LAHORE SCHOOL OF ECONOMICS

Forecasting of Average Price of 20kg Bag of Flour

A Time Series Analysis
M.Rashid Hussain 4/10/2012

This report basically probes the different types of models for the forecasting of the average prices of the 20kg bag of flour for the year 2012. And according to this report best model that can be used for the forecasting is ARIMA. A criterion that is used for the selection of the model is the lowest value of MAPE, MAD and MSE.

Forecasting of Average Price of 20kg bag of flour

Contents
1. 2. Introduction ....................................................................................................................................... 2 Literature Review............................................................................................................................... 2

3. Wheat Industry of Pakistan Overview ................................................................................................... 3 4. Forecasting Models................................................................................................................................ 5 4.1. Nave Models .................................................................................................................................. 5 4.2. Average Models .............................................................................................................................. 5 Simple Average Model ....................................................................................................................... 5 Moving Average Model ..................................................................................................................... 6 Double Moving Average Model ......................................................................................................... 6 4.3. Exponential Smoothing Models ...................................................................................................... 6 Simple exponential smoothing .......................................................................................................... 7 Holts Linear Exponential Smoothing.................................................................................................. 7 Winters Multiplicative Seasonal Model............................................................................................ 7 4.4. Seasonal Decomposition Models.................................................................................................... 8 Additive Model .................................................................................................................................. 8 Multiplicative Model.......................................................................................................................... 8 4.5. Curve Fitting.................................................................................................................................... 8 4.6. ARIMA and SARIMA Regression Models......................................................................................... 8 4.7. Evaluation Criteria .......................................................................................................................... 9 5. Estimated Result Analysis .................................................................................................................... 10 6. Diagnostics and Estimation.................................................................................................................. 17 Interpretation ...................................................................................................................................... 21 7. Conclusion............................................................................................................................................ 22 References ............................................................................................................................................... 22

Forecasting of Average Price of 20kg bag of flour

1. Introduction
The present era in which there is a recession worldwide and sky rocketing inflation and bankruptcy considered as a norm in every country. Therefore our beloved country Pakistan is also not immune from this. At present rich is getting richer and poor is getting poorer in the country. Aggregating to this situation country has recently been hub of the crisis and chased by some the historical natural disasters. Cheery on top Pakistan is also plagued by phenomenal corruption. With all these bleak conditions most of the population is forced to live under the line of poverty and deprived of even from the basic human needs. When it comes to basic needs then first and foremost thing is food and the culture which is observed by the country is to have roti made from wheat with some kind of curry. Therefore the role played by the wheat is pivotal in this regard. Thus it is the need of time to forecast the price of wheat in order to make appropriate policy adjustments or if there is a need of some new polices in order to reduce the severity of the present situation. Though its widespread usage makes it challenging task to gather data and make appropriate forecasts but doesnt make it impossible. In this very paper this task is accomplished and presented as follows. In section 2 review of literature is covered, section 3 provides a birds eye view about the wheat industry in Pakistan, in section 4 some forecasting methods are reviewed, section 5 is allocated for the discussion of estimated results and analysis and lastly this paper concludes at section 6.

2. Literature Review
There has been a great deal of debate about the production of wheat because of recent severe wheat crisis in Pakistan. In order to avoid such a situation in the future various things agendas are being considered among them the most important are factors of production, what change in policies are required and what could be there implication could and lastly there is debate going on about the global warming having its implications on the wheat production. For this purpose many different method of forecasting are considered and their merits and demerits are analyzed. In a study by Falak Sher and Eatzaz Ahmed (2008) wheat production in Pakistan in near future is being estimated and for the parameters selection for the forecasting model a cobbDouglas production function for wheat is estimated and the results showed that
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Forecasting of Average Price of 20kg bag of flour

variables like lagged output, labor force, use of tractor and sum of all the rainfall in the months of November to march plays a pivotal role in the production of wheat. In another study by Nadeem Saeed et.al (2000) ARIMA model was used for the forecasting of the wheat production as this is the same forecasting model which is also incorporated by this report so we can easily relate to this study and conclude that ARIMA model is considered one of the best models for the forecasting and in this study ARIMA (2, 2, 1) is appropriate. In another study by Dr. Pervez Zamurrad Janjua, Ghulam Samad and Nazakat Ullah Khan implies that global warming has serious implications on the production of the wheat because of the global warming overall temperature of the world has been increased so it is affecting negatively on the wheat production in this study Vector Auto Regression model is used for the forecasting of the wheat production in the Pakistan.

