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Stata 10 (Time Series and Forecasting)

Article  in  Journal of Statistical Software · January 2008

DOI: 10.18637/jss.v023.i01 · Source: RePEc

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JSS Journal of Statistical Software
December 2007, Volume 23, Software Review 1. http://www.jstatsoft.org/

Reviewer: Robert Alan Yaffee

New York University

Stata 10 (Time Series and Forecasting)

StataCorp LP, College Station, TX. USD 1,795 (corporate), USD 985 (ed-
ucational) for single user Stata/SE 10 (exact price varies by version and
purchaser status).
http://www.stata.com/

A review of Stata versions 9 and 10 time series and forecasting capability

Stata 10 is a powerful, versatile, and flexible statistical package with a wide range of user-
friendly and accurate time series analytical and forecasting commands. It was released in
June 2007, about two years after Stata 9 appeared. Prospective users want to know what
features the package offers, while veteran users want to know what is novel about the latest
version(s). This review addresses time series and forecasting capability in Stata 10 and notes
prominent new features in versions 9 and 10, what is still needed and what might be refined.
Because all users need to have confidence in the accuracy of the package, this review examines
accuracy of the principal time series algorithms. It also briefly describes associated graphics,
diagnostics, documentation, help facilities, output, customization, and support. Altogether,
these features characterize a very well-designed and well-crafted and powerful time series
analysis and forecasting package (Baum 2004).

Filters and smoothers

For each stage of the time series modeling process, Stata provides capability with which to test
and model the time series. For preliminary examination of time series and their distributions,
Stata 10 has flexible and versatile graphical power. For simple, basic series extrapolation, Stata
has moving average and exponential smoothing capability. It offers simple and customizable,
weighted moving averages. It also offers simple and double exponential smoothing. It contains
a Holt and Winters two parameter version to accommodate linear trend, as well as three
parameter versions to accommodate additive and multiplicative seasonality in the series. For
these smoothers, Stata allows user-specified or grid search convergence on optimal smoothing
constants. Stata contains a variety of Tukey nonlinear smoothers. If the dataset is short and
the analyst needs quick, economical, and easy extrapolation, Stata provides these smoothers.
2 Stata 10 (Time Series and Forecasting)

Preliminary analysis

For preliminary visual analysis, Stata offers a simple and easy time series line plot. This
plot can display single or multiple series under review. These series may be graphed in
different colors, line patterns, line thickness, and with or without symbols. The time series
plots support multiple titles, footnotes, and captions. The user can have legends and/or
annotations. Multiple graphs can be paneled one on top of the other or side by side. Once
the user learns the graphics language, he can superimpose one type of graph on the other.

For identification of the time series, Stata provides for the examination of the autocorrela-
tion structure with ASCII and graphical correlograms. For example, the ASCII corrgram
command on the first difference of the natural log of the consumer price index for all urban
consumers on all items (CPIAUCNS) from the Federal Reserve Economic Depository (FRED,
http://research.stlouisfed.org/fred2/) neatly generates both correlogram functions:

. corrgram dlncpi, lags(25)

-1 0 1 -1 0 1
LAG AC PAC Q Prob>Q [Autocorrelation] [Partial Autocor]

1 0.4465 0.4466 207.52 0.0000

2 0.3544 0.1910 338.42 0.0000
3 0.3341 0.1581 454.85 0.0000
4 0.3316 0.1477 569.68 0.0000
5 0.2614 0.0269 641.08 0.0000
6 0.2465 0.0432 704.64 0.0000
7 0.2905 0.1163 792.98 0.0000
8 0.2665 0.0528 867.4 0.0000
9 0.2615 0.0584 939.14 0.0000
10 0.2618 0.0599 1011.1 0.0000
11 0.3077 0.1133 1110.6 0.0000
12 0.2766 0.0517 1191.1 0.0000
13 0.2473 0.0129 1255.6 0.0000
14 0.2212 -0.0020 1307.2 0.0000
15 0.1750 -0.0568 1339.5 0.0000
16 0.1578 -0.0321 1365.8 0.0000
17 0.1432 -0.0232 1387.5 0.0000
18 0.1354 -0.0279 1406.9 0.0000
19 0.1042 -0.0406 1418.4 0.0000
20 0.1046 -0.0173 1430 0.0000
21 0.1732 0.0837 1461.8 0.0000
22 0.0981 -0.0736 1472 0.0000
23 0.1601 0.0745 1499.3 0.0000
24 0.1710 0.0510 1530.4 0.0000
25 0.1162 -0.0523 1544.8 0.0000

whereas separate graphical commands can generate functions that can be easily combined by
the user as shown in Figure 1.

