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Box-Jenkins Method: Time Series Analysis: Forecasting and Control

The Box-Jenkins method is an iterative approach to time series modeling and forecasting. It consists of three main steps: 1) identification of an appropriate ARMA or ARIMA model based on analyzing time series plots and stationarity, 2) estimation of model parameters, and 3) diagnostic checking of residuals to identify areas for improvement. The goal is to select a parsimonious yet accurate model through this process of identification, estimation, and evaluation.

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Madhurima Das
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358 views4 pages

Box-Jenkins Method: Time Series Analysis: Forecasting and Control

The Box-Jenkins method is an iterative approach to time series modeling and forecasting. It consists of three main steps: 1) identification of an appropriate ARMA or ARIMA model based on analyzing time series plots and stationarity, 2) estimation of model parameters, and 3) diagnostic checking of residuals to identify areas for improvement. The goal is to select a parsimonious yet accurate model through this process of identification, estimation, and evaluation.

Uploaded by

Madhurima Das
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Box-Jenkins Method

The Box-Jenkins method was proposed by George Box and Gwilym Jenkins in their
textbook Time Series Analysis: Forecasting and Control (1970).
The approach starts with the assumption that the process that generated the time series can be
approximated using an ARMA model if it is stationary or an ARIMA model if it is non-stationary.
The 2016 5th edition of the textbook (Part Two, page 177) refers to the process as a stochastic
model building and that it is an iterative approach that consists of the following 3 steps:

1. Identification. Use the data and all related information to help select a sub-class of model that
may best summarize the data.
2. Estimation. Use the data to train the parameters of the model (i.e. the coefficients).
3. Diagnostic Checking. Evaluate the fitted model in the context of the available data and check
for areas where the model may be improved.

It is an iterative process, so that as new information is gained during diagnostics, you can circle
back to step 1 and incorporate that into new model classes.

1. Identification

The identification step is further broken down into:

1. Assess whether the time series is stationary, and if not, how many differences are required to
make it stationary.
2. Identify the parameters of an ARMA model for the data.

1.1 Differencing

Below are some tips during identification.

 Unit Root Tests. Use unit root statistical tests on the time series to determine whether or not it is
stationary. Repeat after each round of differencing.
 Avoid over differencing. Differencing the time series more than is required can result in the
addition of extra serial correlation and additional complexity.

1.2 Configuring AR and MA

Two diagnostic plots can be used to help choose the p and q parameters of the ARMA or ARIMA.
They are:
 Autocorrelation Function (ACF). The plot summarizes the correlation of an observation with lag
values. The x-axis shows the lag and the y-axis shows the correlation coefficient between -1 and
1 for negative and positive correlation.
 Partial Autocorrelation Function (PACF). The plot summarizes the correlations for an
observation with lag values that is not accounted for by prior lagged observations.
Both plots are drawn as bar charts showing the 95% and 99% confidence intervals as horizontal
lines. Bars that cross these confidence intervals are therefore more significant and worth noting.

Some useful patterns you may observe on these plots are:

 The model is AR if the ACF trails off after a lag and has a hard cut-off in the PACF after a lag.
This lag is taken as the value for p.
 The model is MA if the PACF trails off after a lag and has a hard cut-off in the ACF after the lag.
This lag value is taken as the value for q.
 The model is a mix of AR and MA if both the ACF and PACF trail off.

2. Estimation

Estimation involves using numerical methods to minimize a loss or error term.


We will not go into the details of estimating model parameters as these details are handled by the
chosen library or tool.
I would recommend referring to a textbook for a deeper understanding of the optimization problem
to be solved by ARMA and ARIMA models and optimization methods like Limited-memory
BFGS used to solve it.

3. Diagnostic Checking

The idea of diagnostic checking is to look for evidence that the model is not a good fit for the data.
Two useful areas to investigate diagnostics are:

1. Overfitting
2. Residual Errors.

3.1 Overfitting

The first check is to check whether the model overfits the data. Generally, this means that the
model is more complex than it needs to be and captures random noise in the training data.
This is a problem for time series forecasting because it negatively impacts the ability of the model
to generalize, resulting in poor forecast performance on out of sample data.

Careful attention must be paid to both in-sample and out-of-sample performance and this requires
the careful design of a robust test harness for evaluating models.
3.2 Residual Errors

Forecast residuals provide a great opportunity for diagnostics.

A review of the distribution of errors can help tease out bias in the model. The errors from an ideal
model would resemble white noise that is a Gaussian distribution with a mean of zero and a
symmetrical variance.

For this, you may use density plots, histograms, and Q-Q plots that compare the distribution of
errors to the expected distribution. A non-Gaussian distribution may suggest an opportunity for
data pre-processing. A skew in the distribution or a non-zero mean may suggest a bias in
forecasts that may be correct.

Additionally, an ideal model would leave no temporal structure in the time series of forecast
residuals. These can be checked by creating ACF and PACF plots of the residual error time
series.

The presence of serial correlation in the residual errors suggests further opportunity for using this
information in the model.

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