STA-

217

I
NTRODUCTI
ONTOTI
MESERI
ESANALYSI
S

1.I
ntr
oduct
ion

- Def
ini
ti
onoft
imeser
ies

- Exampl
esoft
imeser
ies

2.Obj
ect
ivesoft
imeser
iesanal
ysi
s

3.Component
sofat
imeser
ies

4.Measur
ementoft
rendandseasonal
eff
ect
s

5.Si
mpl
edescr
ipt
ivemet
hodsofanal
ysi
s

6.Ti
meser
iesmodel
s

7.Ti
meandspect
ral
domai
n

8.I
ndi
cat
orsandf
orecast
ing

9.St
ati
onar
ycondi
ti
ons,
model
ident
if
icat
ionandest
imat
ion

10.Spect
ral
andhar
moni
canal
ysi
s

- Li
nearandnon-
li
neart
imeser
iesmodel
s
 I
NTRODUCTI
ONTOTI
MESERI
ESANALYSI
S

I
NTRODUCTI
ON

Ti
meseriesi
sacoll
ecti
onofobser
vat
ionsmadesequenti
all
yint
ime.Ti
memaybeinseconds,
minut
es,
hours,
year
s,etc.
,orev
enatr
egulart
imei
nterv
alssuchas5seconds,
2hour
s,et
c.

Ti
meser
iesi
sal
soasetofobser
vat
ionst
akenataspeci
fi
edt
imeusual
l
yatequal
int
erv
als.

Remar
ks:
1.Obser
vat
ions(
x1,,, xn)
x2x3…, ,tme(
i t ,,,
tt…,
1 2 3 n)
t ;X=xt

2.Ti
metcanbey
ear
s,mont
hs,
day
s,hour
s,seconds,
etc.

3.Ti
meser
iesi
sabi
var
iat
edi
str
ibut
ionofv
ari
abl
est
ime(
t)andobser
vat
ion(
X)

4.Timeser i
esi sdif
ferentfr
om ot
herdat
aanal
ysi
spr
obl
emsi
.e.i
tisbasedonor
der
(x1,
t1)
,(
x2,
t2)
,(
x3,
t3) (i i
,…,x,t)
Exampl
esoft
imeser
ies

1.Economi
cti
meser
ies
Manyti
meser i
esari
sei
neconomics.Theyi
ncludesharepri
cesonsuccessi
veday
s,expor
t
t
otal
sinsuccessi
vemonths,
prof
it
sinsuccessiv
eyearsetc.

2.Phy
sicalt
imeser
ies
Occur
sinphysi
calsci
enceespeci
all
yinmet
eorology
,mar i
nesci
enceandgeophy
sicsfor
exampl
e,r
ainf
all
insuccessi
vedays,t
emper
atureinsuccessi
vehour
s,day
sormont hs.

3.Mar
ket
ingt
imeser
ies
Looksattheanaly
sisofscal
esmadeinsuccessi
veweeks,months,
year
s,et
c.wi
tht
heai
m of
for
ecast
ingsalesandproduct
ionorev
entoexaminet
her el
ati
onshi
pbet
weensal
esandot
her
ti
meseries.

4.Demogr
aphi
cti
meser
ies
Occursi
nthestudyofpopul
ati
on,f
orexample,
populat
ionofacountr
ymeasur
edaf
terever
yten
year
s.Thedemographerswanttor
educethechangesi
nt hepopul
ati
onf
orasl
ongastenyears
or20yearsi
nthefutur
e.

ROLESANDOBJECTI
VESOFTI
MESERI
ES

Rol
es

i
) Hel
psi
nunder
standi
ngpastbehav
ior
s.

- Byobser
vingdataov
eraperi
odoft
ime,onecaneasi
l
yunderstandwhatchanges
hav
etakenplaceint
hepast
.Thi
shelpsi
npredi
cti
ngthef
uturebehav
iors.

i
i
) Hel
psi
npl
anni
ngf
utur
eoper
ati
ons.
 - Inf
luenceswhichhav edeter
minedthef or
msofagi ventimeseri
esmaybe
ascertai
nediftheregul
ari
tyofoccurrenceofanyfeatur
eoverasigni
fi
cantper
iod
couldbeclearl
yestabli
shed,pr
edict
ionsofprobablefut
urevar
iati
onswould
becomepossi ble.

i
i
i) Hel
psi
nev
aluat
ingcur
rentaccompl
i
shment
s.