3. Wheat Industry of Pakistan Overview

In the area of wheat production Pakistan stands at the 59th position in terms of the yield and stands at the 10th position if we considered according to area. In Pakistan wheat is considered as the third largest industry of the country. This is also confirmed by its contribution towards the value addition in agriculture which is 13.8% and its contribution towards GDP of the country is 3.4%. Not only that it has a supreme position in the country and it is spread upon almost 66% of the total area used for the production of food grain and this much covering is worth it because it provides with almost 74% of the total production of food grains. On the provincial level Punjab is the biggest producer of the wheat it contributes almost 72% of total nations supply. After that Sindh stands on second with contribution of almost 17% of total wheat supply. As far as the winter planting season is considered then it started in the beginning of the October and ends in the mid of the December and consequently harvesting starts in April and end by the mid of June. Despite of all these bright prospects country drastically lacks the storage ability. On average the size of the wheat of crop is 23.4 million tones and country has only storage capacity of 7 million tones and from these

Forecasting of Average Price of 20kg bag of flour

5.2 million tones is kept by public sector, 1.3 million tones by the Pakistan Agriculture Storage and Services Corporation and rest went to provincial agricultural departments. As far as the contribution made by the Punjab was concerned in the recent years then it is explained as follows. A chronological order is followed .i.e. from 1999 to 2011. In 1999-00 Punjab shared with the produce of approximately 16.48 million tons at per hectare average of 2667kg. This number dropped in 2000-01 and end up at 15.41 million tons with average per hectare yield of 2465kg. This implies that wheat production and average per hectare yield was reduced by the number of 6.5% and 8% respectively. In the next year 2001-02 the situation is no different wheat production reduced further and boils to the amount of 14.59 million tons with average also going down to 2392kg per hectare. Therefore now the reduction was 3% and 10% when we compared to 1999-00 and 2000-01 respectively. Fast forwarding a bit, the year 2005-06 is the year of recovery though it is minor but it is a good sign. Wheat production increased to 16.81 million tons with average produce per hectare to 2659kg. Comparing to the 1999-00 this produce is around 8kg less than that year produce. After that production of wheat is somewhat stagnant for the last 5-6 years whereas population of the country is increasing continuously at the rate of 2.5% per Annam. On the trading side of the wheat in Pakistan, we would be able to observe following trend. In year 2005-06 importation of wheat was increased to almost 6 million tons. After this year conditions started to improve with a recovery of 1700, 1500 and 1000 million in the years 2007, 2008 and 2009 respectively. Concluding on the note that wheat industry of Pakistan is destined to face crippling problems. Its been around 65 years now but still no government would be able to make appropriate policies for such a basic necessity. Secondly the most obvious problem is the limited storage capacity. Thirdly the smuggling factor is involved to great extent which leads to the shortages. Fourthly extravagant taxation on wheat industry is killing the incentive to progress in this country. Fifthly increased prices contribute a lot to the sufferings. Lastly either country needs to control its population or has to kick start its production of growth.

Forecasting of Average Price of 20kg bag of flour

4. Forecasting Models
Basically by forecasting we mean projecting what will happen to desired event we are focusing on by keenly observing and analyzing the past and present events. Forecasting plays a pivotal role in smooth running of the business and industries. This is because of the fact that in this era of cut throat competition all the business and firms have to be on their heels if they want to achieve success with distinction. Nowadays economy is in a state of flux with lots of information flowing in and flowing out day by day. In order to keep pace with the world and maintain good profits forecasting is needed.

