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A Comparative Study between the ARIMA-Fourier Model and the Wavelet model
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DOI: 10.5251/ajsir.2016.7.6.137.144

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 AMERICAN JOURNAL OF SCIENTIFIC AND INDUSTRIAL RESEARCH
© 2016, Science Huβ, http://www.scihub.org/AJSIR
ISSN: 2153-649X, doi:10.5251/ajsir.2016.7.6.137.144

A Comparative Study between the ARIMA- Fourier Model and the Wavelet
model
1
I.A.Iwok and 2G.M.Udoh
1
Department of Mathematics/Statistics, University of Port-Harcourt,

P.M.B.5323, Port-Harcourt, Rivers State; Nigeria.

e-mail: ibywok@yahoo.com
2
Department of Statistics, Akwa Ibom State Polytechnic, Ikot Osurua.

ABSTACT

This work compared the performances between the autoregressive integrated moving average
(ARIMA) – Fourier model and the wavelet model. The methods were applied to a consumer price
index (CPI) series. The ARIMA-Fourier model was obtained by combining both the linear and
sinusoidal components of the series and was found to fit adequately to the data. Similarly, the
wavelet model was also diagnosed to be adequate. To fish out the most prefered model, the two
competing models were subjected to comparative analysis tests. It was discovered that the
wavelet model performs better than the ARIMA-Fourier model.

Keyword: Fourier series, Autoregressive moving average model, Multi-resolutiom,

White noise process and Dyadic sequence.

INTRODUCTION (ARIMA) models. On the other hand, the frequency

approach sees time series analysis as involving the
Time series is a set of observations obtained by
periodic or systematic sinusoidal variation which is
measuring a single variable regularly over a period of
found naturally in most data with the breakdown of
time. Time series analysis is applicable in so many
the various kinds of periodic variation usually
fields like Science, Social Sciences, Engineering,
achieved through spectral analysis. Examples of the
Medical Sciences, Neurology, Psychology,
frequency domain approach are the Fourier series
Economics etc. The main objective of time series
and Wavelets analysis. The aim of this work is to
analysis is to decompose the data into trend,
combine the time and frequency domain approaches
seasonal, cyclical and error components for
and then compare it with a function that project the
prediction purposes (Kirchgassner and Wolters,
time series of interest onto a discrete wavelet filter
2007).The concept of time series is based on
often called the mother wavelet.
historical observations. These measurements may be
made continuously through time or taken at a In recent years, inflation has become one of the
discrete set of points (Chatfield, 2000). major economic focus of most countries of the world,
especially those in Africa and Asia. Due to its effect
There are two separate but not mutually exclusive
on the economy, the study and prediction of inflation
approaches to time series analysis. These are the
has become imperative in the development of any
time domain approach and the frequency domain
nation. In this respect, time series analysis plays a
approach (Hamilton, 1994).
vital role. The most common way of measuring
Time domain approach studies temporal properties of inflation is the consumer price index (CPI); which can
the realizations of a variable recorded at a be achieved monthly, quarterly or yearly.
predetermined frequency and does not relate any
According to Akpanta and Okorie (2015), Consumer
information concerning frequency components of the
price index (CPI) measures changes in the price level
variable. An example of the time domain approach is
of market basket of consumer goods and services
the Autoregressive Integrated Moving Average