- Act
ualper
for
mancecanbecompar
edwi
thexpect
edper
for
manceandt
hecause
ofv
ari
ati
onanal
yzed.

i
v) Faci
l
itat
escompar
ison.

- Di
ff
erentt
imeser
iesar
eof
tencompar
edandi
mpor
tantconcl
usi
onsdr
awn.

Obj
ect
ives

1)Descr
ipt
ionoft
hedat
a–i
siti
ncr
easi
ngordecr
easi
ngast
imechanges?

2)Const
ruct
ionofamodel
thatf
it
sthedat
a–f
indapr
obabi
l
itymodel
andmakean
i
nfer
ence.

3)For
ecast
ingf
utur
eval
uesoft
hepr
ocess.

4)Deci
dingwhet
hert
hepr
ocess/pr
obl
em i
soutofcont
rol
andmaker
emedi
es.

5)Forvect
orti
meseries,
theobj
ecti
vewouldbetofi
ndtherel
ati
onshipbetweentwoor
moreobservedval
ueswitht
heaim ofusi
ngval
uesofsomeoft heprocessestopr
edi
ct
val
uesoftheother
.Forexampl
e,observi
ngt
heeff
ectofadver
tisi
ngonsal es.

COMPONENTSOFATI
MESERI
ES

Ther
ear
etwoappr
oachesofanal
ysi
soft
het
imeser
iesdat
a:

1)Anal
ysi
sint
het
imedomai
n
Her
etheappr
oachesi
ncl
ude;

a)Descr
ipt
ivemet
hods

b)Pr
obabi
l
itymodel
s4t
imeser
ies

c) Fi
tt
ingmodel
stot
imeser
ies

d)Aut
ocor
rel
ati
onf
unct
ionandf
orecast
ingpr
ocedur
es

Themaintool
ofanalysi
shereist
heAut
oCor
rel
ati
onFunct
ion(
ACF)whi
chdescr
ibest
he
evol
uti
onofprocesst
hroughti
me.
 2)Anal
ysi
sint
hef
requencydomai
n
Thisappr
oachdependsont
hespectr
aldensi
tyf
uncti
onwhichdescr
ibeshowv
ari
ati
oni
nthe
processmaybeaccount
edforbyv
ari
ati
onsatdif
fer
entf
requenci
es.

Descri
pti
vemet
hodsconsi
stsofdecomposi
ngavari
ati
oninaseri
esint
otr
end,
seasonal
,cy
cli
c
andremaini
ngi
rr
egul
arfl
uct
uati
onscall
edther
andom er
rorcomponent
.

a. Tr
end
I
tmaybedefi
nedasthelongter
m changei
nthemeanlevel
oft
imeser
ies.I
tisal
socal
l
edt
he
l
ongt
erm movementorsecul
armovementofvar
iat
ionof

Trendisthechangeoftendencyofdatatoincr
easeorreducedur
ingal
ongper
iodofti
me.I
tis
thegeneraldir
ect
ioni
nwhi chthegraphofatimeser
iesappearst
obegoingov
eralongper
iod
oftheti
me.I ti
salongterm smoothmov ementofati
meser i
es.

Trendcaneit
herbeli
neari
ncr
easi
ng,
li
neardecr
easi
ngornon-
li
neari
ncr
easi
ng,
non-
li
near
decreasi
ngorosci
l
lat
ory.
2 3 r
Tr
endcanberepr
esentedbyapol
ynomial,
i.
e.ao+a1t+a2t
, +a3t +…+artofdegr
eerandaii
s
aconst
antt
obedeterminedf
rom t
hedata.

b.Seasonalv
ari
ati
on
Thesearet
hemov ement
sthatoccuri
natimeseri
eswithi
naper iodofoneyear.I
tisthat
componentoft
imeseri
eswhichchangesi
nseasons.I
tari
sesf r
om systemati
ccalendarr
elat
ed
wants,
e.g.
,Chr
ist
mas,East
er,col
dcli
mateorot
hercustom r
elatedwants.

