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Time Series Modelling and Forecasting

# Time Series Modelling and Forecasting

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11/18/2012

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Contents
TOPICS Page no.Chapter 11.Conceptual understanding:
1.1
Definition of Time Series:
1.1.1
Forecasting
1.1.2
Modelling1.2Types of ForecastingTime Series1.2.1Autoregressive integrated movingaverage (ARIMA)
Box-Jenkins1.3 New terms:1.2.2Stationary process1.2.3ErgodicityChapter 2
2.
Applications of forecasting andmodelling

Chapter 1Introduction
1.1
Definition of Time Series:
A time series is a sequence of observations of a random variable. It is a set of ordered observations on aquantitative characteristic of a phenomenon at equally spaced time points. In statistics, signal processing,econometrics and mathematical finance, a time series is a sequence of data points, measured typically atsuccessive times spaced at uniform time intervals. A time series is a set of numbers that measures thestatus of some activity over time. It is the historical record of some activity, with measurements taken atequally spaced intervals (exception: monthly) with a consistency in the activity and the method of measurement.Examples include the monthly demand for a product, the annual freshman enrollment in a department of auniversity, and the daily volume of flows in a river.An example of a time series for 25 periods is plotted in Fig. 1 from the numerical data in the Table 1. Thedata might represent the weekly demand for some product. We use
x
to indicate an observation and thesubscript ‘t’

to represent the index of the time period. For the case of weekly demand the time period ismeasured in weeks. The observed demand for time ‘t’

is specifically designated ‘x
t
.
The lines connectingthe observations on the figure are provided only to clarify the graph and otherwise have no meaning.

Mathematical Model
Our goal is to determine a model that explains the observed data and allows extrapolation into the future to provide a forecast. The simplest model suggests that the time series in Fig. 1 is a constant value
b
b
determined by a random variable
.
Xt
=
b
+
.......................................................... (1)The upper case symbol
Xt
represents the random variable that is the unknown demand at time
, while thelower case symbol
xt
is a value that has actually been observed. The random variation
about the meanvalue is called the
noise
, and is assumed to have a mean value of zero and a given variance. It is alsocommon to assume that the noise variations in two different time periods are independent.
Analysis of Time Series
Time series analysis comprises methods for analyzing time series data in order to extract meaningfulstatistics and other characteristics of the data. Time series data have a natural temporal ordering. Thismakes time series analysis distinct from other common data analysis problems, in which there is no naturalordering of the observations (e.g. explaining people's wages by reference to their education level, wherethe individuals' data could be entered in any order). Time series analysis is also distinct from spatial dataanalysis where the observations typically relate to geographical locations (e.g. accounting for house prices by the location as well as the intrinsic characteristics of the houses). Time series analysis provides tools for selecting a model that can be used to forecast of future events.There are two main goals of time series analysis:(a) Identifying the nature of the phenomenon represented by the sequence of observations, and(b) Forecasting (predicting future values of the time series variable).