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You are on page 1of 8

Himadri Ghosh

Indian Agricultural Statistics Research Institute, New Delhi-11012

1. Introduction:

Well-known Box-Jenkins Autoregressive integrated moving average (ARIMA) methodology has

virtually dominated analysis of time-series data since 1930s. However, it is applicable to only

those data that are either stationary or can be made so. Another limitation is that the resultant

model is Linear. During the last two decades or so, the area of Nonlinear time-series is

rapidly growing. Here, there are basically two possibilities, viz. Parametric or Nonparametric

approaches. Evidently, if in a particular situation, we are quite sure about the functional form,

we should use the former, otherwise the latter may be employed.

Although several such parametric families have been developed, the three most widely used are

discussed below in Section 2. Finally, Section 3 deals with some important Nonparametric

time-series models.

2. Parametric time-series models:

(i) Bilinear time-series model:

Perhaps the most natural way to introduce nonlinearity into a linear ARIMA model is to add

product terms. By restricting to products of time-series variable Xt-j and errors t-k , we end up

with a bilinear model BL(p,q,r,s), introduced by Granger and Anderson (1978) :

p

j =1

k =1

Xt = a j X t j + t + bk t k + c jk X t j t k

j =1 k =1

(1)

where t IID(0,2), ai , bk , and cjk are parameters. Here p denotes lag in the linear part of

autoregression in Xt, while r and s are lags in the nonlinear terms involving past observations and

error series {t}. The coefficients in past observations depend on past shocks thus enabling the

model to capture data with high level crossings.

Although bilinear models were proposed almost two decades ago and a number of

theoretical contributions were made in succeeding period, yet application of such models to real

data is still a challenging task. Recently, Ghosh et al. (2005, 2006b), have developed computer

programs in C-language for fitting of bilinear models. As mentioned earlier, bilinear models are

of particular importance to describe those data sets that depict sudden bursts of large amplitude

at irregular time epochs. As an illustration, Indias marine products export data during the period

1961-62 to 1998-99 is considered. Based on normalized Akaike information criterion (NAIC),

appropriate bilinear time-series model is fitted by applying Newton-Raphson iterative procedure.

124

Another important parametric nonlinear time-series family is that of Autoregressive

Conditional Heteroscedastic (ARCH) models. These were developed by R. F. Engle in 1982 to

model varying (conditional variance) or volatility of a time-series. It is often found that larger

values of time-series also lead to larger instability (i.e. larger variances), which is termed

conditional heteroscedasticity. An ARCH model is defined as

= t t , t2 = 0 + 1 Xt21 + ... + q Xt2q ;

where t IID(0,1) and i 0 are parameters.

Xt

t = 1, 2, ..., n

(2)

EViews software package may be employed for fitting of these models. Ghosh and

Prajneshu (2003) applied these models to monthly onion price data during April, 1996 to

October, 2001. Volatility in the data is clearly reflected as the onion price jumped to the

maximum of Rs. 1000/- during October, 1998 to December, 1998. Subsequently, it decreased to

the range of Rs. 125/- to Rs. 500/- during the later time period till October, 2001. As the

assumption of constant one-period ahead forecast variance did not hold, ARCH process was

fitted and out-of-sample forecasts for four months were developed.

(iii) Mixture time-series models:

Mixture nonlinear time-series models may be employed to describe those data sets that

depict sudden bursts, outliers and flat stretches at irregular time epochs. Various models, viz.

Gaussian Mixture Transition (GMTD), Mixed Autoregressive (MAR) and MAR- Autoregressive

Conditional Heteroscedastic (MAR-ARCH) are thoroughly studied by Ghosh et al. (2005,

2006a). Weekly wholesale onion price data during April, 1998 to November, 2001 is considered.

After eliminating trend, seasonal fluctuations are studied by fitting Box-Jenkins airline model to

residual series. The tests for presence of nonseasonal and seasonal stochastic trends and use of

appropriate filters in airline models are also examined. Presence of ARCH is tested by Lagrange

multiplier (LM) test. Estimation of parameters is done using Expectation Maximization (EM)

algorithm and the best model is selected on basis of Bayesian Information Criterion (BIC). Outof-sample forecasting is performed for one-step and two-step ahead prediction by naive

approach. It is concluded that, for data under consideration, a three-component MAR and a twocomponent MAR-ARCH is the best in respective classes. Further, identified MAR-ARCH model

is also shown to perform better than three-component MAR model identified earlier in terms of

having fewer numbers of parameters and lower BIC value.