Examplesofseriesthatexhi
bitt
hisvari
ati
onincludesal
esfi
gur
es,t
emper at
urer
eadi
ngs,
and
commodi t
yprices,forexampl
e,maizepricesarelowduri
nghar
vestti
meandgoesupdur i
ng
pl
anti
ngper i
od,salesinasupermarketarehighinDecemberev
eryyear,
etc.

Her
ethev
ari
abl
esr
epeatappr
oxi
mat
elyequal
dur
ingcer
tai
nti
mesoft
hey
ear
.

c. Cy
cli
cef
fect
sofacomponent
Thesearev ar
iat
ionsi
nat i
meseri
eswithaperiodnotequaltooneyear
.Theyarefluct
uat
ing
aroundatrendli
ne/curv
ewhichmayormaynotbeper iodi
c.Theti
meplotrepeat
sacy cl
i
c
mov ementmadeupofboom, recessi
on,depr
ession,
recoveryandsoon.

Thi
sisar
efl
ect
ionofeconomi
cbusi
nesscy
cle.

d.Random ef
fect
s
Iti
sthatcomponentoft i
meser i
eswhichisbey ondcontrol
.Theyarefluct
uat
ionsdue
unpredi
ctablefact
orswhicharesometimesunidenti
fiabl
eandt husrandom.Thefl
uctuat
ions
areduetof orcessuchaseart
hquakes,wars,
floods,stri
kes,et
c.

Aft
ertr
end, seasonali
tyandcy cl
i
cef
fectshavebeenr
emovedfr
om ati
meser i
es,
whatremai
ns
i
sduet orandom fluctuat
ionhenceapredi
ctedval
uei
sthesum oft
hefi
rstt
hreecomponent
s
subj
ecttorandom f l
uctuati
ons.
 MEASUREMENTOFTRENDANDSEASONALEFFECTS

1.METHODSOFESTI
MATI
ONOFTRENDOFTI
MESERI
ES

Af
terget
ti
ngbackgr
oundinf
ormat
ionanddefi
ningobj
ect
ive,t
hefi
rstandfor
emosti
mportant
st
epinti
meseri
esanaly
sisi
stopl
otthedatathewayiti
s.Suchaploti edt
scal
l imeplot
.

Atti
mest hedataneedstransf
ormati
onbytakingexampl
elogari
thmsorev
ensquarewi
tht
he
ai
m ofstabil
i
zingthevar
iancemakingseasonalef
fect
saddit
iveormaki
ngthedat
anormal
l
y
di
str
ibut
ed.

Usi
ngthet i
mepl othelpsindescr
ibi
ngthedat
aorfor
mulati
ngsensi
blemodels.Thetimepl
ot
hel
psinidenti
fyi
ngt hetrendi
ngeneral
.Thetr
endcanbethenest
imatedt
hroughv ar
ious
methods:

i
) Gr
aphi
calmet
hodorf
reehandmet
hod
Her
eat i
meser i
esisplottedonaCartesianpl
anewher
eti
metisanindependentvar
iableandXt
i
sthedependentvari
able.Aftert
hatafreehandcur
veorl
i
nei
splot
tedtodepictthetrendoutof
whi
chtheequationi
sobt ainedfr
om thepoint
s.

NOTE:

Aroughguideoft
hetr
endli
nemakesurethaty
ouhav
eali
neofbestfi
torcur
vewhi
ch
passest
hroughmostoft
hepoi
ntsort
hroughasmanyaspossi
ble.

I
ftheequati
onisofthef
orm y=mx+c,
simpl
ywor
koutt
hegr
adi
entandi
nter
ceptort
ofor
m
t
wosimultaneousequat
ions.

Ift
hetrendl
i
nei ssuspect
edtobepar
abol
i
cofthef m y=ax2+bx+c,
or v
aluesofa,
bandcare
obtai
nedbypicki
ngthreel
inesal
ongt
hetr
endcur
veandsol
vingt
her
esul
ti
ngsimult
aneous
equati
on.

Exampl
e

Thefoll
owingt
abl
eshowst
henumberofcasual
wor
ker
sinPumast
eel
wor
ksl
i
mit
edi
nyear
1999to2007.