In addition to the autocorrelation and partial autocorrelation functions, users have the option
of using a log periodogram for detection of seasonal periodicity in a model.

To obtain preliminary assessment of nonstationarity, Stata proffers a substantial variety of

tests. In addition to the Dickey–Fuller and Augmented Dickey–Fuller (dfuller) tests, it
offers the Phillips–Perron pperron, the Kwiatkowski, Phillips, Schmidt, and Shin kpss, and
the more powerful Elliott, Rothenberg and Stock dfgls tests. Once the series has been
transformed to stationarity, Stata offers time series regression or an ARIMA repertoire.
 Journal of Statistical Software – Software Reviews 3

Correlograms of DLnCPI
Autocorrelations of dlncpi
Autocorrelations of dlncpi
0.20
0.10
0.00
!0.10 0.40
0.30

0 5 10 15 20 25
Lag
Bartlett’s formula for MA(q) 95% confidence bands
Partial autocorrelations of dlncpi

Partial Autocorrelations of dlncpi

!0.20 0.00 0.20 0.40

0 5 10 15 20 25
Lag
95% Confidence bands [se = 1/sqrt(n)]

Figure 1: Combined correlograms.

Time series regression models

When a residual analysis of an ordinary least squares regression reveals autocorrelation in the
residuals, we can use time series regression models. Stata’s prais includes Cochrane–Orcutt,
Hildreth–Lu and Prais–Winston estimators, while newey runs Newey–West regressions. The
first two commands can be run with a robust option to asymptotically accommodate het-
eroskedasticity while the latter can also accommodate autocorrelation. Stata 10 allows the
use of the hc2 and hc3 versions of asymptotically heteroskedastically consistent variance-
covariance matrices as well. With the use of White or Newey–West estimators, Stata makes
semi-robust time series easy.
The new version added new regression postestimation diagnostic tests for time series data.
These diagnostics test the need for adjustments for residual serial correlation or ARCH ef-
fects. Among the tests included in the post-regression estat command are options for the
Breusch–Godfrey estat bgodfrey test for serial correlation, the Durbin–Watson d (estat
dwatson), the Durbin–Watson alternative estat durbinalt test, and the Lagrange Multi-
plier test (estat archlm) for ARCH effects in the residuals.

ARIMA models
For time series model building, Stata features the arima command. Stata offers additive non-
seasonal models as well as multiplicative seasonal modeling capability. Stata also permits the
4 Stata 10 (Time Series and Forecasting)

user to enter time-varying regressors in the ARIMA command to construct dynamic linear
models, RegARIMA, or ARIMAX models. The predictors can be indicator or discrete vari-
ables used to model the impact of external events. They may also be time-varying predictors
that can be used as stochastic regressors in the analysis to form the basis of a dynamic regres-
sion model. For ARIMA or RegARIMA models riven with heteroskedastic residuals, Stata
provides White sandwich variance-covariance estimators most of these programs simply with
a robust option.
The ARIMA command has its own residual diagnostics. The residuals can be saved with the
predict varname, residual command for graphical or objective tests for model misspecifi-
cation. These tests include the Box-Ljung Q tests corrgram or Durbin–Watson durbina tests
for autocorrelation, the Jarque–Bera jb, the Smirnov–Kolmogorov sktest test, the Shapiro–
Wilk swilk test for normality. Bartlett wntestb and Box-Ljung white noise wntestq tests
are also available.
With the estat ic postestimation command, the user can save the information criteria (AIC
and BIC) of the model just estimated. He can use this command to determine the order of
nested models or for a fit comparison of those models. Thus, he can select the best model for
forecasting.
Stata post-estimation commands make forecasting simple. Stata offers either iterative pro-
jections (one-step ahead), structural, or dynamic forecasts. For models with explanatory
variables, the user may wish to program a conditional forecast. He can generate the forecasts
for the explanatory variables first. Stata can generate ex post or ex ante forecasts and their
confidence intervals. The forecast profile can be saved and graphed with ease.

