Forecasting (prediction) limits

Example Linear deterministic trend estimated by least-squares

Yt   0   t  t  et
Yˆt l  E Yt l Y1 , , Yt   b0  b1  t  l   b0 Y1 , , Yt   b1 Y1 , , Yt   t  l 
eˆt l  Yt l  Yˆt l
Var eˆt l   Yt l and Yˆt l independen t  Var Yt l   Var Yˆt l   
  t  1 
2

 t  l   
1 2  
 From regression analysis theory   e2   e2     2 

t t  t 1 



 s 1


s 
2
 
 
  t  1 
2

 t  l    Note! The average of the numbers 1, 2, … , t is
 1 2  
  e2  1    2  1 1 t  t  1 t  1
t    
t
t t 1    
   s
 s 1
 s    t s 1
t 2 2
  2  
Hence, calculated prediction limits for Yt+l become

 t 1
t  l  
Yˆt l  c  ˆ e  1    
1 2
t 1
2
t t 
s1  s  2 

where c is a quantile of a proper sampling distribution emerging from the use of

ˆ e2 as an estimator of  e2 and the requested coverage of the limits.

For t large it suffices to use the standard normal distribution and a good
approximation is also obtained even if the term
 t 1
t  l  
1
  2 
t 1
2
t t 
s 1  s  2   Yˆt l  z 2  ˆ e
is omitted under the square root Pr N 0,1  z 2    2
ARIMA-models


l 1
Yˆt l  z 2  ˆ e  j 0
ˆ 2
j

where ˆ 0 ,,ˆ l 1 are functions of the

parameter estimates ˆ ,, ˆ and ˆ ,,ˆ
1 p 1 q

Using R
ts=arima(x,…) for fitting models

plot.Arima(ts,…) for plotting fitted models with 95%

prediction limits

See documentation for plot.Arima . However, the generic command plot

can be used.

forecast.Arima Install and load package “forecast”. Gives

more flexibility with respect to prediction
limits.
 Seasonal ARIMA models
Example “beersales” data

A clear seasonal pattern and also a trend, possibly a quadratic trend

Residuals from detrended data

beerq<-lm(beersales~time(beersales)+I(time(beersales)^2))
plot(y=rstudent(beerq),x=as.vector(time(beersales)),type="b",
pch=as.vector(season(beersales)),xlab="Time")

Seasonal pattern, but possibly no long-term trend left

SAC and SPAC of the residuals:

SAC

Spikes at or close
to seasonal lags
(or half-seasonal
lags)

SPAC
Modelling the autocorrelation at seasonal lags

Pure seasonal variation:

Yt    1  Yt 12  et Seasonal AR(1) 12 - model

Stationary if 1  1  Roots to the characteri stic equation 1  12
1 0

outside the unit circle

1k 12 k  0,12,24,36,...
ρk  
 0 otherwise
Yt    et  1  et 12 Seasonal MA(1)12 - model
Invertible if 1  1  Roots to the characteri stic equation 1  12
1 0

outside the unit circle

 1 k 0
  
ρk   1
k  12
 1   2
1
 0 otherwise
Non-seasonal and seasonal variation:

AR(p, P)s or ARMA(p,0)(P,0)s

Yt    1  Yt 1     p  Yt  p  1  Yt  s     P  Yt  Ps  et

However, we cannot discard that the non-seasonal and seasonal variation

“interact”  Better to use multiplicative Seasonal AR Models

1  B   B 1  B

1 p
p
1
s

    P B Ps Yt    et
Example:

1  0.3  B 1  0.2  B12 Yt  et


 1  0.3  B  0.2  B12  0.3  0.2  B13 Yt  et 
 Yt  0.3  Yt 1  0.2  Yt 12  0.05  Yt 13  et
Multiplicative MA(q, Q)s or ARMA(0,q)(0,Q)s

 
Yt    1  1B    q Bq 1  1B s    Q BQs et 
Mixed models:

1   B     B 1   B     B Y   
1 p
p
1
s
P
Ps
t

 1   B     B 1   B     B e
1 q
q
1
s
Q
Q s
t

Many terms! Condensed expression:

 B B s Yt     B B s et

 B   1  i 1i  B i ; B s   1  i 1  i  B s 
p P i

ARMA  p, q  P, Qs

 B s   1   j 1 j  B j ; B   1   j 1  j  B s 
q Q j
Non-stationary Seasonal ARIMA models

Non-stationary at non-seasonal level:

d Yt  Yt   1  B Yt
d
Model dth order regular differences:

Non-stationary at seasonal level:

Seasonal non-stationarity is harder to detect from a plotted times-series. The

seasonal variation is not stable.

Model Dth order seasonal differences:

D
s t 
 Y   s  s  sYt   1  B Y
s D
t

Example First-order monthly differences:

 
12Yt  1  B s Yt  Yt  Yt 12

can follow a stable seasonal pattern

The general Seasonal ARIMA model

 B B 1  B  1  B
s d
 Y     B B e
s D
t
s
t

It does not matter whether regular or seasonal differences are taken first

ARIMA  p, d , q  P, D, Q s
Model specification, fitting and diagnostic checking

Example “beersales” data

Clearly non-
stationary at non-
seasonal level, i.e.
there is a long-
term trend
Investigate SAC and SPAC of original data

Many substantial spikes

both at non-seasonal and at
seasonal level-

Calls for differentiation at

both levels.
Try first-order seasonal differences first. Here: monthly data

 
Wt  1  B12 Yt  Yt  Yt 12

beer_sdiff1 <- diff(beersales,lag=12)