Year 1999 2000 2001 2002 2003 2004 2005 2006 2007

Number 9960 9930 9950 9150 8860 8640 8360 7820 7580
of
worker
s

a)Gr
apht
hisdat
a
 b)Dr
awat
rendofbestf
it

c) Det
ermi
net
heequat
ionoft
het
rend

d)Est
imat
ethenumberofwor
ker
sin1998

e) Pr
edi
ctt
henumberofwor
ker
sin2008

Sol
uti
on

Equat
ionoft
het
rendi
sther
efor
ey= -
325.
67x+ 10545

Numberofwor
ker
sin1998i
s10545

Numberofwor
ker
sin2008i
sy=10545- 67(
325. 10)=7288.
3≅7288
 i
i
) Met
hodofSemi
-Av
erages
Inthismet hod,thegivendatai sdiv
idedint
otwopar ts,
preferablywi
thequalnumberofyearsor
periods.Anav erageorar i
thmet i
cmeanofeachpar tisobtainedsot hatwegettwopoint
s.Each
pointisplottedatthemi dpointoftheclassi
nterval
coveredbyr especti
vepar
tthenthepoint
s
arejoinedbyast r
aightl
inewhi chgivesustherequir
edtrendl i
ne.

Foranoddnumberoft
imeper
iod,
themi
ddl
eobser
vat
ioni
sdr
opped.

Exampl
e

Fi
tat
rendl
i
net
othef
oll
owi
ngdat
abymet
hodofsemi
-av
erages.

Year 2002 2003 2004 2005 2006 2007 2008

Sal
esof
afar
min
102 105 114 110 108 116 112
‘
000

Sol
uti
on

Si
nce7year
sar
egi
ven,
wedr
opt
hemi
ddl
eyearandobt
aint
heav
erageoft
hef
ir
stt
hreeandt
he
l
astt
hree

̅ 102+105+114
X1= =107
3

̅ 108+116+112
X2= =112
3

ot(
Pl 107,
yr2003)and(
112,
yr2007)
Adv
ant
ages
1)Si
mpl
e

2)Accur
ateanswercompar
edt
ofr
eehandmet
hod

3)Est
imat
ioni
seasy

Di
sadv
ant
age
1)Assumpt
ionofav
eragepoi
ntsf
orm al
i
ne

i
i
i) Met
hodofLeastSquar
es
Thi
smet hodi
sthemostwidelyusedmet
hodinthetimeseri
esanal
ysi
s.Her
eat rendl
ineis
obt
ainedorfi
tt
edint
othedatainsuchamannerthatthef
oll
owi
ngtwocondi
tionsaresati
sfi
ed:

 ∑( Yc)=0Wher
Y- eYistheactualobser
vati
onsandYci
sthefi
tt
edobservat
ion.Thati
s,
thesum oft
hedev
iat
ionsofactualval
uesofYandthecomputedv
aluesofYi szer
o.

 ∑(Y-Yc)
2
Isleast
,thatis,t
hesum ofsquar
eofdev
iat
ionsoft
heact
ual
andcomput
ed
valuesisleastf
rom thisli
ne.
Thi
smet
hodcanbeusedei
thert
ofi
tast
rai
ghtl
i
net
rendorapar
abol
i
ctr
end.

Ast r
aightli
netrendisr
epr esentedbytheequat
ionYc=a+bxwher existheti
mefact
or
(
transformed),Ycdenotest hetr
end(computedvalues)todist
inguishthem fr
om t
heactualY
val
ues, aisthey-i
ntr
eceptandbr epr
esent
stheslopeoft heli
neort heamountofchangeinthe
Yv ar
iablethati
sassociatedwi t
hachangeofoneuni tinXv ari
able.

Not
ethatt
heXv
ari
abl
erepr
esent
sti
me.

Thev
aluesofaandbar
eobt
ainedf
rom t
hef
oll
owi
ngt
wonor
mal
equat
ions:

∑Y=Na+b∑X Wher
eNi
sthenumberofobser
vat
ions
2
∑XY=a∑X+b∑X

Thevar
iabl
eXcanbemeasur
edfr
om anyti
meinoriginsuchasthefi
rsty
earbutt
osi
mpl
i
fy
cal
cul
ati
ons,t
hemi
dpoi
nti
ntimei
stakenastheor
igin.Sincei
nthi
scasethe∑X=0,
2
∑XY=b∑X

̅ ∑XY
∑Y=NaSot
hata=Y andb= 2
∑X

Exampl
e

Bel
ow,
giv
enar
ethef
igur
esofpr
oduct
ioni
nmi
l
li
onsoft
onnesofasugarf
act
ory
.