(iv) Threshold autoregressive time-series models:

The third important parametric nonlinear time-series family is that of Threshold

Autoregressive (TAR) models, initiated by H. Tong in 1980. These assume different linear forms

in different regions of the state space. The division of the state-space is usually dictated by one

threshold variable, say Xt - d, for some d 1. The model is of the form

X t = a0( i ) + ai( i ) X t 1 + ... + a (pi ) X t p + t( i ) , if Xt-d Ri

125

(4)

for i = 1,,k, where Ri forms a (nonoverlapping) partition of the real line and

t( i )

IID(0, i2 ). The simplest thresholding model is the two-regime (i.e. k = 2) TAR model with R1 =

{Xt-d r}. The AR parameter depends on whether Xt-d exceeds the threshold value r; hence the

name TAR. Further, if r = , TAR model reduces to AR(1) model. A comprehensive

discussion of TAR models is given in Tong (1995). STAR software package may be used for

fitting of these models. A heartening feature of TAR models is that these are capable of

describing cyclical fluctuations. Ghosh et al. (2005, 2006c) applied this model to describe

countrys lac export data during the period 1901- 2001. The data set exhibited prominent cycles

of approximately 13 years. The best-identified model on the basis of minimum NAIC value is

found to be two-regime TAR model with delay parameter d =1 and p = 2. Finally, out-of-sample

forecasts for years 2002 and 2003 were obtained.

3. Nonparametric time-series analysis: Parametric families discussed above provide powerful

tools for analyzing time-series data when models are correctly specified. However, any

parametric model is at best only an approximation to the true stochastic dynamics that generates

a given data set. A time-series may be of the type for which there is no suitable parametric model

that gives a good fit to the data under consideration. In such a situation, a newly developing

Nonparametric approach may be employed (Fan and Yao, 2003).

(i) Functional-coefficient autoregressive model:

A very versatile model of the above type is Functional-coefficient autoregressive (FAR)

model introduced by R. Chen and R.S. Tsay in 1993. this model is of the form

(7)

X t = a1 ( X t d ) X1 + ... + ap ( X t d ) X p + ( X t d ) t

where t IID(0,1) and is independent of Xt-1, Xt2, The FAR model depends critically on

choice of model-dependent variable Xt-d, which is one of the lagged variables. A generalization

of this class of models is to allow a linear combination of past values as a model-dependent

variable. Accordingly, the whole class of Adaptive FAR (AFAR) models has been developed

(Fan and Yao, 2003). Recently, Ghosh et al. (2010) applied FAR model for forecasting of Indias

annual export lac data during the period 1900 to 2000.

(ii) Wavelet analysis:

Currently, there is a lot of interest in employing Wavelet analysis for nonparametric

nonlinear time-series modelling. Novel idea of wavelets is that these are localized in both time

and space whereas traditional Fourier bases are localized only in frequency but not in time. The

theory of wavelets permits decomposition of functions into localized oscillating components and

so is an ideal tool for modelling and forecasting purposes. An excellent description of various

aspects of wavelet methodology is given in Abramovich et al. (2000). A further improvement in

this methodology is incorporation of concept of thresholding. Various types of thresholding

are discussed in Percivel and Walden (2000) and Jansen (2001).

126

Illustrations

Problem. Indias monthly export of spices data (in Rs. Crores) during the period April

to December 2006 is as follows:

Year

Apr

May

Jun

Jul

2000-01

137.95

129.95

123.51

123.28

2001-02

136.18

96.05

123.24

2002-03

148.44

177.88

2003-04

117.94

2004-05

Aug

Sep

Oct

123.97

124.68

119.42

109.23

129.99

118.62

110.75

106.18

152.74

156.13

2005-06

166.77

2006-07

187.32

2000

Nov

Dec

Jan

Feb

Mar

110.52

134.18

126.61

141.00

163.51

163.32

99.94

142.34

95.94

90.44

105.77

110.72

123.59

132.59

121.42

142.20

126.62

107.91

135.11

110.45

128.65

104.54

93.80

122.46

131.32

129.90

163.96

119.06

104.83

223.73

167.17

166.81

149.59

158.54

135.19

148.11

143.66

143.00

162.24

189.11

162.09

162.19

160.79

175.06

178.36

187.73

160.29

192.91

169.11

176.98

221.39

222.72

232.33

235.40

267.57

272.59

245.04

292.45

256.74

Fit GARCH nonlinear time-series model to above data using SAS Package.

Solution.

(i) Print Data

title 'Monthly Spices Data April 2000 to August 2006';

data spices;

input time y;

cards;

1 137.95

2 129.95

3 123.51

.

.

.