Look at SAC and SPAC again

Better, but now we need to try regular differences

Take first order differences in seasonally differenced data

 
U t  1  B  1  B12 Yt  1  B Wt  Wt  Wt 1  Yt  Yt 12  Yt 1  Yt 13 
beer_sdiff1rdiff1 <- diff(beer_sdiff1,lag=1)

Look at SAC and SPAC again

SAC starts to look “good”, but SPAC not

Take second order differences in seasonally differenced data

Since we suspected a non-linear long-term trend

 
Vt  1  B  1  B12 Yt  1  B U t  U t  U t 1 
2

 Wt  Wt 1  Wt 1  Wt 2   Wt  2Wt 1  Wt 2 
Yt  Yt 12  2Yt 1  Yt 13   Yt 2  Yt 14
beer_sdiff1rdiff2 <- diff(diff(beer_sdiff1,lag=1),lag=1)

Non-seasonal part Seasonal part

Could be an ARMA(2,0)(0,1)12 or an ARMA(1,1) (0,1)12

These models for original data becomes
ARIMA(2,2,0) (0,1,1)12 and ARIMA(1,2,1) (0,1,1)12

model1 <-arima(beersales,order=c(2,2,0),
seasonal=list(order=c(0,1,1),period=12))

Series: beersales
ARIMA(2,2,0)(0,1,1)[12]

Coefficients:
ar1 ar2 sma1
-1.0257 -0.6200 -0.7092
s.e. 0.0596 0.0599 0.0755

sigma^2 estimated as 0.6095: log likelihood=-216.34

AIC=438.69 AICc=438.92 BIC=451.42
Diagnostic checking can be used in a condensed way by function tsdiag. The
Ljung-Box test can specifically be obtained from function Box.test

tsdiag(model1)
standardized residuals

SPAC(standardized residuals)

P-values of Ljung-Box test with K = 24

Box.test(residuals(model1), lag = 12, type = "Ljung-Box",
fitdf = 3)
K
p+q+P+Q (how many lags
(how many degrees of freedom withdrawn from K) included)

Box-Ljung test

data: residuals(model1)
X-squared = 30.1752, df = 9, p-value = 0.0004096

For seasonal data with season length s the L-B test is usually calculated for
K = s, 2s, 3s and 4s
Box.test(residuals(model1), lag = 24, type = "Ljung-Box",
fitdf = 3)

Box-Ljung test

data: residuals(model1)
X-squared = 57.9673, df = 21, p-value = 2.581e-05
Box.test(residuals(model1), lag = 36, type = "Ljung-Box",
fitdf = 3)

Box-Ljung test

data: residuals(model1)
X-squared = 76.7444, df = 33, p-value = 2.431e-05

Box.test(residuals(model1), lag = 48, type = "Ljung-Box",

fitdf = 3)

Box-Ljung test

data: residuals(model1)
X-squared = 92.9916, df = 45, p-value = 3.436e-05
Hence, the residuals from the first model are not satisfactory

model2 <-arima(beersales,order=c(1,2,1),
seasonal=list(order=c(0,1,1),period=12))
print(model2)

Series: beersales
ARIMA(1,2,1)(0,1,1)[12]

Coefficients:
ar1 ma1 sma1
-0.4470 -0.9998 -0.6352
s.e. 0.0678 0.0176 0.0930

sigma^2 estimated as 0.4575: log likelihood=-192.86

AIC=391.72 AICc=391.96 BIC=404.45

Better fit ! But is it good?

tsdiag(model2)

Not good! We should maybe try second-order seasonal differentiation too.

 Time series regression models

The classical set-up uses deterministic trend functions and seasonal indices

Yt  mt   S t   et
Examples :
12
Yt   0  1  t    s , j  x j t   et linear tr end in monthly data
j 2

1 if t is in month j
where x j t   
0 otherwise
Yt   0  1  t   2  t 2 quatadic trend, no seasonal variatio n

The classical set-up can be extended by allowing for autocorrelated error

terms (instead of white noise). Usually it is sufficient with and AR(1) or
AR(2). However, the trend and seasonal terms are still assumed deterministic.
Dynamic time series regression models

To extend the classical set-up with explanatory variables comprising other time
series we need another way of modelling.

Note that a stationary ARMA-model

Yt   0  1  Yt 1     p  Yt  p  et  1  et 1     q  et  q

1    B    
1 p  B p

Yt   0  1 
 1  B    1  B q
et 

 B Yt   0   B et

can also be written

 B   0 
Yt   0  et    0 
 B    B  
The general dynamic regression model for a response time series Yt with one
covariate time series Xt can be written

C   B  b  B 
Yt   0  B Xt  et
 B   B 

Special case 1:

Xt relates to some event that has occurred at a certain time points (e.g. 9/11)

It can the either be a step function

1 t  T
X t T    St T 
0 t  T
or a pulse function

1 t  T
X t T    Pt T 
0 t  T
Step functions would imply a permanent change in the level of Yt . Such a change
can further be constant or gradually increasing (depending on (B) and (B) ). It
can also be delayed (depending on b )

Pulse functions would imply a temporary change in the level of Yt . Such a

change may be just at the specific time point gradually decreasing (depending
on (B) and (B) ).

Strep and pulse functions are used to model the effects of a particular event, as
so-called intervention.
 Intervention models

For Xt being a “regular” times series (i.e. varying with time) the models are called
transfer function models