
T ( B )   j 0  ( j ) B  ,
1  v1 B   v p B p
and the input process {X(t)} is assumed to be an ARMA process,
 X ( B) X (t )   X ( B) Z (t ),{Z (t )} ~ WN (0,  Z2 ).
The parameters in the last three equations are all to be estimated from the given
observations of (X(t),Y(t)). Residual correlations and cross-correlations can
be computed for model checking. The AIC value of the fitted model is computed
for model comparisons, and forecasts of Y(t) (and of the original output series
V(t)) are computed from the fitted model. The steps are illustrated in the following
example.

Example. Select the options File>Project>Open then click Multivariate, OK,

and select the file LS2.TSM. This file contains two columns,the first being a leading
indicator and the second a sales figure. In the following dialog box you can therefore
accept the default value 2 for the number of columns and click OK. The following
graphs of the input and output series will then appear.
S e r i e1
s S e r i e2
s

14. 00

260.
13. 50

13. 00 250.

12. 50
240.

12. 00
230.
11. 50

220.
11. 00

10. 50 210.

10. 00
200.

9. 50

0 20 40 60 80 100 120 140 0 20 40 60 80 100 120 140

Select the options Transform>Difference and difference at lag 1, then Transform>

Subtract Mean to produce two stationary-looking series {X(t)} and {Y(t)}.

Click on the Export button at the top right of the ITSM window and export the
transformed time series to the Clipboard. Open Microsoft Excel and paste the
contents of the clipboard which will appear as two adjacent columns in Excel.
Copy the first column, {X(t)}, and paste it into a Notepad file, then save it as
DLEAD.TSM in the ITSM6 directory. Repeat for the second column, giving it
the name DSALES.TSM. Return to ITSM, where the screen should still show
the graphs of {X(t)} and {Y(t)}. Without closing the original bivariate project,
proceed through the following steps.
Modelling {X(t)}: Select File>Open>Project>Univariate and select DLEAD.TSM.
The univariate toolbar will then reappear at the top of the ITSM window. Clicking
on the Plot Sample ACF/PACF button and inspecting the sample ACF suggests an
MA(1) model for {X(t)}. The maximum likelihood MA(1) model is found to be
(see Preliminary Estimation and Maximum Likelihood Estimation,)
X (t )  Z (t )  .4744Z (t  1),{Z (t )} ~ WN (0,.07794).
(The mean is not subtracted from {X(t)} for this calculation.)
Export X-Residuals: Press the Export Button and in the dialog box select Residuals
and Clipboard.and then click OK. Paste these residuals into a spreadsheet
column in Excel. Also paste them into a notepad file and save as the file XRES.TSM.
Import {Y(t)}: With the DLEAD.TSM window highlighted, select File>Import File
and type DSALES.TSM. without changing the MA(1) model fitted above,
Export Y-Residuals: Press the Export Button, in the dialog box select Residuals
and Clipboard.and then click OK. Paste these residuals into the spreadsheet column
immediately to the right of the column containing the corresponding X-residuals.
Import Bivariate X-Y-Residuals: Mark the 149 by 2 array in the Excel spreadsheet
containing the X- and Y-residuals, click Copy, and then return to ITSM. Now, making
sure that the LS2.TSM window is highlighted, select File>Import Clipboard and
the graphs of the bivariate series of X- and Y-residuals will appear in the window
labelled LS2.TSM.
Preliminary Transfer Coefficients: Press the Plot Sample Cross Correlations
button and you will see the array of cross-correlation graphs shown below.
Series1 Series1x Series2
1.00 1.00

