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You are on page 1of 32

Florian Pelgrin

University of Lausanne, Ecole des HEC

Department of mathematics (IMEA-Nice)

Florian Pelgrin (HEC) Univariate time series Sept. 2011 - Dec. 2011 1 / 32

Road map

1 Introduction

Overview

2 Identification

Overview

Identifying d

Seasonality

Identifying p and q

Estimation

Information criteria

4 Diagnostic checking

Overview

Residual diagnostics

Florian Pelgrin (HEC) Univariate time series Sept. 2011 - Dec. 2011 2 / 32

Introduction Overview

1. Introduction

order to build ARIMA models

Step 1 : Identification

Florian Pelgrin (HEC) Univariate time series Sept. 2011 - Dec. 2011 3 / 32

Introduction Overview

required (p, d, and q) in order to capture the salient dynamic features

of the data. This mainly leads to use graphical procedures (plotting

the series, the ACF and PACF, etc).

parameters of the different models (using step 1) and proceeds to a

first selection of models (using information criteria).

specified and estimated is adequate. Notably, one uses residual

diagnostics.

Florian Pelgrin (HEC) Univariate time series Sept. 2011 - Dec. 2011 4 / 32

Introduction Overview

Tentative

Range-Mean Plot

Identification

ACF and PACF

Least Squares or

Estimation

Maximum Likelihood

Checking and Forecasts

No

Model

ok?

Yes

Forecasting

Use the Model Explanation

Control

Florian Pelgrin (HEC) Univariate time series Sept. 2011 - Dec. 2011 5 / 32

Identification Overview

2. Identification

2.1. Overview

Three objectives

(d) ?

Florian Pelgrin (HEC) Univariate time series Sept. 2011 - Dec. 2011 6 / 32

Identification Identifying d

2.2. Identifying d

Graphical procedure : this involves plotting the data over time and

the corresponding (partial) autocorrelation function.

If the ACF does not decrease to zero or at a very slow decay : this

suggests non-stationarity (or long-memory effects).

approach :

2 Iterate the previous step until the ACF looks like the one of a stationary

series

3 Check the inverse autocorrelation function to avoid over-differencing.

Test procedure : unit root tests (see Chapter 6)

Florian Pelgrin (HEC) Univariate time series Sept. 2011 - Dec. 2011 7 / 32

Identification Identifying d

2000 30 4

3

0 20

2

10

-2000 1

0 0

-4000

-10 -1

-6000 -2

-20

-3

-8000 -30

-4

-10000 -40 -5

250 500 750 1000 250 500 750 1000 250 500 750 1000

Florian Pelgrin (HEC) Univariate time series Sept. 2011 - Dec. 2011 8 / 32

Identification Identifying d

Florian Pelgrin (HEC) Univariate time series Sept. 2011 - Dec. 2011 9 / 32

Identification Seasonality

2.3. Seasonality

with periodicity s if Zt and Zt+ks have the same distribution.

GDP, monetary aggregates, stocks, etc ;

Seasonal variations can constitute a large part of total variation in

certain (macroeconomic) time series.

Florian Pelgrin (HEC) Univariate time series Sept. 2011 - Dec. 2011 10 / 32

Identification Seasonality

12.8

12.6

rfs

12.4

12.2

12.0

tdx

Florian Pelgrin (HEC) Univariate time series Sept. 2011 - Dec. 2011 11 / 32

Identification Seasonality

3000

Quadrillion Btu

2500

2000

1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993

Year

Florian Pelgrin (HEC) Univariate time series Sept. 2011 - Dec. 2011 12 / 32

Identification Seasonality

The ACF ;

Florian Pelgrin (HEC) Univariate time series Sept. 2011 - Dec. 2011 13 / 32

Identification Seasonality

pattern is completely removed. This is particularly true if the entire

span of data is not used.

well-known Census X-12 makes extensive use of such filters) can

distort sone of its important properties and may complicate further

analysis.

SARIMA models (see Appendix).

