BSC HONOURS IN STATISTICS

HSTS 203 : Time Series Analysis

University Of Zimbabwe

L Dhliwayo
Department of Statistics
University of Zimbabwe
Contents
1 Models for Non-Stationary Time Series 1
1.1 What this Unit is all About . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.2 Models for Non-Stationary Series: ARIMA(p,d,q) Processes . . . . . . . 1
1.3 Statinarity Through Differencing . . . . . . . . . . . . . . . . . . . . . . 2
1.4 Random Walk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
1.5 Seasonal ARMA Models . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
1.6 Non Stationary Seasonal Processes . . . . . . . . . . . . . . . . . . . . . 5

i
Unit 1
Models for Non-Stationary Time
Series

1.1 What this Unit is all About

Unit Objectives

At the end of this unit students are expected to be able to

1. ,

2.

3.

4.

5.

6.

7.

8.

1.2 Models for Non-Stationary Series: ARIMA(p,d,q) Pro-

cesses
In practice most time series are non-stationary. Some series are integrated (non-
stationary) and become stationary after differencing d-times (∆d Xt ).

There are various transformations that we use to make a time series stationary. Some
of them are:

1. differencing

1
2 Control Charts for Variables

2. log transformation

3. square root transformation

4. arcsine transformation

5. power transformation, etc

1.3 Statinarity Through Differencing

A time series is an integrated ARMA process of order d if Zt = ∆d Xt is a stationary
ARMA(p,q) process.
We say Xt is an ARIMA(p,d,q). The model for Xt can be expressed as

φ(B)∆d Xt = θ(B)at (1.1)

where
d  
X d
∆d Xt = (−1)j B j Xt (1.2)
j
j=0

Example 1.1 Show that Xt = 23 Xt−1 − 12 Xt−2 + at is an ARIMA(1,1,0) process and

the final process after differencing is stationary.

Solution 1.1

Xt = 32 Xt−1 − 12 Xt−2 + at

⇒ (1 − 23 B + 12 B 2 )Xt = at

⇒ φ(B) = (1 − 23 B + 12 B 2 ) = 0 ⇒ B = 1 or B = 2

⇒ Xt is not stationary since one of the roots lie on the unit circle.

Let d = 1 and Zt = Xt − Xt−1

Xt = Xt−1 + 21 Xt−1 − 12 Xt−2 + at

⇒ Xt − Xt−1 = 21 [Xt−1 − Xt−2 ] + at

⇒ Zt = 12 Zt−1 + at

⇒ (1 − 21 )Zt = at

⇒ φ(B) = (1 − 12 ) = 0 ⇒ B=2
Control Charts for Variables 3

Since |B| > 1 ⇒ Zt is stationary

⇒ Xt ∼ ARIM A(1, 1, 0)

Example 1.2 Consider the process Xt = 5 + 2t + at where at is a white noise with

mean µ and variance σa2

1. Show that Xt is not stationary.

2. Verify that the process becomes stationary if differenced once.

Solution 1.2 1.

E(Xt ) = E(5 + 2t + at )

= 5 + 2t + E(at )

= 5 + 2t + µ

Since E(Xt ) depends on t, Xt is not stationary.

2.

1.4 Random Walk

Let a1 , a2 . . . be independent, identically distributed random variables each with con-
stant mean µ and variance σa2 . The time series that can be observed, {Zt } is called a
random walk if it can be expressed as follows:

Z1 = a1
Z2 = a1 + a2
Z3 = a1 + a2 + a3
..
.
Zt = a1 + a2 + . . . + at

We can rewrite the equation in the form

Zt = Zt−1 + at (1.3)

Mean and variance of Random Walk

E(Zt ) = E(a1 + a2 + . . . + at ) = tµ
4 Control Charts for Variables

V ar(Zt ) = V ar(a1 + a2 + . . . + at )

= V ar(a1 ) + V ar(a2 ) + . . . + V ar(at )

= σa2 + σa2 + . . . + σa2 = tσa2

For 1 ≤ t ≤ s

Cov(Zt , Zs ) = γt,s = Cov(a1 + a2 + . . . + at , a1 + a2 + . . . + as )

= Cov(a1 , a1 ) + Cov(a2 , a2 ) + . . . + Cov(at , at )

= σa2 + σa2 + . . . + σa2 = tσa2

Therefore
r
tσa2 t
ρt,s = p = f or 1 ≤ t ≤ s (1.4)
tσa2 × sσa2 s

1.5 Seasonal ARMA Models

In other situationswe may have data with a seasonal component. In order to fit a model
we need to take this seasonality component into consideration.

Definition 1.1 A process {Zt } is called a seasonal ARMA process of non seasonal
order p, q and seasonal component P, Q and seasonanility of order S if Zt satisfies:

Φ(B)φ(B)Zt = Θ(B)θ(B)at (1.5)

where

Φ(B) = 1 − Φ1 B S − Φ2 B 2S − ΦP B SP

Θ(B) = 1 − Θ1 B S − Θ2 B 2S − ΘQ B SQ

φ(B) = 1 − φ1 B − φ2 B 2 − φp B p

θ(B) = 1 − θ1 B − θ2 B 2 − θq B q
Control Charts for Variables 5

Example 1.3 Write equations of the following models

1. ARMA(0,0)(0,2)12

2. ARMA(0,0)(2,0)4

Solution 1.3 1. ARMA(0,0)(0,2)12

2. ARMA(0,0)(2,0)4

1.6 Non Stationary Seasonal Processes

Definition 1.2 A Dth seasonal difference of order S for a series Zt is defined as

D  
j D
X
∆D
S Xt = (−1) B jS Xt (1.6)
j
j=0

For example, if S = 12 and D = 1 we have

∆1S Xt = Xt − Xt−S = Xt − Xt−12 (1.7)

Definition 1.3 A process {Zt } is called a seasonal ARIMA process of non seasonal
components p, d, q and seasonal component P, D, Q and seasonal component of order S
if Zt satisfies:

Φ(B)φ(B)∆d ∆D
S Zt = Θ(B)θ(B)at (1.8)
where

Φ(B) = 1 − Φ1 B S − Φ2 B 2S − ΦP B SP

Θ(B) = 1 − Θ1 B S − Θ2 B 2S − ΘQ B SQ

φ(B) = 1 − φ1 B − φ2 B 2 − φp B p

θ(B) = 1 − θ1 B − θ2 B 2 − θq B q

Example 1.4 Obtain the model equations of the following models

1. ARMA(0,1,1)(0,1,2)12

2. ARMA(0,1,0)(2,1,0)4