.80 .80

.60 .60

.40 .40

.20 .20

.00 .00

-.20 -.20

-.40 -.40

-.60 -.60

-.80 -.80

-1.00 -1.00
0 2 4 6 8 10 12 14 16 18 20 0 2 4 6 8 10 12 14 16 18 20

Series2x Series1 Series2

1.00 1.00

.80 .80

.60 .60

.40 .40

.20 .20

.00 .00

-.20 -.20

-.40 -.40

-.60 -.60

-.80 -.80

-1.00 -1.00
0 2 4 6 8 10 12 14 16 18 20 0 2 4 6 8 10 12 14 16 18 20

The upper right and lower left graphs show that the Y-residual at time t+h is
significantly correlated with the X-residual at time t for h=3,…,9, but not otherwise.
This suggests a transfer function model (see above) with j) non-zero for j=3,…,9,
and zero otherwise. The estimated values of j) are (see B&D (2002) Section 10.1
 ( j )   ( j ) 2 /  1
where (j) is the correlation between the Y-residual at time t+j and the X-residual at time t
Right-clicking on the graphs of the cross correlations and selecting Info gives
 (3)  .6768,  (4)  .4718, ,  (9)  .1846, .
and right clicking on the graphs of the residuals and selecting Info gives
 1  0.2792, 2  2.0055 .
These give preliminary coefficient estimates
 (3)  .4.861, (4)  3.389, , (9)  1.326.
(The arithmetic can be carried out in Excel by clicking the Export button, selecting
Sample ACF and then pasting the exported cross correlations into a spreadsheet..)
The next step is to use a more efficient estimation procedure with these 7 coefficients
as preliminary estimates. However the approximately geometric rate of decay of
the preliminary estimates suggests fitting instead the two-parameter transfer
function
w0 B 3
T ( B)  ,
1  v1 B
with the preliminary estimates,
w0  4.86, v1  0.7.
Least Squares Estimation: We are now ready for more efficient estimation of
the parameters in our preliminary model. Close ITSM, reopen it and reopen the
original project LS2.TSM consisting of the Leading indicator and Sales series.
Difference at lag 1 and subtract the mean as above. Select Transfer>Specify Model
and complete the first two pages of the dialog box as follows, clicking OK when
they are completed.
Press the Plot ACF of Residuals button (the rightmost green button) and you will
see a sample ACF which suggests an MA(1) model with negative coefficient for N(t).
Making a rough guess at the coefficient (it will be estimated at the next step), select
Transfer>Specify>Model and complete the third page of the dialog box as follows
(the first two will still contain the preliminary Input and Transfer models.

Final Estimates: Select Transfer>Estimation and click OK to accept the default

optimization step-size of 0.1. All of the parameters in the model (except for the
Input model) are reestimated by least squares. You will notice that the transfer function
residuals (which are estimates of the noise W(t) in the model for N(t)) now appear, as
they should, to be uncorrelated. To refine the fit, again select Transfer>Estimation,
select step-size 0.01 and click OK. You will notice an improvement in the fit, with
the AICC value now down to 29.932. Refining the fit several more times gives the model,.

========================================
ITSM2000:(Transfer Function Model Estimates)
========================================

X(t,2) = T(B) X(t,1) + N(t)

B^3(4.717)
T(B) = -----------------
(1 -.7248 B^1)

X(t,1) = Z(t) - .4740 Z(t-1)

{Z(t)} is WN(0,.077900)

N(t) = W(t) - .5825 W(t-1)

{W(t)} is WN(0,.048643)

AICC = 27.664882

Accuracy Parameter .000010

Alternative models (e.g. the moving average transfer-funcion model with seven
coefficients introduced above) can also be explored in the hope of finding another
model with smaller AICC. We shall not do that here, but instead demonstrate the
correlation checks for goodness of fit of the model just determined.
Residual Checking: Press the Export button, select Residuals and Clipboard and
press OK. Open Notepad, paste in the Noise residuals and save in the ITSM2000 directory
as NRES.TSM. Now we can check the correlations and cross correlations of the
Input and Noise residuals as follows. Select File>Open>Project>Multivariate with one
column and open the Input residual file XRES.TSM created earlier. Then
select File>Open>Project>Univariate NRES.TSM. To create a bivariate project
press the Project Editor button (the leftmost button), click on the plus signs beside
each of the two projects XRES.TSM and NRES.TSM to display the files in each
project.. Next click on the file Series in the project NRES, drag the file to the
project XRES and click. Confirm the transfer of data in the dialog box which then
appears and the project XRES will now contain both the input and noise residuals.
You can rename the files in XRES by double-clicking on their names and
typing in new names (e.g. XRES and NRES). Click OK in the Project Editor
window. Highlight the window XRES.TSM and press the Plot Sample
ACF/PACF button and you will see the following graph. It shows clearly that
there are no significant correlations between the input and noise residuals, thus
confirming our confidence in the fitted transfer-function model.

Series1 Series1x Series2

1.00 1.00

.80 .80

.60 .60

.40 .40

.20 .20

.00 .00

-.20 -.20

-.40 -.40

-.60 -.60

-.80 -.80

-1.00 -1.00
0 2 4 6 8 10 12 14 16 18 20 0 2 4 6 8 10 12 14 16 18 20

Series2x Series1 Series2

1.00 1.00

.80 .80

.60 .60

.40 .40

.20 .20

.00 .00

-.20 -.20

-.40 -.40

-.60 -.60

-.80 -.80

-1.00 -1.00
0 2 4 6 8 10 12 14 16 18 20 0 2 4 6 8 10 12 14 16 18 20

Forecasting: The output series can be forecast up to twenty steps ahead using the
fitted transfer function model. To do this for the current example, select
Forecasting>Transfer-function, then in the dialog box enter 20 for the number of
predictors, check the box to plot 95% prediction bounds and click OK. You will
then see the following graph of predicted future sales and corresponding bounds.

Further details on transfer-function models can be found in B&D (1991) p. 506

or B&D (2002) p.323.
S e r i e2
s

280.

260.

240.

220.

200.

0 20 40 60 80 100 120 140 160

TSM Files
See also GETTING STARTED, Data sets.

All ITSM projects are stored in files with the suffix .TSM. The simplest of these contain data
only. A multivariate time series with m components should be stored in an ASCII file with a
name such as MYFILE.TSM, and with the data in m columns, one for each component.

Data and graphs can be saved at any time as described in GETTING STARTED.

You can also save the entire project by using the Save Project As button, fourth from the left on
the toolbar at the top of the ITSM2000 screen. The resulting file will contain the current data,
the transformations which have been applied to the original data, as well as the current model
and the residuals, so that further analysis or comparisons with other models can be made at a
later date. If you have renamed one or more series in a project, they will be saved with the new
names.