Nonlinear time series analysis

Stata boasts a wide range of ARCH and GARCH models for volatility analysis. In fact, Stata
currently provides more flavors of (G)ARCH models than most other statistical packages
with the ARCH arch command and its GARCH garch option for GARCH models. A
later generation of ARCH and GARCH models includes GARCH-in-mean (archm), as well
as versions designed to model leverage effects of enhanced volatility due to bad news, such
as the exponential (earch) ARCH and GARCH, threshold (tarch) ARCH and (tgarch) and
GARCH, as well as the Glosten, Jagannathan, and Runkle (1993) GARCH version. The
GJR GARCH, formulated as a version of threshold GARCH, was recommended by Engle
and Ng (1995) for its ability to model the bad versus good news leverage effects. For long-
memory situations, Stata has an asymmetric power (aparch, apgarch) GARCH. Among
the other later generation GARCH models are the nonlinear power (nparch) GARCH (for
highly persistent volatility), threshold Power (tparch) GARCH for different models based on
a given threshold, nonlinear power(narchk, nparchk GARCH) with single shifts, and power
(parch, pgarch) GARCH, among others. Stata 9 and 10 permit model formulation with
constraints, asymmetric leverage effects, and can graph volatility skews and smiles. Stata 9
estimates GARCH with a normal distribution, so that Stata 9 users may have had to resort to
the normalizing and variance stabilizing (NOVAS) transformation of Dimitris Politis for their
GARCH modeling. Stata 10, however, also allows GARCH modeling with a t or generalized
error distribution (GED) to accommodate those fat-tailed leptokurtotic or heteroskedastic
financial distributions.
 Journal of Statistical Software – Software Reviews 5

New commands and features

Many analysts work with real-time or tick data that are sampled on intra-day intervals. To
facilitate this analysis, Stata 10 has incorporated a clock-time index, so that the time of day
can be used as an index in the construction of a time series. For those who might later bin
their data into equidistant time intervals, this renders time series of such data possible.
Most time series analysts visually examine their data before they proceed with analysis.
Stata 10 continues the newly developed graphics procedures found in Stata 9, but adds point-
and-click graphics editing. The Stata 9 time series graphics capability for a wide arrange
of time line graphs, interrupted line graphs, lowess plots, graphical correlograms, graphical
cross-correlation plots, residual plots, has been fortified with a new point-and-click graphics
editor. The user may edit and annotate the graph after it has been generated with the new
graphics editor.
With Stata 9, new time series commands included the rolling analysis and recursive least
squares, the Box–Jenkins seasonal ARIMA models, the multivariate commands of vector au-
toregression and vector error correction models as well as the model comparison with postes-
timation estat ic capability. With Stata 10, models could be indexed by time as well as
days, weeks, months, quarters, or years.
Both Stata 9 and Stata 10 have the capability of estimating and graphing various types (raw,

Impulse Response Function

dlinc2dlcons, dlincome, dlconsumption
.6

.4

.2

!.2

0 2 4 6 8
step
95% CI impulse response function (irf)
Graphs by irfname, impulse variable, and response variable

Figure 2: Impulse response function from a univariate dynamic regression model of differenced
natural log of consumption as a response to a unit impulse in the differenced natural log of
income, using Lütkepohl (1993) Table E1: West German macroeconomic data.
6 Stata 10 (Time Series and Forecasting)

orthogonalized, structural, cumulative) of impulse response functions, dynamic multipliers,

and forecast error variance decompositions for both univariate and multivariate vector models.
We show an impulse response function of an impulse from the first difference of the natural
log of income on the first difference of the natural log of consumption in a univariate dynamic
regression, using Lütkepohl (1993), Table E.1. of quarterly West German macroeconomic data
in billions of DEM in Figure 2.

Rolling analysis
Rolling analysis is an important new feature. Before the we forecast a series, we want to be
sure of parameter stability. Stata 10 offers a new rolling analysis with the rolling command,
saving the parameters of a model as it is estimated in a window rolling along the time axis.
We can plot those parameters over time to see if they are variable or stabilizing. We can use
regression, ARIMA, or other models in this command to explore the asymptotic assumptions.
The window can be of fixed or expanding size. A recursive least squares analysis option
provides a chance to examine the parameters before attempting to forecast with the model.
In Figure 3, we examine the parameter instability of the constant and time coefficient of a 60
day windowed rolling regression of the Chicago Board of Options Exchange Volatility Index
(VIX) over time before deciding to attempt a forecast.
By generating and overlaying confidence limits for these coefficients, the time variation in the

Rolling regression reveals parameter instability

Level
0 400
!800

01jan2007 01mar2007 01may2007 01jul2007

start

_b[_cons] Upper 95% conf. lim. of constant

Lower 95% conf. limit of constant

trend
!.5 0 .5 1

01jan2007 01mar2007 01may2007 01jul2007

start

Linear trend parm. est. Upper 95% conf. limit of trend

Lower 95% conf. lim. of trend

Source: Yahoo finance ^Vix data

Figure 3: Rolling regression estimates of constant and coefficient in 60-day window.

 Journal of Statistical Software – Software Reviews 7

constant and regression coefficient is shown to be significant over time, providing advance
warning to forecasters. By restricting the window to the appropriate size, rolling analysis
with confidence intervals can be used for backtesting as well.