76 235.40

77 267.57

;

Proc print data=spices;

run;

127

/* Test for Heteroscedasticty*/

ods html;

ods graphics on;

proc autoreg data=spices;

model y = / nlag=1 archtest dwprob method=ml;

output out=r r=yresid;

run; quit; ods graphics off;

ods html;

Table 1

Q and LM Tests for ARCH Disturbances

Order

Pr> Q

LM

19.0861

<.0001

35.1593

31.9060

<.0001

38.7479

Pr > LM

Order

Pr >Q

LM

<.0001

42.3082

<.0001

48.2483

<.0001

42.9105

<.0001

42.4390

<.0001

48.4019

<.0001

<.0001

46.2432

<.0001

42.4813

<.0001

48.7728

<.0001

39.6084

<.0001

46.4692

<.0001

10

42.4981

<.0001

48.9755

<.0001

42.1106

<.0001

47.5614

<.0001

11

42.7323

<.0001

48.9770

<.0001

42.1426

<.0001

47.6035

<.0001

12

42.7925

<.0001

49.7264

<.0001

Ods html;

Ods graphics on;

/*-- AR(1)-GARCH(1,1) model for the Y series --*/

proc autoreg data=spices ;

model y = / nlag=1 garch=(q=1,p=1) maxit=50 ;

output out=out_spices cev=vhat p=pred lcl=lcl ucl=ucl r=r_garch cpev=cpev;

run;

quit;

ods graphis off;

ods html;

Output of the AR(1)-GARCH(1,1)

AIC= 711.72, SBC=723.59

128

Pr > LM

Table 2

Variable

DF

Estimate

Intercept

149.4223

AR1

ARCH0

Standard

Error

t Value

Approx

Pr > |t|

11.2830

13.24

<.0001

-0.7888

0.0883

-8.93

<.0001

144.0878

96.9414

1.49

0.1372

ARCH1

0.8183

0.4530

1.81

0.0708

GARCH1

0.2112

0.2251

0.94

0.3482

y t = 149.42 0.789 y t -1 + t , where t = ht1 / 2t

(11.283) (0.088)

and

ht = 144.088 + 0.818 t2-1 + 0.211 h t -1

(96.941) (0.453) (0.225)

(iv) Graph

/*GRAPH of Fitted series along with data*/

proc sgplot data=out_spices;

scatter x=time y=y; series x=time y=pred;

xaxis label= 'Month (April,2000 To August, 2006)';

yaxis label=Indias Monthly export of spices (in Rs.Crore)';

run;quit;

129

\

(v) Forecasts

/*Forecast data for four months*/

data b;

y = .;

do time = 78 to 81; output; end;

run;

data b;

merge spices b;

by time;

run;

proc print data=b;

run;

proc autoreg data=b ;

model y = / nlag=1 garch=(q=1,p=1) maxit=50;

output out=out_spices1 cev=vhat p=pred lcl=lcl ucl=ucl r=r_garch cpev=cpev;

run;

proc print data=out_spices1;

run;

Table 3

Forecasts of export of spices (in Rs. Crore) for fitted AR(1)-GARCH(1,1) model

Months

Actual

Value

(Static)

(Dynamic)

September 2006

272.59

242.62(48.66)

242.62(48.66)

October 2006

245.04

224.57(25.44)

222.94(50.81)

November 2006

292.45

210.16(16.69)

207.41(52.93)

December 2006

256.74

198.17(13.85)

195.17(55.51)

REFERENCES

Abramovich, F., Bailey, T. C. and Sapatinas, T. (2000). Wavelet analysis and its statistical

applications. Statistician, 49, 1-29

Fan, J. and Yao, Q. (2003). Nonlinear Time Series: Nonparametric and Parametric Methods,

Springer, U.S.A.

130

Ghosh, H., Iquebal, M. A. and Prajneshu (2006a). On mixture nonlinear time-series modelling

and forecasting for ARCH effects. Sankhya, 68, 111-29

Ghosh, H., Paul, R. K. and Prajneshu (2010). Functional coefficient autoregressive

nonlinear time-series model for forecasting Indian lac export data. Model Assist. Statist.

Applns., 5, 101-08.

Ghosh, H. and Prajneshu. (2003). Nonlinear time-series modelling of volatile onion price data

using AR(p)-ARCH(q)-in-mean. Cal. Stat. Assn. Bull., 54, 231 47

Ghosh, H., Prajneshu and Paul, A. K. (2005). Study of nonlinear time series modelling in

agriculture. I.A.S.R.I. Project Report

Ghosh, H., Prajneshu and Sunilkumar, G. (2006b). Modelling and forecasting of bilinear timeseries using frequency domain approach. J. Combi. Info. Sys. Sci., 31, 217-33

Ghosh, H., Sunilkumar, G. and Prajneshu (2006c). Self exciting threshold autoregressive

models for describing cyclical data. Cal. Stat. Assn. Bull., 58, 115-32

Jansen, M. (2001). Noise Reduction by Wavelet Thresholding. Lecture Notes in

Statistics, Vol. 161, Springer-Verlag, U.S.A.

Percivel, D. B. and Walden, A. T. (2000). Wavelet methods for time series analysis. Cambridge

Univ. Press, U. K.

Tong, H. (1995). Nonlinear Time Series: A Dynamical System Approach. Oxford Univ. Press,

U. K.

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