Year Product
ioni
n
‘
000000
tonnes

2002 80

2003 90

2004 92

2005 83

2006 94

2007 99

2008 92

a)Fi
tast
rai
ghtl
i
net
rendt
othi
sdat
a

b)Pl
ott
hesef
igur
esonagr
aphandshowt
het
rendl
i
ne

c) Est
imat
ethel
i
kel
ypr
oduct
ioni
nthef
act
orydur
ing2009.
Sol
uti
on

X Y XY X2 Yc

-
3 80 -
240 9 84

-
2 90 -
180 4 86

-
1 92 -
92 1 88

0 83 0 0 90

1 94 94 1 92

2 99 198 4 94

3 92 276 9 96

∑X ∑Y ∑XY ∑X 2

=0 =630 =56 =28

∑Y=Na+b∑X,
630=7a

⇒a=90
2
∑XY=a∑X+b∑X

56=28b,
⇒b=2

Si
nceYc=a+bx,
thenYc=90+2x
Whenaparaboli
ctrendistobefit
ted,weneedanequat
ionoftheform Yc=a+bx+cx2.When
thenumer
ical
valuesoftheconstantsa,
b,
chavebeenderi
ved,thet
rendv al
uef
oranyy
earcan
becomputedbysubstit
uti
ngintheequati
ontheval
ueofXf ort
hatyear.

Thev
aluesofa,
b,
ccanbeobt
ainedbysol
vi
ngt
hef
oll
owi
ngt
hreenor
mal
equat
ions
si
mult
aneousl
y:
2
∑Y=Na+b∑X+c∑X
2 3
∑XY=a∑X+b∑X +c∑X
2 2 3 4
∑YX =a∑X +b∑X +c∑X
3
Whent
het
imeor
igi
nist
akenast
hemi
ddl
eyear
,∑Xand∑X isequal
tozer
o.
2
∑Y=Na+c∑X
2
∑XY=b∑X
2 2 4
∑YX =a∑X +c∑X

∑XY c∑X2
∑Y-
2
∑YX- a∑X2
Ther
efor
eb= 2 ,a= ,
c= 4
∑X N ∑X

Exampl
e

Thepr
iceofacommodi
tydur
ing2003t
o2008i
sgi
venbel
ow.

a)Fi
tapar
abol
a,Y=a+bx+cx2t
othi
sdat
a

b)Est
imat
ethepr
iceoft
hecommodi
tyf
ort
hey
ear2007

Year Pr
ice

2003 100

2004 107

2005 128

2006 140

2007 181

2008 192

Sol
uti
on

Year X Y XY X2 X3 X4 X2Y
2003 -
2 100 -
200 4 -
8 16 400

2004 -
1 107 -
107 1 -
1 1 107

2005 0 128 0 0 0 0 0

2006 1 140 140 1 1 1 140

2007 2 181 362 4 8 16 724

2008 3 192 576 9 27 81 1728

Tot
al 3 848 771 19 27 115 3099

2
∑Y=Na+b∑X+c∑X
848=6a+3b+19c
2 3
∑XY=a∑X+b∑X +c∑X
771=3a+19b+27c
2 2 3 4
∑YX =a∑X +b∑X +c∑X
3099=19a+27b+115c
6a+3b+19c=848
3a+19b+27c=771
19a+27b+115c=3099

Theaugment
edmat
ri
xi
(
6 3 19 a
|) ( )
848
s 3 19 27 b = 771
19 27 115c 3099

ByKr
amer
’sr
ule,
thedet
ermi
nanti
sgi
venas

|6 3 19
|
D= 3 19 27 =6(
19 27 115
1456)
-3(
-168)+19(
-280)=3,
920

| 848 3 19
|
Da= 771 19 27 =496,
3099 27 115
496

D 496496
a= a = =126.
6571
D 3920
 |6 848 19
|
Db= 3 771 27 =70,
19 3099 115
728

D 70728
b= b = =18.
04286
D 3920

|6 3 848
|
Dc= 3 19 771 =7,
19 27 3099
000

D 7000
c= c = =1.
7857
D 3920

Yc=a+bx+cx2

Yc=126.
6571+18. 7857x2
0429x+1.