Florian Pelgrin (HEC) Univariate time series Sept. 2011 - Dec. 2011 14 / 32

Identification Seasonality

Example: Seasonality

Florian Pelgrin (HEC) Univariate time series Sept. 2011 - Dec. 2011 15 / 32

Identification Identifying p and q

the ACF and PACF.

ACF Tails off Cuts off after q Tails off

PACF Cuts off after p Tails off Tails off

Florian Pelgrin (HEC) Univariate time series Sept. 2011 - Dec. 2011 16 / 32

Identification Identifying p and q

Exponential decay to zero : Autoregressive model (use the partial

autocorrelation plot to identify the order p)

Autoregressive model

model (order q identified by where autocorrelation plot becomes zero)

and moving average model

Florian Pelgrin (HEC) Univariate time series Sept. 2011 - Dec. 2011 17 / 32

Identification Identifying p and q

No significant autocorrelations (zero or close to zero) : White

noise

terms

long-memory effects...

Florian Pelgrin (HEC) Univariate time series Sept. 2011 - Dec. 2011 18 / 32

Identification Identifying p and q

trial and error approach...with more or less subjectivity in interpreting

these functions : real data rarely exhibit simple patterns !

the competing models.

Florian Pelgrin (HEC) Univariate time series Sept. 2011 - Dec. 2011 19 / 32

Estimation and information criteria Estimation

3.1. Estimation

identified (specified) in Step 1 (with or without constraints). This can be

done using (see Chapter 3, part 5)

(Nonlinear) Linear least squares method ;

Etc

Florian Pelgrin (HEC) Univariate time series Sept. 2011 - Dec. 2011 20 / 32

Estimation and information criteria Information criteria

(a) Overview

The goodness-of-fit of the model can be assessed with the residual

variance

T

2 1 X 2

(k) = t

T

t=1

where T is the number of observations used for the estimation, k is

the total number of parameters estimated (e.g., k = p + q + 2), t is

the adjusted residual at time t.

The residual sum of squares is inversely proportional to the number of

degrees of freedom : large models with many parameters are often

chosen when the sample size is large ;

Choosing over-parameterized (profligate) models tends to fit to data

specific features, which would not be replicated out-of-sample the

models may appear to fit the data very well (with a large R 2 ) but

would give inaccurate forecasts !

Florian Pelgrin (HEC) Univariate time series Sept. 2011 - Dec. 2011 21 / 32

Estimation and information criteria Information criteria

fit of the model by assigning an informational cost to the number of

parameters to estimate (making clear the idea that it is always

possible to more or less trade off p versus q in selecting the ARMA

orders)

1 A term which is a function of the residual sum of squares ;

2 A term which penalizes for the loss of degrees of freedom from adding

extra parameters.

1 residual sum of squares ;

2 value of the penalty term

IC if and only if |SSR| > |PT|

minimizes the value of the information criteria.

Florian Pelgrin (HEC) Univariate time series Sept. 2011 - Dec. 2011 22 / 32

Estimation and information criteria Information criteria

Definition

The Akaike information criterion (AIC) is defined to be

2

2 (k) + (k)

AIC(k) = log

T

where k is the total number of parameters estimated.

Remarks :

AIC may give more than one minimum (p, q) ;

AIC depends on the normality assumption ;

AIC is not consistent : it will deliver on average too large a model

(even with T )AIC tends to over-parameterize.

AIC is generally efficient (small average variation in selected model

orders from different samples within a given population).

Florian Pelgrin (HEC) Univariate time series Sept. 2011 - Dec. 2011 23 / 32

Estimation and information criteria Information criteria

Definition

The Schwarz bayesian information criterion (SBIC) is defined to be

k

2 (k) + log(T )

SBIC(p, q) = log

T

where k is the total number of parameters estimated.

Remarks :

SBIC embodies a much stiffer penalty term than AIC, i.e. SBIC

penalizes larger models more than AIC and thereby tends to select

lower-order models than the AIC.

SBIC is strongly consistent in selecting p and q : if the data are truly

generated by an ARMA(p,q) process, the SBIC picks the true model

with probability 1 as the sample size approaches infinity.

SBIC is less efficient than AIC.