4.1. Nave Models

The most simple and basic model which is used for forecasting is nave model. In this model future values are being projected using the most recent values of the past. So this implies that all the weightage is allocated for the immediate set of past data. This model can also be specified with seasonality and trend in the model in order to absorb the seasonality and trend in the data sets under consideration. On the advantage side it does not require huge amount of data in order to forecast with this data only one data set is more than enough and on the disadvantage side this model cannot give accurate results for the time series data having various time series features in it. Mathematically it can be represented as: Nave model: Yt+1 = Yt

4.2. Average Models

Simple Average Model

Simple moving average is the most commonly and widely used by the industry professionals because of its simplicity and ease of using it. In this model forecasting is made by summing up all the data available and dividing it by the number of observations. So this implies that importance is given to all of the data not only to most recent ones. On the advantage side it requires only data points in order to make forecasts but on the disadvantage side the extreme values significantly affect the results. Simple average:

Forecasting of Average Price of 20kg bag of flour Moving Average Model

In order to improvise for its shortcomings we can use moving average method. In this method forecasting is made by adding up the new observation and dropping the old observation so in this way total count of the observation remains constant but it will keep on updating as soon as the new observation made available. In this model minimum data required is k and can be any finite positive number but this is the case for only three components of the time series namely seasonality, trend and cyclicality. This method is not suitable for the random component of the time series. This model can be written mathematically as follows:
Double Moving Average Model

There is also further classification of this model and it is double moving average method. This simply the moving average of the moving average. This method is used to smooth out the deficiencies of the moving average method and move one step further in achievement of accuracy of results. Mathematical representation is as follows: The adjustment parameter is: And The p period ahead forecast a value is:

4.3. Exponential Smoothing Models

For this model it is safe to make the statement that it provides more adequate results compared to other methods but the reason it is not widely used and only limited to forecasting literature is that it is bit difficult to incorporate. It keeps on revising the forecasts of the data as soon as the new data made available. So it implies that again more weightage is given to recent data compared to old data and this weightage depreciates geometrically and on this quality it is named after as exponential smoothing method. The weights given to the values are between 0 and 1 as total weight is equal to 1. So for stable and smoothed variations we will need a small
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Forecasting of Average Price of 20kg bag of flour

weighted parameter and opposite is the case for rapid change to a real change of observation. This model is suitable for all the components of time series except trend. Alpha is the weighted parameter that is used here. This model has three extensions which are explained as follows:
Simple exponential smoothing

This model incorporates a very simple technique of forecasting and have all the characteristics explained above. Mathematically it can be explained as follows:

Holts Linear Exponential Smoothing

This method is used when data does not have seasonal component and it has a small amount of local linear trend. In this model estimate of current level and slope of trend are the pre-requisite for forecasting the values. Mathematical representation is as follows:

Winters Multiplicative Seasonal Model

This model is used for smoothing at the broader level because of the fact that this can be applied to the data having both trend and seasonality components. And for this model prerequisite is the initial estimate of the smoothed values. Mathematical representation is as follows:

Where; Lt = current level estimate Yt = actual value in period t

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Forecasting of Average Price of 20kg bag of flour

= smoothing constant for trend estimate Tt = trend estimate = smoothing constant for seasonality estimate s = seasonal estimate and length of seasonality p = number of forecasting period ahead Yt+p = forecast for p periods into future

4.4. Seasonal Decomposition Models

This model is used when data has the entire four time series components namely random, trend, seasonal and cyclical. Such type of data is first decomposed into all the four parts and then all of them are estimated and forecasted separately and in the end all of them are combined in order to obtain the final forecasted values. Using this model we can easily identify which component has what effect on the sales. This model further classified into following parts:
Additive Model

This model is used when the variation in the time series is constant over the time period and symbolically it can be represented as: Yt+1 = Tt+1 + St+1 + Ct+1 + It+1
Multiplicative Model

This model is used when the variation in the time series is increasing over the time period and symbolically it can be represented as: Yt+1 = Tt+1 * St+1 * Ct+1 * It+1

4.5. Curve Fitting

Curve fitting means taking time as independent variable and data that is being used as dependent variable. Forecasts are made using regression models and this could either be linear or non-linear. They can be referred as linear, quadratic and exponential trend.