Multivariate time series analysis

For multivariate analysis, Stata 9 introduced an elegant vector autoregression var, structural
vector autoregression svar and vector error correction vecm model capability. For simple
reduced form models, Stata has a basic command that allows fitting var models without
constraints. This command generates an output table. The user may also output a set of
impulse response functions (the response of an endogenous variable over time to a unit shock
to another endogenous variable in the model). When there are multiple endogenous variables,
independent impulse response functions may be generated, shown in Figure 4. In addition,
forecast error variance decomposition, which reveals the proportional contribution of each
variable to the forecast error variance are also easily available (Figure 5).
Most users will need a more elaborate specification. Model specification can be controlled
by designating exogenous variables or by constraints on variables and their lags. For var
and svar postestimation, Stata has a commendable repertoire of diagnostic options, such as
Granger causality tests, Lagrange Multiplier tests for residual autocorrelation, information

Impulse Response Function

cons_resp, dlinc, dlcons
.6

.4

.2

!.2

0 2 4 6 8
step
95% CI impulse response function (irf)
Graphs by irfname, impulse variable, and response variable

Figure 4: Orthogonalized impulse response functions of differenced natural log of consumption

and differenced natural log of income to unit impulses from the other, using Lütkepohl (1993)
West German economic data.
8 Stata 10 (Time Series and Forecasting)

varbasic, dlcons, dlcons varbasic, dlcons, dlinc

1

.5

varbasic, dlinc, dlcons varbasic, dlinc, dlinc

1

.5

0
0 2 4 6 8 0 2 4 6 8

step
95% CI fraction of mse due to impulse
Graphs by irfname, impulse variable, and response variable

Figure 5: Forecast error variance decomposition of differenced natural logged consumption

and differenced natural log of income, using Lütkepohl (1993) West German economic data.

criteria to test and select optimal lag order, residual normality tests, and eigenvalue stability
tests for autoregressive roots, to help diagnose and specify these models. Constraints may be
applied as well as deterministic variables in the model. When a stable vector autoregression is
reparameterized as a moving average process, it can be modeled as a structural vector autore-
gression. Orthogonalized impulse response functions, cumulative impulse response functions,
forecasts, and their confidence intervals can be graphed while the forecast error variance can
be decomposed and tabulated. In this way, a dynamic simultaneous equation model can be
analyzed.
Moreover, these processes may be cointegrated. The Stata vec command has the capability
to identify the cointegrating rank of the long term parameters with the Johansen trace and
maximum eigenvalue tests. A variety of simple options are available for model specification
including a variety of restrictions on trends and constants in the levels or in the cointegration
relation system. The var or vec commands permit easy autoregressive lag order selection
with either standard or Lütkepohl versions of information criteria (AIC, SBC, or HQ). The
proper lag order is assessed with Lagrange multiplier tests. Model stability is tested with a
simple command to test whether the equation roots are all less than one. Residual normality is
easily assessed with Jarque–Bera tests for the parameters. The autoregressive roots are easily
analyzed for stability of their eigenvalues. Then impulse response functions and forecast
error variance decompositions can be generated. Various models can be tracked with their
information criteria and if the user keeps a record of what was in these models, the optimal
 Journal of Statistical Software – Software Reviews 9

Parameters NIST results Stata 9.2 SPSS 15 SAS 9.13

R2 0.995479004577296 0.995479 0.995 0.9955
σ 304.854073561965 304.85407 304.854 304.85407
Constant -3482258.63459582 -3482258.6 -3482259 -3482259
b1 15.0618722713733 15.061872 15.062 15.06187
b2 -0.0358191792925910 -.03581918 -0.036 -0.03582
b3 -2.02022980381683 -2.0202298 -2.020 -2.02023
b4 -1.03322686717359 -1.0332269 -1.033 -1.03323
b5 -0.0511041056535807 -0.05110411 -0.051 -0.0511
b6 1829.15146461355 1829.1515 1829.151 1829.15146

Table 1: Comparative accuracy of OLS regression model parameters using National Institute
of Standards and Technology NIST(a) Longley dataset.

ones can be modeled later.

While Stata 9 introduced the impulse response functions for dynamic models, Stata 10 includes
computation of individual and cumulative impulse response functions as well as the capability
of bootstrapping their standard errors.