purchased by households over a period of time. In
Nigeria, the CPI is calculated by the National Bureau
of Statistics, assisted by the Central Bank of Nigeria.
It is one of the most frequently used statistics for
identifying periods of inflation and deflation. It is also
used to index the real value of wages, salaries etc.
However since most financial data like the CPI are
usually defective in terms of irregular characteristics,
such as abrupt changes as well as trend and
seasonal changes, it has become necessary to
smoothen such data.
Over the years a lot of emperical researches have
been carried out using ARIMA and SARIMA models
in esimating time series data containing nonseasonal
and seasonal components respectively. However,
most of the reseachers see the two models as most
suitable for modeling financial time series data such
as the consumer price index. In line with this, Pufnik
and Kunovac (2006) provided a similar method of
forecast on the Croatia’s consumer price index by
using univariate seasonal ARIMA models and
estimating the values of the variables from the series
behaviour. Their work considered improving the final
result of all items indexed and it was suggested that
given a some what longer time horizon (three to
twelve months), the most precise forecasts of all
items consumers price index developments would be
obtained by first forecasting the index’s components
and aggregating the result to obtain the all item
index.
In the same vein, Akdogan et al (2012) in their work
used a large number of econometric models such as
ARIMA models, decomposition based models, a
phillips curve motivated time varying parameter
model, a suit of Bayesian vector autoregressive
models and dynamic factor models to forecasts
inflation data in Turkey. Based on their findings, they
encouraged that models which incorporate more
economic information should be preferred since they
produce better results than the random walk model.
Doguwa and Alade (2013) working together modeled
CPI using SARIMA and SARIMAX model and
compared their performance using pseudo – out – of
- sample forecasting procedure covering the period
July 2011 to September 2013. On the course of the
research, it was strongly recommended that SARIMA
model be used in forecasting core inflationary
situations.
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Am. J. Sci. Ind. Res., 2016, 7(6):137-144
Stockton and Glassman (2003) carried out a
comparative study on three different inflation
processes namely: rational expectations model,
monetarist model and the ARIMA model. Their
findings showed that the ARIMA model fairs better
than the other two models and performed as good as
the Philips curve in all specifications.
Konarasinghe and Abeynayake (2015) focused on
the application of Fourier transformation on the model
fitting for Stock Returns of Sri Lanke share market
and compared the forecasting ability of the above
model with the Autoregressive Integrated Moving
Average (ARIMA) model. They made use of the
Fourier transformation to transform monthly returns to
series of trigonometric series and Multiple regression
analysis for the purpose of estimating amplitudes.
The amplitudes were considered to be a set of
orthogonal functions as proved by Wei (2006). The
result showed that Fourier transformation along with
regression analysis was better and suitable for
forecasting individual company returns of Sri Lanke
share market than the ARIMA model.
Because of the drawbacks of Fourier Analysis,
Masset (2008) presented a set of tools which allows
gathering information about the frequency
components. He discussed Spectral Analysis and
Filtering methods and pointed out that Spectral and
Filtering methods have two drawbacks and that
Wavelet analysis which take its root from Spectral
and Filter methods can be used to overcome this
drawbacks. In line with this, Yogo (2003) in his paper
stressed that Multiresolution wavelet analysis is a
natural way of decomposing economic time series
into components of various frequencies which are
long-run trend, business-cycle component and high
frequency noise. His paper applied the method on
real Gross National Product and inflation, and an
encouraging result was obtained.
Renaud, Stark and Martagh (2002) took a critical look
at the Wavelet-Based method for financial time
series. The work was based on multiple
decomposition of signal using a redundant “a trous”
wavelet transform which has the advantage of being
shift-invariant. The result was a decomposition of the
signal into range of frequency scales which explicitly
showed that the method works well and adapts itself
to studies involving financial data.
According to Jessey (2014), wavelet analysis has
advantage over linear time series model by
 Am. J. Sci. Ind. Res., 2016, 7(6):137-144

