box jenkins or arima forecasting
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Box Jenkins or Arima Forecasting. H:\My Documents\classes\eco346\Lectures\chapter 7\Autoregressive Models.doc. All stationary time series can be modeled as AR or MA or ARMA models A stationary time series is one with constant mean ( ) and constant variance. - PowerPoint PPT PresentationTRANSCRIPT
Box Jenkinsor
Arima Forecasting
• H:\My Documents\classes\eco346\Lectures\chapter 7\Autoregressive Models.doc
• All stationary time series can be modeled as AR or MA or ARMA models
• A stationary time series is one with constant mean ( ) and constant variance.
• Stationary time series are often called mean reverting series—that in the long run the mean does not change (cycles will always die out).
• If a time series is not stationary it is often possible to make it stationary by using fairly simple transformations
Nonstationary Time series
• Linear trend
• Nonlinear trend
• Multiplicative seasonality
• Heteroscedastic error terms (non constant variance)
How to make them stationary
• Linear trend– Take non-seasonal difference. What is left
over will be stationary AR, MA or ARMA
Nonlinear trend
• Exponential growth– Take logs – this makes the trend linear– Take non--seasonal difference
• Non exponential growth ?
Multiplicative seasonality
• Take logs– Multiplicative seasonality often occurs when
growth is exponential.– Take logs then a seasonal difference to
remove trend
Heteroscedsatic errors
• Take logs– Note you cannot take logs of negative
numbers
Box Jenkins Methodology
• Identification
• Estimation
• Forecasting
• Examine residuals
• Re—estimate
• Repeat until you only have noise in residuals
Identification
• What does it take to make the time series stationary?
• Is the stationary model AR, MA, ARMA– If AR(p) how big is p?– If MA(q) how big is q?– If ARMA(p,q) what are p and q?
Seasonality
• Is the seasonality AR, MA, ARMA
• What are p, q?
AR(p) models
• The ACF will show exponential decay
• The first p terms of the PACF will be significantly different from zero (outside the parallel lines)
MA(q) models
• The first q terms of the ACF will be significantly different from zero
• The PACF will decay exponentially towards zero
ARMA models
• If you can’t easily tell if the model is an AR or a MA, assume it is an ARMA model.