Analytical accuracy
Needless to say, we want to be assured that our software is producing accurate results. I have
downloaded data from the National Institute of Standards and Technology (NIST) Web site
to test the main time series commands for accuracy. I have tested OLS regression, simple
exponential smoothing, nonseasonal and seasonal ARIMA models. To test classical ordinary
least squares regression, I used the Longley data (Longley 1967). To test the exponential
smoothing, I downloaded sample data from the NIST Web site (National Institute of Stan-
dards and Technology 2003). To test ARIMA data, I used the Antuan Negiz aerosol particle
size data (Negiz 2003), and to test the seasonal ARIMA model, I used the Box-Jenkins Series
G data from the NIST Web site (Box and Jenkins 1976). All of these data are listed on the
NIST Web site, and the test results, displayed in four tables, are noteworthy.
In Table 1 we compare the classical ordinary least squares regression results from a NIST
analysis of the Longley data, used to assess the accuracy of an electronic computer, to those
from Stata 9.2, SPSS 15 (SPSS Inc. 2006), and SAS 9.13 (SAS Institute Inc. 2003), all on
a Windows XP/SP2 operating system. The first variable is the dependent while the last
variable, year, is treated as x6. We first compare the R2 and the model error standard
deviation and then the parameter estimates and their standard errors. Apart from minor
rounding error, these results are essentially identical. Descriptions of the data are found in
the references.
In Table 2, we compare the simple exponential smoothing of that of NIST (NIST(b)) with
that of Stata. We find that the fit as measured by sum of squared errors (SSE) is actually
better for the Stata command.
In the two panels of Table 3, we compare two ARIMA models. Using the nonseasonal Antuan
Negiz data measuring particle size after pulverization and drying, we run two different models.
10 Stata 10 (Time Series and Forecasting)

Parameters NIST Stata

α 0.5 0.5
SSE 208.94 149.03739

Table 2: Comparison of Stata and NIST simple exponential smoothing parameters using
NIST(b) sample data.

Parameters NIST ARIMA(0, 1, 1) Stata ARIMA(0, 1, 1)

Constant -0.00511 -0.00511
Constant se 0.011431230 0.01154271
MA(1) 0.393 0.392
MA(1) se 0.03902847 0.02686429
Parameters NIST ARIMA(2, 1, 0) Stata ARIMA(2, 1, 0)
Constant -0.0040182899 -0.0049692
Constant se 0.011972592 0.0121377
AR(1) -0.4060457 -0.4063475
AR(1) se 0.041885445 0.02851256
AR(2) -0.1641447 -0.1648906
AR(2) se 0.041836922 0.03925299

Table 3: Comparison of Stata and NIST nonseasonal ARIMA model parameters using Antuan
Negiz particle size (NIST(c)) data.

In the upper panel, we model an AR(2) model and in the lower panel we model an MA(1)
model. Whether the modeling is an AR(2) model or an MA(1) model, the ARIMA results are
essentially the same, with the exception that the Stata standard errors are a little smaller. In
the AR(2) the constant in the NIST AR model is computed from the mean as Constant =
(1 − φ1 − φ2 )µ in order to compare the constants (NIST Web site).
For the seasonal ARIMA, the results are also comparable. There is a difference in the sign
of the moving average parameters. Stata parameterizes the moving average parameter θt in
a first order moving average process as yt = 1 + θet−1 whereas the conventional Box–Jenkins
parameterization uses a yt = 1 − θet−1 parameterization. To show that the untransformed
series are identical, the raw mean, variance, and sample size are given in the lower panel of
Table 4. The Stata model was run with the vce(oim) option. The parameters of the models
are almost identical, whereas there is some minor difference in the standard errors. In general,
the user can rely on Stata for an accurate and reliable time series analysis.

Support, documentation, and other resources

Stata support is superb and virtually full-service. The user can directly access help files in
the program or he can obtain competent technical support via e-mail or an 800 telephone
number. Integration of Stata with the World Wide Web allows the user to obtain assistance
from the official Stata support database. From there, we can access Stata News, the Stata
Journal, the Stata Technical Bulletin and other Web resources. For training, we can sign
up for the NetCourses that Stata offers or find other short courses on Stata that are offered.
 Journal of Statistical Software – Software Reviews 11

Parameters NIST ARIMA(0, 1, 1)(0, 1, 1)12 Stata ARIMA(0, 1, 1)(0, 1, 1)12

MA(1) 0.3765 -0.4018323
MA(1) se 0.0811 0.0896442
SMA(1) 0.5677 -0.556934
SMA(1) se 0.0775 0.0731055
raw mean 280.2986 280.2986
raw variance 14391.9170 14391.92
Sample size 144 144

Table 4: Comparison of Stata and NIST seasonal ARIMA model parameters using Box–
Jenkins Series G (NIST(d)) monthly total of international airfares from 1949–1960.