4.6. ARIMA and SARIMA Regression Models

Box Jenkins model or also known as autoregressive integrated moving average, ARIMA (p,d,q) as the name suggests it is a regression based model and it make forecasts by regressing past values of the variable itself and current and past values of the error term with different lag
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Forecasting of Average Price of 20kg bag of flour

length. This model is the combination of autoregressive (p) and moving average (q) process with the differencing methods (d). This model consists of four parts processes which are identification, estimation, diagnostic checking and forecasting. This model works best when the data is stationery and this can be identified by the correlogram. For this model highest order of autoregressive part is identified through partial auto correlation function (PACF) and moving average part from the autocorrelation function (ACF). After that maximum likelihood method was used. Moving to third step which is of diagnostics this can be done by using Akaike Information Criteria (AIC), adjusted R2 , final prediction error chi-square, Ljung-Box Q statistics, and ACF and PACF functions and so on. Last step of forecasting is made by the estimation of the regression model using different forecasting period ahead recursively. Forecast of ARIMA:

And if the data accounts for seasonality factor then this model turns into SARIMA (p,d,q)(P,D,Q)s. as this is just an extension of the ARIMA so variables in the first bracket representing same things as explained above and from the next bracket P,D,Q and s stands for seasonal autoregressive term, seasonal difference at seasonal lag, seasonal moving average term and seasonal order respectively. This is the only variation this model has. It is identified, estimated, diagnostically checked and forecasted in the same way as ARIMA.

4.7. Evaluation Criteria

Before digging into evaluation criteria it is good to know what forecasting errors are. Basically it is the difference between actual and forecasted values and the model having the leas forecast errors is considered to be best model. Now for the evaluation we will be using following models: Mean Absolute Deviation (MAD) | | Mean Squared Error (MSE)

Forecasting of Average Price of 20kg bag of flour

Mean Absolute Percentage Error (MAPE) | |

Where et = Yt Yt

5. Estimated Result Analysis

Wheat industry of Pakistan is selected and from that monthly data of average prices of the 20kg bag of flour for the last five years from 2007 to 2011 is considered for the forecasting of the average price of the 20kg bag of flour in 2012. The unit of measurement of price of the bag is hundreds. Descriptive statistics for the average price is reported in table 1 this table gives the basic idea about the nature of the data. Indicating that prices are higher in December 2011 and this fact is also confirmed by the graph. Overall we can see that prices are increasing at the increasing rate this is because of the reason that Pakistan is suffering a high inflation plus all the great deal of crisis and natural disaster that it has to face leads to the increase in the prices. As far as the distribution is concerned then this data is not normally distributed because values of skewness and kurtosis are away from 0 and 3 respectively and this trend can be shown for the whole time period.

Graph 1 indicates the time series plot of average prices in hundred. This graphs clearly shows that there is an increasing trend in the prices over the last five years as far as the seasonality is concerned then this is also can be seen from the graph that data does not show any hint of

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Forecasting of Average Price of 20kg bag of flour

seasonality. Therefore this implies that data is not stationary and an effort required converting the data into stationary before running any kind of model or continuing with the forecasting. Graph 1: Average Prices of 20kg Bag of Flour (in hundred)

Time Series Plot of Avg. Price Values

600 550 500 450 400 350 300 250 Month Jan Year 2007 Jul Jan 2008 Jul Jan 2009 Jul Jan 2010 Jul Jan 2011 Jul Jan 2012

As we know that autocorrelation function and partial autocorrelation function performs the task of identification of the nature of the data and indicates if there is any presence of seasonality or not and either data is stationary or non-stationary. Therefore ACF and PACF graph for the prices at level and are depicted in graph 2a and 2b. The ACF graph at level shows that data is not stationary because its co-efficient dies out slowly and also statistically significant at 5% level of significance. One thing to worth noting is that it does not show any seasonality. The same conclusion can be drawn from the PACF graph that data is not stationary and there is no sign of seasonality. Plus there is one value which is close to one indicating that it is significantly different from zero also confirming the fact that data is not stationary and need to be converted into stationary form.