Ther
efor
e,t
hepr
iceofcommodi
tyi
nyear2007i
s

126. 0429(
6571+18. 2)+1.
7857(
2)2
=169.
8856

i
v) Met
hodofMov
ingAv
erages
Whenat r
endist obedet
erminedbythemethodofmovingaverages,theaverageval
ueofa
numberofyearsormonthsorweeksissecuredandt
hisaver
agei stakenast henormal
ortrend
val
uefortheunitoft
imefal
li
ngatthemiddl
eoftheperi
odcov eredi
nt hecalcul
ati
onofthe
aver
age.

Remar
ks:
 Theeff
ectofaveragi
ngistogiv
easmoothercurv
elesseni
ngtheinfl
uenceof
fl
uct
uati
onsthatpull
theannualfi
gur
esawayfr
om thegeneral
trend.
  I
tisnecessar
ytoselectaper
iodofmov i
ngaver
agesuchas3-
year
lymovingaverage,
6-
y
earl
ymov ingaver
age,8-y
ear
lyetc.t
hisi
stobedeci
dedinl
i
ghtoft
helengthofthecycl
e.

 I
fthecyclesint
hedat
aarenotofuni
formlengt
h,t
akeamov
ingav
erageper
iodequal
to
orsl
ight
lygreat
ert
hantheav
erageperi
odofthecycl
e.

 I
ftheperiodoft hemovingaveragei seven,
say4or6, t
hemov i
ngtotalandaverage
whichareplacedatthemi ddl
eoft het i
mespanf r
om whichtheyarecomput edfall
betweentwot i
meperi
ods.Inthiscase, wesynchr
oni
zemov i
ngaveragesandt he
ori
ginal
dat abycenter
ingwhichinv olv
estaki
ngat woperiodmov i
ngav erageofthe
mov i
ngav erages.

Exampl
e

Cal
cul
atethe5yearl
ymov i
ngaver
ageand7yearl
ymovingaver
agefort
hefol
lowingdataofa
numberofcommercial
indust
ri
alf
ail
uresi
nacountr
yduri
ng1993to2008.Pl
otthegraphof
numberoffai
l
uresagai
nstti
me.

Year Numberof
f
ail
ures

1993 23

1994 26

1995 28

1996 32

1997 20

1998 12

1999 12

2000 10

2001 9

2002 13

2003 11

2004 14

2005 12

2006 9

2007 3

2008 1
Sol
uti
on

Year Numberof 5year 5year 7yearmov

ing 7year
f
ail
ures movingt
otal moving tot
al moving
av
erage av
erage

1993 23 - - - -

1994 26 - - - -

1995 28 129 25.

8≈26 - -

1996 32 118 23.

6≈24 153 21.
86

1997 20 104 20.

8≈21 140 20.
0

1998 12 86 17.
2≈17 123 17.
57

1999 12 63 12.
6≈13 108 15.
43

2000 10 56 11.
2≈11 87 12.
43

2001 9 55 11.
0≈11 81 11.
57

2002 13 57 11.
4≈11 81 11.
57

2003 11 59 11.
8≈12 78 11.
14

2004 14 59 11.
8≈12 71 10.
14

2005 12 49 9.
8≈10 63 9.
0

2006 9 39 7.
8≈8 - -

2007 3 - - - -

2008 1 - - - -

MEASUREMENTOFTRENDBYLOGARI
THM

Trendsmayal sobepl ottedonasemi

-logari
thmi
ccharti
nthef
orm ofstr
aightl
ineoranon-
l
inearcurve.Astrai
ghtlineonasemi-
logari
thmicchar
tshowsthei
ncreaseony -
val
uesofti
me
seri
esataconst antratewhereasast
raightli
neonanari
thmet
icchar
tindicat
esanincr
easeina
constantamount.