The integration of Stata with the World Wide Web makes access of support information easy.
The findit command obtain lists of official help files, frequently asked questions, examples,
relevant Stata Journal articles, and resources from Stata and other users available on the
World Wide Web. There is a support database on the World Wide Web. Automatic updates
over the World Wide Web provide Stata users with the latest programs. The hsearch utility
builds an index of all of the programs that contain mention of the target word or set of words.
Stata News notifies users of new developments and upcoming events of interest to members
of the Stata community.
Among other Web sources, there is widespread academic support of Stata. Outstanding
among these sources is the excellent Web site of the Academic Technical Services at Uni-
versity of California at Los Angeles (UCLA) that maintains an excellent Stata portal at
http://www.ats.ucla.edu/stat/stata/, which even features starter kits, classes, seminars,
learning modules, movie tutorials, a library of Stata programs for research and teaching, code
fragments and tools for generating LATEX output as well as a variety of important Web links
to online sources of support.
For documentation, Stata offers an encyclopedia of documentation, consisting of Getting
Started with Stata, Data Management, Graphics, Users Guide and Programming manuals
(StataCorp. 2007). Also included is the multi-volume Reference Manual, an alphabetical
sorting of statistical command descriptions. Larger modules, such as those of Time Series,
Multivariate Statistics and Longitudinal/Panel Data analysis, among others, have their own
manual, replete with chapters alphabetically sorted by statistical command. The chapter for
each command consists of descriptions of the syntax, their details, common models, options,
examples of models, and their output interpretation. Saved statistics, methods, formulae,
missing data issues, and references are also described. Following the chapter on the statistical
command comes another one devoted to postestimation for the previous command. When
connected to the Internet, the user has access to helpfiles on the Stata support Web site as well
as a variety of Web resource links to tutorials, books, articles, and other resource materials.

Customization
Another nice feature of Stata is the capability for users to customize the package. Stata pro-
vides a matrix language called Mata with which programmers can write their own programs.
Stata allows users to modify the programs which they run with the Stata programming lan-
12 Stata 10 (Time Series and Forecasting)

guage. This is a feature that many statistical packages do not permit. These programs are
saved in ‘.ado’ files and the user may modify these to suit his needs.
Stata community support is available from a library of programs accessible by a Stata user
whose computer is connected to the World Wide Web: the SSC Archive at http://ideas.
repec.org/s/boc/bocode.html. We merely type ssc describeletter and a list of packages
beginning with that letter is displayed. If he wishes to install such a packages, the user
simply types: ssc installpackagename and this is downloaded into the Stata library for our
personal use. In this way, users customize Stata’s capabilities to fit their needs.
Moreover, users can write their own programs in ‘.do’ files or ‘.ado’ files. These can be
activated for submission by typing do filename in the command window. These features
allow the users who know the Stata programming language the ability to customize the package
to suit their needs.
For example, at the North American Stata Users Group Conference in Boston on 2007-08-14,
Ben Jann of ETH Zürich presented a customized estout program for comparative presenta-
tion of Stata output (Jann 2007). This program is now available in the SSC Archive, freely
available to Stata users for downloading and installation. After installing this package, I was
able to display a comparison of three ARIMA models of Intel closing price data, downloaded
from http://finance.yahoo.com/.

. eststo ar1c: arima intc, ar(1)

. eststo ar12c: arima intc, ar(1/2)
. eststo ar123c: arima intc, ar(1/3)
. esttab, aic bic title(IBM closing prices) mtitle("ar1c" "ar12c" "ar123c")
IBM closing prices

(1) (2) (3)

ar1c ar12c ar123c

intc
_cons 32.25*** 32.85*** 34.41**
(3.82) (3.63) (3.27)

ARMA
L.ar 0.997*** 0.942*** 0.963***
(549.68) (43.10) (43.01)
L2.ar 0.0555* -0.110**
(2.55) (-3.23)
L3.ar 0.145***
(7.28)

sigma
_cons 0.972*** 0.978*** 0.976***
(185.27) (167.47) (138.08)

N 1147 1147 1147

AIC 3479.7 3478.7 3465.1
BIC 3494.8 3498.9 3490.3

t statistics in parentheses
* p<0.05, ** p<0.01, *** p<0.001

The Stata programming language is so familiar to a C programmer that the user can write his
own programs with some amount of ease. Moreover, if he knows the C programming language,
he can use a plugin option to run the dynamic link library that he might write on his own.
 Journal of Statistical Software – Software Reviews 13