Avg. Price Values

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Forecasting of Average Price of 20kg bag of flour

Graph 2a: ACF at level

Autocorrelation Function for Avg. Price Values

(with 5% significance limits for the autocorrelations) 1.0 0.8 0.6
Autocorrelation

0.4 0.2 0.0 -0.2 -0.4 -0.6 -0.8 -1.0 1 2 3 4 5 6 7 8 9 Lag 10 11 12 13 14 15 16

Graph 2b: PACF at level

Partial Autocorrelation Function for Avg. Price Values
(with 5% significance limits for the partial autocorrelations) 1.0 0.8
Partial Autocorrelation

0.6 0.4 0.2 0.0 -0.2 -0.4 -0.6 -0.8 -1.0 1 2 3 4 5 6 7 8 9 Lag 10 11 12 13 14 15 16

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Forecasting of Average Price of 20kg bag of flour

After taking the second difference of the data again time series, ACF and PACF graphs been drawn and they are listed in graph 2c, d and e respectively. All of these three exhibits indicate that now data is more or less stationary. Looking at the time series graph it indicates that variance is fluctuating around a same band of values which means now variance is constant which automatically implies that data is stationary. When we consider ACF graphs it is showing only one spiking violating the safe limit and one spike out of the limit is negligible again this confirms that we have now a stationary set of data. On the other hand when PACF is considered after second difference it again implies that now the task of transformation of data from non-stationary to stationary is achieved and now this data can safely be used for further forecasting of the average prices of the 20kg bag of flour. Graph 2c: Time Series Graph after 2nd difference

Time Series Plot of 2nd Diff

100

50
2nd Diff

-50

12

18

24

30 36 Index

42

48

54

60

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Forecasting of Average Price of 20kg bag of flour

Graph 2d: ACF at 2nd difference

(with 5% significance limits for the autocorrelations) 1.0 0.8 0.6

Autocorrelation

Autocorrelation Function for 2nd Diff

0.4 0.2 0.0 -0.2 -0.4 -0.6 -0.8 -1.0 1 2 3 4 5 6 7 8 Lag 9 10 11 12 13 14 15

Graph 2e: PACF at 2nd difference

Partial Autocorrelation Function for 2nd Diff

(with 5% significance limits for the partial autocorrelations) 1.0 0.8

Partial Autocorrelation

0.6 0.4 0.2 0.0 -0.2 -0.4 -0.6 -0.8 -1.0 1 2 3 4 5 6 7 8 Lag 9 10 11 12 13 14 15

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Forecasting of Average Price of 20kg bag of flour

The forecasts for the prices of year 2012 are listed in table 2a and b. In the first table that is 2b simple nave model is considered to be appropriate because it has the comparatively lower MAPE value compared to other models except nave trend because it also has the same MAPE value but this fact can be confirmed by the MAD which is also comparatively lower than all other models even from the nave trend. In this model forecasted value for the next month that is January 2012 is simply the value of the previous time period that is December 2011. Moving forward to averages section of the table then we have one value for each simple average, moving average and double moving average because of the fact that if more than one time period is considered for forecasting then the results will distort and we shall have misleading analysis. With that the distinguishing feature about the double moving average is that it provides with the lowest MSE indicating that this model is also eligible for forecasting but the drawback it has of one forecast cannot be ignored. On the concluding note after the consideration of linear, exponential and quadratic trend we can safely recommend that both liner and quadratic trend model will give best forecasting results because both has the smaller MAPE value i.e. 8.46 and 6.26. But if we have to select one model then obviously quadratic trend model will be better based on the criteria of the lowest MAPE value.