Florian Pelgrin (HEC) Univariate time series Sept. 2011 - Dec. 2011 24 / 32

Estimation and information criteria Information criteria

Definition

The Hannan-Quinn information criterion (HQIC) is defined to be

2k

2 (k) +

HQIC(p, q) = log log (log(T ))

T

where k is the total number of parameters estimated.

Remarks :

HQIC contains a penalty term which is somewhere between AIC and

SBIC.

HQIC is strongly consistent in selecting p and q.

Florian Pelgrin (HEC) Univariate time series Sept. 2011 - Dec. 2011 25 / 32

Estimation and information criteria Information criteria

General methodology

1 Set upper bounds, pmax and qmax , for the AR and MA order,

respectively ;

2 Fit all possible ARMA(p,q) models for p pmax and q qmax using a

common sample size ;

min AIC(p, q)

ppmax ,qqmax

min SBIC(p, q)

ppmax ,qqmax

min HQIC(p, q).

ppmax ,qqmax

Florian Pelgrin (HEC) Univariate time series Sept. 2011 - Dec. 2011 26 / 32

Estimation and information criteria Information criteria

information criteria : goodness-of-fit is important but typically not the

only relevant information criterion for choosing a model (especially, if

the main goal is to generate forecasts...)

Even if one decides to only use one of these criteria, several models

that are close to the minimum information criterion value might be

considered (adjacent models)...

for the final selection and may be assessed by further diagnostic

checks.

Florian Pelgrin (HEC) Univariate time series Sept. 2011 - Dec. 2011 27 / 32

Diagnostic checking Overview

4. Diagnostic checking

4.1. Overview

in the previous step.

extracted by the model. For instance, the part of the data unexplained

by the model (residuals) should be small and no systematic or

predictable patterns should be left in the residuals (i.e., weak white

noise).

involves the statistical properties of the error terms (normality

assumption, weak white noise assumption).

Florian Pelgrin (HEC) Univariate time series Sept. 2011 - Dec. 2011 28 / 32

Diagnostic checking Residual diagnostics

(a) Procedures

model should exhibit white noise-like behavior : departure from this

assumption means that some information can still be exploited in the

modeling...

Two methods

Graphical procedure

1 Plot of the residuals : do they exhibit systematic patterns ?

2 Use the SACF and SPACF (as in the identification step) of the

residuals : Do they have significant elements ?

Testing procedure : autocorrelation tests.

Florian Pelgrin (HEC) Univariate time series Sept. 2011 - Dec. 2011 29 / 32

Diagnostic checking Residual diagnostics

autocorrelation is that each element might be individually

insignificant, but all (or a subset) of the elements may be jointly

significant.

hypothesis that the first K autocorrelations of the adjusted error

terms are jointly zero :

Florian Pelgrin (HEC) Univariate time series Sept. 2011 - Dec. 2011 30 / 32

Diagnostic checking Residual diagnostics

K

X

Q=T 2 (k)

k=1

residuals, T is the sample size, and K is chosen sufficiently large.

The Q-test has an asymptotic chi-square (2 ) distribution with

K p q degrees of freedom. The null hypothesis of uncorrelated

(estimated) residuals is rejected if the Q exceeds the tabulated critical

value (for a chosen significance level).

The Q-test is only asymptotically valid and may perform poorly for

small and medium size samples.

Refinements have been introduced in the literature : Ljung-Box test,

McLeod-Li test, Montis test, etc.

Florian Pelgrin (HEC) Univariate time series Sept. 2011 - Dec. 2011 31 / 32

Diagnostic checking Residual diagnostics

(c) Discussion

model that is underparameterised (too small) and would not reveal

a model that is overparameterised (too large).

in overfitted models. This makes estimation difficult and the

statistical tests ill-behaved. For example, if the true data generating

process is an ARMA(p,q) and one deliberately then fits an

ARMA(p+1,q+1) there will be a common factor (all of the

parameters in the latter model can be identified).

assumption (especially for maximum likelihood estimation), etc.

Florian Pelgrin (HEC) Univariate time series Sept. 2011 - Dec. 2011 32 / 32

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