What is needed
Although Stata 10 has a vast variety of time series commands, it, like all other packages,
could benefit from the addition of a few more. Perhaps for the vast majority of people, these
new suggestions might not be compelling. For some advanced users, however, they might be
helpful. We therefore tender some suggestions that some more advanced users might wish
included in the Stata repertoire.
At this time, there is no modeling capability for irregularly spaced time series. There are
circumstances where the data generating process under study is not equally spaced in time.
There are processes with weekend gaps, or trapping gaps during winter snows, etc. where
no data were collected. The observations for such series were plagued with missing values at
these times. There should be available methods that can handle such irregularly spaced time
series. One such method might be an automatic command for binning an irregularly spaced
time-series. Another might be Croston’s method, usually applied to situations of intermit-
tent demand (Shenstone and Hyndman 2003) and another is the autoregressive conditional
duration model (Engle and Russell 1998). Having these capabilities would allow researchers
to investigate a larger variety of time series.
The exponential smoothing capability could benefit by the addition of Everette Gardiner
Jr.’s damped trend (Gardiner 2005). This method has been found to be very accurate at fore-
casting under particular circumstances. James W. Taylor has also suggested an exponential
smoothing method that can handle interventions, which should prove very useful.
There are processes with strong autocorrelation persistence and slow decay of the autocorrela-
tion function, that can be modeled by long-memory parameterization. Fractionally integrated
ARIMA, or ARIFIMA, models are needed to analyze long-memory data generating processes.
The size of the d in the p, d, q parameters of the arima ranges between 0.2 and 0.5. Although
the SSC Archive contains a rescaled range test and a Geweke and Porter-Hudak test, Stata
does not contain a quasi-full-information estimated FARIMA or ARIFIMA command that
accommodates stochastic regressors, generates forecasts, while allowing for full estimation of
the three p,d,q parameters.
Although Stata has a one of the most powerful GARCH repertoires available from currently
available software, it could benefit by adding a few tests and graphs as automatic output,
along with some more models for long-memory GARCH capability. To determine whether
there are leverage effects, it would be helpful were Stata to include the sign bias test, positive
size sign bias test, negative size sign bias test, and the joint test (Engle and Ng 1995).
In addition to its currently available asymmetric power GARCH command, it might have
integrated GARCH along with fractionally integrated: FIGARCH (Baillie, Bollerslev, and
Mikkelsen 1996; Chung 1999) and fractionally integrated exponential GARCH: FIEGARCH
(Bollerslev and Mikkelsen 1996) as well as hyperbolic GARCH models (Davidson 2004) to
handle long memory processes. The latter would be especially useful in fitting asymmetric
models with leverage effects. In addition to the ability to model variance clusters and outliers
in univariate GARCH, some multivariate GARCH (MGARCH) models—Engle and Kroner’s
BEKK (Engle and Kroner 1995), the constant conditional correlation (Tse and Tsui 2002),
dynamic conditional correlation along with the dynamic conditional correlation model of
(Engle 2002)—should be added. Possible options are discussed by Palandri (2004). Hull and
White (1999) have suggested that as the size of the high frequency dataset grows, there may
be more need to give greater emphasis to more recent data. They have suggested volatility
14 Stata 10 (Time Series and Forecasting)

updating by historical simulation weighted by adjusting the current with previously observed
volatility to give more recent data more weight in estimation of volatility. Although Stata has
threshold GARCH and nonlinear ARCH with a single shift, stochastic volatility models with
multi-jump diffusion might be another helpful addition if there were more than one crisis.
Although stationary dynamic simultaneous equation models can be accommodated by the var,
svar, and vecm commands, they deal with nonstationarity through the prior differencing or
the incorporation deterministic trends, seasonal dummies, seasonal trigonometric functions,
or cointegration. Stata needs more flexibility for dealing with nonstationary processes in
their original levels and variances. State space models with the augmented Kalman filter
(Durbin and Koopman 2000) could offer a form of structural method of modeling such time
series. Because a lot of data are nonstationary and analysts may need to examine them in
their levels configuration, such state space models would be a substantial, worthwhile, and
welcome addition to Stata. Multivariate state space models could permit dynamic factor
analysis to be performed. For nonlinear model and non-Gaussian processes, Poisson state
space and particle filter commands would be welcome additions.
Many financial analysts want to analyze and forecast the volatility clustering of asset prices
or returns, while others would like to model extreme values of a loss series. They may want
to use a Black–Scholes calculator to compute the implied volatility to compare it to the
historical volatility or realized volatility described by a GARCH model to determine whether
asset is under or overvalued. They may want to be able to perform Value-At-Risk (VaR)
analysis and and the factors that contribute to it. They need a flexible modeling capability
for volatility as well as peaks over thresholds (extreme events). This can be done with a
distributional analysis of the losses over time. However, the tails of a normal distribution
fail to accurately model such loss distributions. To properly model cumulative losses over
time, Frechet or generalized extreme value distributions could be helpful in modeling such
tail-loss, allowing us to examine the quantiles of cumulative losses over a some period of
time to estimate VaR. Generalized Pareto distributions and functions allowing models to use
them would be helpful for risk managers performing a peaks over threshold analysis. Chavez-
Demoulin and Embrechts (2004) have suggested smoothing extreme value methods fitted by
penalized likelihood to explore the extreme value processes. If the loss distributions are too
unusual, they might want the ability to use Markov-chain Monte Carlo (MCMC) estimation
of their historical data may necessary. These methods must be adapted so they capturing
the volatility clustering within the data. Financial analysts often want to perform portfolio
allocation. To do so, they would like the ability to use a mean return-variance Markowitz
efficient frontier optimization method to be able to substitute a Beta, Sharpe, or Sortino ratio
for the standard deviation as a measure of risk (Chavez-Demoulin and Embrechts 2004; King
2001; Marrison 2002).
There are nonlinear time series, apart from GARCH, that might be very useful. Stata 10 needs
a test for nonlinearity. Two types of such a test are the Brock, Dechert, and Scheinkman
(BDS) or the TAR-F test (Tsay 2001). Other forms of nonlinear time series models should
be available. Among those might be the bilinear, threshold autoregressive (TAR), self-exiting
threshold autoregressive (SETAR), or exponential autoregressive model. These models would
enhance the nonlinear time series capability of Stata beyond GARCH.
For time series models with nonnormal residuals, a time series bootstrap could provide empiri-
cal standard errors and confidence intervals. For many time series models, the block bootstrap
might be helpful. One merely needs to determine the length of the block and the number
 Journal of Statistical Software – Software Reviews 15