Warning !.
TSM files are all in ASCII format and can be edited with any text editor such as Notepad.
Editing a project file of the type described in the previous paragraph must however be done with
great care so as not to introduce inconsistencies into the saved project.

Examples. To see an example of a file containing data only, use notepad to open the file
LS2.TSM. To see an example of a more elaborate TSM file saved as a project from ITSM, open
the file STOCK7.TSM.

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Itsm - Help PDF

Uploaded by

Itsm - Help PDF

Uploaded by

ITSM2000

See also Graphs, TSM Files.

Example: Use the options File>Project>Open>Multivariate to open the project LS2.TSM,

Tansferring a Component of a Multivariate Series to a Univariate Project. From an m

Example. Use File>Project>Open>Multivariate to open the project STOCK7.TSM. (This file

Indonesia Malaysia Nikkei 225

0 50 100 150 200 250 0 50 100 150 200 250

Hang Seng Nikkei 225

The autocorrelation function (ACF) of the stationary time series {Xt}

The ACF is a measure of dependence between observations as a function

The autocorrelation function of an ARMA process decreases in absolute

Another useful diagnostic tool is the sample partial autocorrelation

The partial autocorrelation function (PACF) of the stationary time series

The ARAR algorithm is an adaptation of the ARARMA forecasting algorithm

Yule-Walker equations are used to fit a subset AR model to the mean-corrected

0 20 40 60 80 100 120 140 160

Given the current (possibly transformed) data X1 , X2 , …, Xn, and assuming

These transformations can be applied to the data by selecting the

Such a transformation is useful when the variability of the data increases

The choice of  can be made visually by clicking on the pointer in the

0 20 40 60 80 100 120 140

The fitted model is

Example: Import the bivariate series LS2.TSM by selecting

0 20 40 60 80 100 120 140 0 20 40 60 80 100 120 140

Series2x Series1 Series2

0 20 40 60 80 100 120 140 0 20 40 60 80 100 120 140

Series1 Series1x Series2

Series2x Series1 Series2

Burg White Noise Covariance Matrix, V

Series1 Series1x Series2

Series2x Series1 Series2

0 20 40 60 80 100 120 140 160 0 20 40 60 80 100 120 140 160

Classical decomposition of the series {Xt} is based on the model,

Example: Under the heading Box-Cox we showed how to stabilize the

Instead of fitting the most general seasonal component, it is also possible to

The sample cross-correlation functions of the component series,

0 50 100 150 200 250 0 50 100 150 200 250

Series2x Series1 Series2

The sample cross-correlation functions of the component series,

0 50 100 150 200 250 0 50 100 150 200 250

Series2x Series1 Series2

The superscript * denotes complex conjugate transpose. If we have a multivariate project in

Example: Import the project LS2.TSM by selecting File>Project>Open>Multivariate, OK and

Further details on cross-spectra can be found in B&D (1991) p.434.

APPF.TSM General Index of Industrial Production (monthly). From the Makridakis

APPH.TSM Annual Mink Trappings, 1848--1911. B&D (1991) Appendix Series H.

CHAOS.TSM The series x(t), t=1,…,200, defined by the logistic equation

CHOCS.TSM Australian monthly chocolate-based confectionery production in tonnes. July,

E1321.TSM 200 values of a simulated fractionally differenced MA(1) series.B&D (1991)

ELEC.TSM Australian monthly electricity production in millions of kilowatt hours. January,

FINSERV.TSM Australian expenditure on financial services in millions of dollars. September

LRES.TSM Whitened Leading Indicator Series obtained by fitting an MA(1) to the

OSHORTS 57 consecutive daily overshorts from an undergraound gasoline tank at a filling

USPOP.TSM Population of United States at ten-year intervals, 1790--1980 (U.S.Bureau of the

Differencing is a technique which (like Classical Decomposition) can be used

Example: Under the heading Box-Cox we showed how to stabilize the

It shows no apparent seasonality, however there is a slight trend which suggests

Yt  (1  B)(1  B12 ) X t  X t  X t 1  X t 12  X t 13 ,

After selecting the suboption Exponential Smooth from the

Once the parameter a has been entered (or automatically selected),

Example: Applying the test to the series SUNSPOTS.TSM gives the

A GARCH(p,q) process {Zt } is a stationary solution of the equations,

To fit a GARCH model with t-distributed noise:

To estimate the stochastic volatility:

0 50 100 150 200 250 300 350 400 450

Residual ACF: Abs values Residual ACF: Squares

Garch Model for Z(t):

Garch Model for Z(t):

0 50 100 150 200 250 300 350 400 450

Garch Model for Z(t):

Accuracy parameter = .000006400000

See also GETTING STARTED.

This algorithm is designed to forecast future values from observations Y1,

This algorithm extends the Holt-Winters algorithm to take account of seasonality

cˆn1   (Yn 1  aˆ n 1 )  cˆn 1d ,

X(t,2) = T(B) X(t,1) + N(t)