combining information from both the time-domain and The expression (1) is the Fourier series of the
the frequency domain. He further suggested that with sequence * +. The ’s and the ’s are the Fourier
such attributes, the wavelet approach should be coefficients.
extended to non linear models as well.
Multiplying . / and . / on both sides of
Al Wadi et al (2010) recommended the use of Haar
wavelet transform as a mathematical function that cut (1) respectively and summing over
off the data into different frequency components and gives:
has better advantages over the traditional Fourier
series in analyzing financial data. He further added
that Daubechies (1992) Db1 wavelet filter is ∑ . /
equivalent to Haar wavelet filter can be used for
prediction purporses.
Due to the differences in choices of models by { ∑ . /
authors, Nachane and Clavel (2014) examined three (2)
models which exhibits several specific features of
real world asset prices such as non-stationarity and ∑ . /
non-linearity. The three models were Wavelet, mixed (3)
spectrum and non-linear Autoregressive Moving
Following the above result; we can express a time
Average models (ARMA) with Fourier coefficients. ( ) as a linear
indexed variable
These models were used to model weekly data
combination of the orthogonal sine and cosine
interest rates in India. Their findings showed that
functions as:
mixed Spectral models outperformed the Wavelet
analysis and the non-linear ARMA models with ∑ 0 . /
Fourier coefficients.
. /1 (4)
From the above literature reviews it can be seen that
time series analysis in the frequency domain is also
applicable to financial data like the CPI. This has
therefore provided a pedestal for a comparative ∑
analysis of the ARIMA- Fourier Model and the
Wavelet model in modeling Nigerian CPI as a major {
determinant of inflation in Nigeria. ∑
(5)

METHODOLOGY ∑
Fourier Series Representation of a Time Series: (6)
Let be a sequence of numbers. This where and is a white noise process.
sequence can be regarded as a set of coordinates of
a point in dimensional space. It is a well known White Noise Process: A process * + is said to be a
fact that for a given dimensional space, any set white noise process with mean 0 and variance
of orthogonal vectors forms a basis. Thus, the written * + ( ), if it is a sequence of
sequence * + can be written as a linear uncorrelated random variables from a fixed
combination of orthogonal trigonometric functions as distribution.
shown:
Autoregressive Moving Average (ARIMA) -
∑ 0 . / . /1 Fourier Model: The ARIMA-Fourier model was first
introduced by Nachane et al (2014) to address the
(1)
shortcomings of Fourier series. The method was
capable of fitting time series with both linear and

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 Am. J. Sci. Ind. Res., 2016, 7(6):137-144

sinusoidal elements. The ARIMA form is obtained if
the series is differenced to achieve stationarity.
According to Nachane et al (2014), the procedure
starts by estimating the best fitted
ARMA model of a stationary series * +
using the standard Box-
Jenkins methods. The ARMA model is given as
∑ ∑
(7)
where is a constant that determines the level of
the time series, ’s and ’s are the
parameters, and are the autoregressive and
moving average orders, and is the
residual.
The second step involves singling out one particular
coefficient in (3) as being
particularly prone to time variability (usually
). Let this coefficient be . Let
; ( ); then we estimate the
model
According to Nachane et al (2014), diagnostic checks
can then be performed and the significant coefficients
are reserved while the insignificant ones are dropped.
Apart from addressing the drawbacks of Fourier
series, it has advantage of having linearity in and is
therefore suitable for forecasting purposes [Nachane
et al , (2014)].
Wavelets: A Wavelet is a function which enables us
to split a given signal into several components, each
reflecting the evolution trough time of the signal at a
particular time. The wavelet is also a tool for
addressing the draw backs of the Fourier series. This
is because the wavelet transform allows the
components of a non-stationary signal to be easily
analyzed by projecting the time series of , -
( ) onto a discrete wavelet filter often
called the mother wavelet. The mother wavelet is
represented as
, - ( )
and posseses the following properties:
or
1. ∑
(10)
2. ∑ (11)

̂ ( ) ( ) ; 3. ∑
( ) (8) (12)

where is a white noise process. where L is a suitably chosen positive integer and
and padded with zeros at the end so that it has
Let the Schwarz Bayesian Criterion (SBC) that the same dimension N as [ -.
determines the order of (7) be denoted by
(1)
By virtue of (10), , - is a high-pass filter. Associated
SBC and SBC that determines the order of (8) be
(2)
with , - is a scaling filter (or father wavelet) which is
denoted by SBC . The methods states that we a low-pass filter, recoverable from , - via the
include as a relevant frequency in the model if relationship
(2) (1)
and only if SBC < SBC . This means only the
coefficient that satisfy this condition will be ( )
(13)
included.
This leads to a set of relevant frequencies
(with ) and a set Wavelet analysis commences with Mallat (1999)
algorithm which was fully explained by Rahman et al
of significant coefficients from and . Kenedy (2011).
(2015) suggested that .
For a discrete series , - of dyadic length ( ,
The original model is now re-estimated including the where is a positive integer), the algorithm yields the
significant frequencies and coefficients in (4). That is, dimensional vector of wavelet coefficients
( ) ( ) ( )
̂ ∑ ̂ ∑ ̂ . /
∑ , ( ) ( )- (9) (14) ;