Wheniti
sanonl
inearcurveonthesemi-l
ogar
it
hmi
cchar
tanupwar
dcur
veshowst
hei
ncr
ease
atv
ary
ingrat
esdependingontheslope.
Ty
pesoft
rendscomput
edbyl
ogar
it
hms
Ty
pesoft
rendsar
e:

Exponent
ialt
rends
x
Theequat
ionoft
heexponent
ial
cur
vei
soft
hef
orm Y=ab.Put
ti
ngt
heequat
ioni
nlogar
it
hmi
c
for
m,wegetlogY=loga+x l
ogb

Toobt
aint
hev
aluesofaandb,
thet
wonor
mal
equat
ionst
obesol
vedar
e:

∑l
ogY=Nl ogb∑x………….
oga+l .(
i)

ogy=l
∑xl ogb∑x2………….
oga∑x+l .(
ii
)

Whent
hedev
iat
ionsar
etakenf
rom t
hemi
ddl
eyear
,∑x=0t
hisi
mpl
i
est
hat

∑l oga………….
ogY=Nl (i
ii
)

∑xl ogb∑x2…….
ogy=l .(
iv)

∑l
ogY ∑xlogy
⇒l
oga= andl
ogb= 2
N ∑x

Now,taket
heant
il
ogoft
hesel
ogv
aluest
oobt
aint
hev
aluesofaandbandgett
heact
ual
trend
val
ues.

Exampl
e

Thesal
esofacompanyin‘000000ofshi
ll
i
ngsfrom 2002t
o2008ar
egi
venbel
ow.Est
imat
ethe
x
sal
esfi
gur
esfor2011usi
nganequationofthef
orm ofY=ab.

Year Sal
es

2002 32

2003 47

2004 65

2005 92

2006 132

2007 190

2008 275

Sol
uti
on

Year Sal
es(
Y) X X2 l
ogY Xl
ogY
2002 32 -
3 9 1.
5051 -
4.5154

2003 47 -
2 4 1.
6721 -
3.3442

2004 65 -
1 1 1.
8129 -
1.8129

2005 92 0 0 1.
9638 0

2006 132 1 1 2.
1206 2.
1206

2007 190 2 4 2.
2788 4.
5575

2008 275 3 9 2.
4393 7.
3180

Tot
al 0 28 13.
7926 4.
3237

∑l
ogY ∑xlogy
Weuset
heequat
ionsl
oga= ,ogb=
l 2 si
nce∑x=0
N ∑x
13.
7926
oga=
l =1.
97
7
4.
3237
ogb=
l =0.
1544
28

Ther
efor
elogY=1.
97+0.
1544x

Fory
ear2011:
x=6,
logY=1. 1544(
97+0. 6)=2.
8965

Y=ant
il
og2.
8965=787.
966

Sal
esi
nyear2007i
s787.
966×1000000=shs.787965000

Exampl
e

Gi
venthedat
abelow,
obt
aint
het
rendv
aluesandest
imat
eval
ueofY i
nyear2011usi
ngt
rend
l
ogar
it
himicmet
hod.

Year Y

2003 64

2004 70

2005 75

2006 82

2007 88

2008 95
Sol
uti
on

Year Y X X2 l
ogY Xl
ogY

2003 64 -
2 4 1.
8062 -
3.6124

2004 70 -
1 1 1.
8451 -
1.8451

2005 75 0 0 1.
8751 0

2006 82 1 1 1.
9138 1.
9138

2007 88 2 4 1.
9445 3.
8896

2008 95 3 9 1.
9777 5.
9332

Tot
al 3 19 11.
3624 6.
2791

x
Y=ab
l
ogy=l
oga+xl
ogb

∑l
ogY=Nl
oga+l
ogb∑x

ogy=l
∑xl ogb∑x2
oga∑x+l
11.
3624=6l
oga+3l
ogb
6.
2791=3l
oga+19l
ogb

Sol
vi
ngt
het
woequat
ionssi
mul
taneousl
y,wegetl
ogb=0.
034166andl
oga=1.
87665.

Ther
efor
elogy=1.
87665+0.
034166x

Fory
ear2011,
x=6

l
ogy=1. 034166(
87665+0. 6)=2.
081646

Ther
efor
ey=120.
68297

Seconddegr
eecur
vesf
it
tedt
ologar
it
hms
Whendataispl
ott
edonsemi-logari
thmicchar
t,i
tmaycont
inuetoshowcur
vatur
ebeing
concav
eupwardsordownwards.Insuchcases,wemayfi
tseconddegr
eecurv
estothelogofY
val
uesusi
ng

ogY=l
l ogb+x2l
oga+xl ogc

Bychoosi
nganar
bit
rar
yor
igi
n,weobt
ain
∑l
ogy
=Nl
oga+l ogc∑x2
ogb∑x+l

∑xl =oga∑xl
ogyl ogc∑x3
+ogb∑x2+l
2
∑xl ogb∑x3+l
oga∑x2+l
ogy=l ogc∑x4

Wet
hensol
vesi
mul
taneousl
yfora,
bandc.

