Econ 415 Dr. D.

Tran

CHAPTER 12

NONSEASONAL PROCESSES IN BACKSHIFT FORM

1. BACKSHIFT NOTATION
Backshift operator B, defined as

BYt = Yt-1
BZt = Zt-1

B2Yt = Yt-2

B3Zt = Zt-3
BC = C (C is a constant)

BkC = C (where k is a constant)

Since Zt = Yt ! where is a constant mean of Yt

BZt = B(Yt ! )
= BYt ! B

Zt!1 = Yt!1 !

BZt-1 = Zt-2

2. DIFFERENCING OPERATOR (1!B)

First Order Simple (regular) Differencing:

(1!B)Zt = Zt ! Zt!1

Second Order Simple (regular) Differencing:

(1!B)2Zt = (1!B)(1!B)Zt

= (1 ! 2B + B2)Zt

= (1!B)(Zt ! Zt!1)

= (Zt ! Zt-1) ! (1!B)Zt!1

= Zt ! Zt!1 ! Zt!1 + Zt!2

= Zt ! 2Zt!1 + Zt!2
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From now on, when we refer to a realization (sample) we write

Zt = Yt ! (where is the realization mean)

But when we refer to the process, we write

Zt = Yt ! (where is the mean of the process).

Thus Zt could be deviation from realization or process mean, depending on the context.

To simplify further we write difference operator as

= (1-B)Zt = Zt - Zt!1

= (1-B)2Zt

= Zt ! Zt!1 ! (Zt!1 ! Zt!2)

= Zt ! 2Zt!1 + Zt!2

In general,

3. NONSEASONAL ARIMA MODELS

Examples on backshift notations:

AR(1)
Algebraic Form:

(1)

Backshift Form:

(2)
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substituting , we get

Now let , then (2) is equivalent to (1).

MA(1)
Algebraic Form:

(3)

Backshift form:

(4)

Substituting , we get

Let C = then (3) and (4) are equivalent.

4. DIFFERENCING
Consider a process for a variable Yt which must be differenced once because its mean is not
constant. Suppose that the first difference of Yt are a series of independent random shocks, a
random walk model, i.e.
Econ 415/Tran Chapter 12/Page 4

Yt ! Yt!1 = at

To write this in backshift from, multiply Zt = Yt ! by (say gradient):

Zt ! Zt-1 = at

(Yt ! ) - (Yt-1 ! ) = at

Yt ! Yt-1 = at

Note that drops out when is applied to Zt = Yt ! . This happens with any process
even when we apply multi-level differencing, i.e. when d > 0.

Examples

ARIMA(1,1,1)

For ARIMA(1,0,1) we have . Now

to Yt:

Algebraic form:

First apply the first difference to Yt and Yt-1, then express it in a common algebraic form:

(1)

Backshift Form:

(2)

5. SUMMARY OF PROCEDURE
To write nonseasonal ARIMA processes in backshift form, follow the following
procedure:

1. Start with a variable Yt that has been transformed (if necessary) so that it has a constant
variance (by Box-Cox transform).

2. Write Yt in deviations from its mean, i.e. use Zt where Zt = Yt - .

Econ 415/Tran Chapter 12/Page 5

3. Multiply Zt by the differencing operator (1 - B)d or to ensure that we have a variable

whose mean is stationary.

4. Multiply the result from step 3 by the AR operator whose general form is

( ).

For a specific process, assign the appropriate numerical value to p, the order of the AR
part of the process. If any coefficient with subscripts less than p are zero, exclude
those terms from the AR operator.

5. Multiply the random shock at by the MA operator whose general form is

( ).

For specific process, assign the appropriate numerical value to q, the order of the MA
portion of the process. If any the coefficients at lag less than q are zero, exclude them
from the MA process.

6. Equate the results from step 4 and step 5.

7. Combining the above 6 steps, a nonseasonal process in backshift notation has this general
form:

In a more compact form, we write:

where

Now we want to show that both forms are equivalent for ARIMA(1,1,1).

Algebraic Form:

(1)

Backshift Form:
Econ 415/Tran Chapter 12/Page 6

(2)

Substituting Zt = Yt ! , we obtain

Thus let C = 0, then (1) and (2) are equivalent. This means that the first differences have a mean
of zero.

6. EXERCISES:

(1) Write the following in both algebraic form and backshift form:

(a) ARIMA (1,1,2)

(b) ARIMA (0,2,1)
(c) ARIMA (2,0,2)
(2) Write the following in back shift form:

(a)

(b)

(c)

(3) Write the following in both ARIMA(p,d,q) notation and common algebraic form:

(a)

(b)
Econ 415/Tran Chapter 12/Page 7

(c)