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 Am. J. Sci. Ind. Res., 2016, 7(6):137-144

( ) Diagnostic Check of the Models: The diagnostic

According to Gencay et al (2002), the vector 2 3 is
the vector of wavelet coefficients associated with the
( )
dynamics of the series * + and the vector 2
represents the averages on the scale of length
Multi-resolution: Multi-resolution process
decomposes a given series * + into changes
attributable at different scales.
checks involves residual analysis. The residuals
obtained from each model are examined whether
3 they are uncorrelated at the various lags. This is
. easily detected by the Autocorrelation Function (ACF)
plot of the resisuals. If the Autocorrelation Function (
ACF) plot does not show any spike above or below
the 95% confidence interval, then residuals of each
model are uncorrelated at various lag and the fitted
model is adequate.

Let the filter coefficients be expressed in reverse Model Evaluation: Comparison of the two competing
order as: models shall be based on the following statistics:
( ) (1) The Mean Square Error (MSE) given as
Let denote the zero-padded scale wavelet filter ∑ ( ̂)
coefficients obtained by convolutions of with itself
(2) The mean absolute error (MAE) given as
and let represent the ⁄ matrix of
∑ ̂
“circularly shifted” coefficients of (by a factor of ).
We can now write the matrix as (3) The mean absolute percentage error (MAPE)
given as
̂
0 ∑ | |1
= ̂ are the
where are the observed value and
estimated value
[ ] The above listed statistics shall be used to determine
where, the model that is most efficient and reliable for
modeling Nigerian consumer price index (CPI).
is vector with each term equal to ⁄√ .
Data Analysis and Results: The data (CPI) was
The multi-resolution scale defines the th level obtained from the Central bank of Nigerian official
wavelet detail as: web site (www.cbn.gov.ng). The analysis was
( )
done using Minitab and Matlab softwares.
The ARIMA Model: The raw data plot of the series
(15)
(figure 1 in the appendix A) is not stationary and
( ) therefore needs differencing to make it stationary.
where are the wavelet coefficients at the th
scale defined in (9). After first differencing, the Autocorrelation function
(ACF) and Partial autocorrelation function (PACF) of
The multi-resolution Wavelet is then expressed as: the series (see figure 3 and figure 4 in the appendix
∑ A) suggest an ARIMA (1,1,1) model for the data.
1
Besides, the SBC attains its minimum at lag 1 (see
(16) table 1); and this further confirms the model.
( )
where is the wavelet smooth and is a Thus from (7), we have
white noise process.
(17)
This means each observation in the series is
where (i.e. taking first difference) and
additively decomposed into the wavelet details and
the wavelet smooth.

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 Am. J. Sci. Ind. Res., 2016, 7(6):137-144

The residual ACF (figure 5) obtained from fitting this and seasonality. According to Renaud et al (2004),
model does not show any for a series * + whose dynamics is made of
( ) and cyclical components, the
significant spike. This is an indication that the fitted
wavelet analysis can be used to remove these
model (17) is adequate.
irregularities.
2
The ARIMA-Fourier Model: The minimum SBC
The computer program in Appendix B was used to
obtained from fitting the noise model in (4) occurs at
(1) decompose the series * + into trend, seasonal and
lag 1 (see table 1). Then for each , the SBC and
(2) the error component. The series * + contains 256
SBC are tabulated in table 1.
data points which give rise to a dyadic sequence
As stated in the methodology, only the coefficients * +. This means that we can decompose
(2) (1)
that satisfy the condition SBC < SBC are the data set until level 8. Nevertheless, it was found
regarded as significant and are included in the that level 3 and upward had similar results. Therefore
equation. the series was decomposed until level 3 as
suggested by Daubechies (1992). The multiresolution
From (9), the re-estimated model is
wavelet analysis was used to reconstruct the series
and the significant details ( ) that captured the
seasonal period ( see figure 7 and 8, appendix A )
was added to the smooth or trend ( ) so as to
estimate * + The series needed no additional
decomposition at this stage because the residual
(18) after reconstruction was found to be random as
shown by the ACF in figure 9 (appendix A).