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Forecasting of Average Price of 20kg bag of flour

Moving forward to the other table that is table 2b in this table we have seasonal decomposition analysis using both multiplicative and additive model, then we have forecasts using simple exponential smoothing, Holts method and winter method and lastly we have ARIMA model. Seasonal decomposition model is usually used on the data which possess at least three of the time series components i.e. seasonality, trend and random error. We also know that multiplicative model is used when we have non-constant mean and additive model when we have constant mean. In this table different combination of seasonal decomposition are analyzed in order get the best results. And finally seasonal decomposition with additive model and seasonality and trend is considered to be the best because it has the lowest MAPE and MAD value compared to other seasonal decomposition model. Now as far as smoothing models are considered then it requires a very critical step of proper allocation of smoothing values alpha and this decision is again based on the criteria of model having the lowest MAPE, MAD and MSE. Among this single exponential method is considered appropriate because it has the lowest MAPE and MAD value which are 2.97 and 13.56 respectively compared to Holts and Winter method. Final nail in the coffin is the ARIMA model which identified in this case to be having the highest autoregressive order of four, difference of two and moving average order of one. In short forms it can be written as ARIMA(4,2,1) this implies that we have p equal to four, d equal to two and q equal to one. Now comparing this with all other models than we conclude that this model is the best for the forecasting purposes because it has all the MAPE, MAD and MSA lowest compared to all other models in both the tables.

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Forecasting of Average Price of 20kg bag of flour

6. Diagnostics and Estimation

Dependent Variable: DAVGPRICE Method: Least Squares Date: 04/09/12 Time: 20:55 Sample (adjusted): 4 62 Included observations: 59 after adjustments Convergence achieved after 12 iterations MA Back cast: 3

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Forecasting of Average Price of 20kg bag of flour

Variable C AR(1) MA(1) R-squared Adjusted R-squared S.E. of regression Sum squared resid Log likelihood F-statistic Prob(F-statistic) Inverted AR Roots Inverted MA Roots

Coefficient 10.12477 -0.070689 0.988357 0.451596 0.432010 25.37500 36057.87 -272.9700 23.05726 0.000000 -.07 -.99

Std. Error 6.112500

t-Statistic 1.656404

Prob. 0.1032 0.5961 0.0000 11.08475 33.66943 9.354915 9.460552

0.132594 -0.533119 0.016844 58.67706

Mean dependent var S.D. dependent var Akaike info criterion Schwarz criterion

Hannan-Quinn criter. 9.396152 Durbin-Watson stat 2.040864

Dependent Variable: DAVGPRICE Method: Least Squares Date: 04/09/12 Time: 21:04 Sample (adjusted): 5 62 Included observations: 58 after adjustments Convergence achieved after 116 iterations

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Forecasting of Average Price of 20kg bag of flour

MA Back cast: OFF (Roots of MA process too large) Variable C AR(1) AR(2) MA(1) R-squared Adjusted R-squared S.E. of regression Sum squared resid Log likelihood F-statistic Prob(F-statistic) Coefficient 12.07512 -0.203432 -0.230202 1.223629 0.594560 0.572035 22.21572 26651.06 -260.0725 26.39617 0.000000 -.10-.47i Std. Error 1.316195 t-Statistic 9.174261 Prob. 0.0000 0.1418 0.0984 0.0000 11.15517 33.95911 9.105949 9.248049

0.136452 -1.490867 0.136868 -1.681931 0.144411 8.473270

Mean dependent var S.D. dependent var Akaike info criterion Schwarz criterion

Hannan-Quinn criter. 9.161300 Durbin-Watson stat 1.570368

Inverted AR Roots -.10+.47i Inverted MA Roots -1.22

Estimated MA process is noninvertible

Dependent Variable: DAVGPRICE Method: Least Squares Date: 04/09/12 Time: 21:06 Sample (adjusted): 6 62 Included observations: 57 after adjustments Convergence achieved after 14 iterations

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Forecasting of Average Price of 20kg bag of flour