of blocks sampled should be a multiple of the block length. For GARCH models, the wild
bootstrap, time consuming though it might be, could be helpful.

What needs refinement

Stata by default should automatically construct a log file of the session. We should be
prompted for a name and the log file can should be saved with that name. When the next run
is executed, the former log file should be backed up automatically if it is replaced by the newer
one. A version number can be attached indicating which is the latest version. Responsible
replicable research requires that log files be maintained. The log file should automatically be
saved by a name given by the user unless he disables this option for the next session.
ARIMA models should automatically output information criteria. These should include the
Akaike, Schwartz, Hannan–Quinn, and corrected AIC of Tsay and Hurvich. Moreover, they
should also be available for customized user programming.
ARCH and GARCH models testing leverage effects should upon request graphically output
the news impact curve rather than require us to program it.
Stata should automatically keep a record of the model parameter estimates and information
criteria of each model run in a session. We should be able to review the model coefficients
and model fit criteria at will. We should be able to automatically recall the best model for
re-analysis or modification at will. When different models are being compared, these criteria
can be used by which to compare the models. This model and information criteria should be
stored in a file capable of being saved and merged with other such files from other sessions for
more global comparisons. The parameterization of the related models should be retrievable
once the optimal information criterion is found from these global comparisons.
Stata should also have the capability of out-of-sample forecast evaluation for ARIMA and
GARCH models. Using such criteria as mean absolute error, mean absolute percentage error,
median absolute percentage error, relative absolute error, and relative absolute percentage
error against naive forecasts of the last value carried forward, we should be given the choice
of criteria to be applied within a user-defined out-of-sample time period. For GARCH models
the user should be able to select one or more options from a slightly different set of criteria.
In addition to the aforementioned criteria, we should be able to include the mean logarithmic
absolute error and the heteroskedastically adjusted mean square error should be included
in his evaluation. Like the information criteria logs, these forecast evaluation logs for each
session should be capable of being saved and merged with those from other sessions. In this
way, models can be evaluated with respect to their predictive accuracy as well. It would be
nice if the associated parameters could be saved so they could be recalled once the optimum
model is identified.
Dynamic regression models in Stata are very easy to program. Their impulse response func-
tions are also available. Nevertheless, it would be helpful if we could design a rational poly-
nomial transfer function for an ARIMA model. This transfer function is a rational lagged
polynomial coefficient of a stochastic regressor. Provision for these transfer functions should
be built into the ARIMA command (Pankratz 1991).
16 Stata 10 (Time Series and Forecasting)

Recapitulation
In sum, Stata 10 is a very well-designed, powerful, versatile, accurate, and easily customizable
general purpose time series and forecasting package. The variety and capability of the time
series commands offered by Stata make this a very substantial offering. With the vast array
of commands for estimation and robustness, Stata is one of the best deals for the money.
With the superb support offered by Stata, it is no wonder that the user community is rapidly
growing around the world.

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 18 Stata 10 (Time Series and Forecasting)

Reviewer:
Robert Alan Yaffee
Shirley M. Ehrenkranz School of Social Work
New York University
New York, NY, United States of America
E-mail: [email protected]

Journal of Statistical Software http://www.jstatsoft.org/

published by the American Statistical Association http://www.amstat.org/
Volume 23, Software Review 1 Published: 2007-12-03
December 2007

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