Table 1: Values of Minimum SBC for each Hence from (8), the model that reconstructs the
Coefficient and Lag series is

SBC(1) SBC(2) ̂ ∑ ∑
1 12.131 11.012 0.14 0.34 0.11 (9)
2 14.278 12.311 0.55 0.62 0.74
Model Evaluation and Comparison: The residual
3 23.401 19.188 0.42 - 0.43 0.51
autocorrelation function (ACF) plots of the two
4 12.264 12.712 0.38 0.02 0.11 competing models (ARMA-Fourier and Wavelets) do
5 17.221 16.932 0.34 0.13 0.03 not raise any alarm on the validity and adequacy of
the fitted models since the ACF plots in both cases
6 30.142 27.528 0.72 0.23 -0.47 do not show any spike above or below the 95 percent
7 15.273 15.112 0.22 0.61 0.44 confidence interval. This means the residuals are
8 13.772 11.123 0.41 - 0.35 - 0.66
consistent with the white noise process as seen in
figure 6 and 9. Hence the two models are adequately
fitted.
Diagnostic Checks: Examining the residual ACF However, despite the adequacy of the two models,
(figure 6 in the appendix A), it is clear that the model there is need to fish out the most prefered model.
(18) is well fitted to the data because there is no The two models were subjected to three model
significant spike in ACF. evaluation test described in section … of the
methodology. The result are tabulated in table 2
The Wavelet Model: As seen in figure 1 (appendix
below:
A), the raw series * + is non-stationary and contains
trend. The Autocorrelation function of the raw series Table 2: Model Performance of Estimated
(figure 3, appendix A) exhibit significant spikes at lag Models.
12, 24, 36,… . This shows that the series is seasonal
and since the series is a monthly data; the season
. Hence, the series * + contains trend, noise
142

Model MSE MAE MAPE
ARIMA- 0.69208 0.59559 0.59561
FOURIER
WAVELET 0.15262 0.30020 0.53770
ANALYSIS
From these error statistics, the Wavelet method has
the lowest errror statistic in all the three
computations. The Wavelet model is therefore said to
be more efficient than the ARMA-Fourier Model.
Summary and Conclusion: In the ARIMA-Fourier
model, a transformed (differenced) series was used.
However, in the wavelet analysis, the original series
was not transformed; rather it was decomposed into
smooth ( ) and details ( ), by using Haar
stationary Wavelet tools. The reconstruction of the
( ) at multiresolution three gave the smooth . Hamilton, J. D. (1994). Time Series Analysis. Princeton:
From the result, the seasonal component of 12
months was captured at three details and the model
that reconstructs the series was obtained.
The two competing models were evaluated using the
MSE, MAE and the MAPE. The result obtained
showed that the Wavelet method had the least error
statistic in all the computations. This result is contrary
to the results obtained by Nachane and Clavel
(2014). This shows the flexibility of wavelet method in
handling non-stationary series and its advantage in
combining information from both time-domain and
the frequency domain as discussed by Jessey
(2014). According to Jessey (2014), the wavelet
transform is a superior version of Fourier transform
because it allows the components of a non-stationary
signal to be easily analyzed. With the rsult obtained
in this study, there is no gain saying the fact that
wavelet approach to modeling time series is more
efficient than the ARIMA-Fourier method introduced
by Nachane et al (2014).
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