MA Back cast: 5 Variable C AR(1) AR(2) AR(3) MA(1) R-squared Adjusted R-squared S.E. of regression Sum squared resid Log likelihood F-statistic Prob(F-statistic) Inverted AR Roots Inverted MA Roots Coefficient 10.04550 -0.074693 -0.137822 0.029202 0.992061 0.463160 0.421865 26.04505 35273.91 -264.0732 11.21578 0.000001 .16 -.99 -.12+.40i -.12-.40i Std. Error 5.754789 t-Statistic 1.745590 Prob. 0.0868 0.5901 0.3208 0.8351 0.0000 11.24561 34.25393 9.441163 9.620378

0.137814 -0.541984 0.137506 -1.002299 0.139570 0.017429 0.209227 56.91876

Mean dependent var S.D. dependent var Akaike info criterion Schwarz criterion

Hannan-Quinn criter. 9.510812 Durbin-Watson stat 2.024171

Dependent Variable: DAVGPRICE Method: Least Squares Date: 04/09/12 Time: 21:07 Sample (adjusted): 7 62 Included observations: 56 after adjustments Convergence achieved after 13 iterations

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Forecasting of Average Price of 20kg bag of flour

MA Back cast: 6 Variable C AR(1) AR(2) AR(3) AR(4) MA(1) R-squared Adjusted R-squared S.E. of regression Sum squared resid Log likelihood F-statistic Prob(F-statistic) Inverted AR Roots Inverted MA Roots Coefficient 10.51737 -0.077651 -0.146905 0.015875 -0.121979 0.997433 0.471953 0.419148 26.31180 34615.55 -259.4083 8.937711 0.000004 .35+.44i -1.00 .35-.44i -.39+.48i -.39-.48i Std. Error 5.026832 t-Statistic 2.092245 Prob. 0.0415 0.5781 0.2947 0.9115 0.3676 0.0000 11.46429 34.52375 9.478869 9.695871

0.138689 -0.559891 0.138722 -1.058987 0.142178 0.111652

0.134146 -0.909295 0.025475 39.15377

Mean dependent var S.D. dependent var Akaike info criterion Schwarz criterion

Hannan-Quinn criter. 9.563001 Durbin-Watson stat 2.035096

Interpretation
1. The correlogram suggested a Model ARIMA(4,2,1) 2. The ARMA models for Second Difference of Series were estimated as ARMA(1,1), ARMA(2,1), ARMA(3,1) and ARMA(4,1). 3. ARMA(2,1) is the model where Coefficient of AR(2) I s significant at 10% level of significance while MA(1) is significant at all level of significance. 4. Adjusted R2 is greatest while Akaike Information Criterion and Schwarz Criterion values are the lowest one for the Model ARMA(2,1) amongst all other Models 5. It is concluded that ARIMA(2,2,1) is the best model for forecasting

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Forecasting of Average Price of 20kg bag of flour

7. Conclusion
In this report various univariate forecasting models of time series are used for the appropriate forecasting of the average prices of the 20kg bag of flour. The more comparison oriented approach is being used in which out-of-sample forecast accuracy of various models using the mean absolute percent error, mean absolute deviation and mean squared error. Therefore these measures are used as forecasting accuracy criteria for the evaluation of the forecasting performances. Data which is used for forecasting in this model comprised of monthly observation of last five years that is 2007-11 for the average prices of the 20kg bag of the flour. As we know that flour is considered one of the basic necessities in the country like Pakistan so its demand more or less remains same throughout the period under consideration, therefore no tint of seasonality is being observed. This implies that data is only eligible for the ARIMA model and this model provides comparatively better results with lowest MAPE values. In short ARIMA model can safely be recommended for the forecasting of the monthly average prices of the 20kg bag of flour.

References
http://www.slideshare.net/KAMITHEGREAT/wheat-consumption-in-pakistan-ppt http://www.pide.org.pk/psde/25/pdf/agm26/day3/Pervez%20Zamurrad%20Janjua.pdf http://www.pide.org.pk/psde23/pdf/Falak%20Sher.pdf http://www.fspublishers.org/ijab/past-issues/IJABVOL_2_NO_4/24.pdf http://www.internationalresearchjournaloffinanceandeconomics.com/ISSUES/IRJFE_8 3_13.pdf

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