2.MEASUREMENTOFSEASONALVARI
ATI
ONS

Ther
ear
efourmai
nmet
hodsofmeasur
ingseasonal
var
iat
ions:

i
) Met
hodofsi
mpl
eav
erages

i
i
) Rat
iot
otr
endmet
hod

i
i
i) Rat
iot
omov
ingav
eragemet
hod

i
v) Li
nkr
elat
ivemet
hod

i
) Met
hodofsi
mpl
eav
erages
St
ep1:
Arr
anget
heunadj
ust
eddat
abyy
ear
sandmont
hsorquar
ter
sifquar
ter
lydat
aar
egi
ven.

St
ep2:
Findt
otal
sforJanuar
y,Febr
uar
y,Mar
ch,
….et
c.

St
ep3:
Div
ideeacht
otal
byt
henumberofy
ear
sforwhi
chdat
aar
egi
ven.

Step4:
Obt
ainanav
erageoft
hemont
hlyav
eragesbydi
vi
dingt
het
otal
oft
hemont
hlyav
erages
by12.

Step5:Taki
ngtheav
erageoft
hemonthl
yav
eragesas100,
comput
etheper
cent
ageoft
he
vari
ousmonthl
yaver
agesasfol
lows:

monthl
yaver
agef
orJanuary
Seasonal
indexf
orJanuar
y= ×100%
av
erageoft
hemont
hlyaver
ages

Exampl
e

Cal
cul
atet
heseasonal
indi
cesf
rom t
hedat
abel
ow:

Year Jan Feb Mar

ch Apr
il May June Jul
y August Sept Oct Nov Dec

2004 318 281 278 250 237 216 223 245 269 302 325 347

2005 342 309 299 268 249 236 248 262 288 321 342 364

2006 367 328 320 287 269 251 259 284 309 345 367 394

2007 392 349 342 311 290 273 282 305 328 364 389 417

2008 420 378 370 334 314 296 305 330 356 396 422 452
Sol
uti
on

Year Monthly 5years

t
otalfor monthl
y
Mont
h 2004 2005 2006 2007 2008 Seasonal
5years average
i
ndex

Januar
y 318 342 367 392 420 1839 367.
8 116.
098

Febr
uar
y 281 309 328 349 378 1645 329.
0 103.
851

Mar
ch 278 299 320 342 370 1609 321.
8 101.
578

Apr
il 250 268 287 311 334 1450 290.
0 91.
540

May 237 249 269 290 314 1359 271.

8 85.
795

June 216 236 251 273 296 1272 254.

4 80.
303

Jul
y 223 242 259 282 305 1311 262.
2 82.
765

August 245 262 284 305 330 1426 285.

2 90.
025

Sept
ember 269 288 309 328 356 1550 310.
0 97.
854

Oct
ober 302 321 345 364 396 1728 345.
6 109.
091

Nov
ember 325 342 367 389 422 1845 369.
0 116.
477

December 347 364 394 417 452 1974 394.

3 124.
621

Average Av
erage Av
erage
=1584 =316. 8 =99.998

monthl
yav
eragef
orthatmont
h
Seasonal
indexf
oranymont
h= ×100%
aver
ageofthemonthl
yaver
ages

i
i
) Rat
iot
otr
endmet
hod
Thisisal
socal
ledtheper
centaget
otrendmethod.Themet hodassumesthatseasonal
vari
ati
onforagiv
enmonthisaconstantfr
act
ionoftrend.Thi
smet hodi
sol
atestheseasonal
fact
orsinthef
oll
owingmonth.

T×S×C×I
Tr
endiseli
minat
edwhenther
ati
osarecomput
edinef
fect =S×C×Iwher
eTi
str
end,
S
T
i
sseasonal
,Ciscycl
i
candIst
andsfori
rr
egul
ar.

Themet
hodi
s:
St
ep1:
Trendv
aluesar
eobt
ainedbyappl
yi
ngt
hemet
hodofl
eastsquar
es.

Step2:Di
videt
heor
igi
nal
dat
amont
hbymont
hbyt
hecor
respondi
ngt
rendv
aluesandmul
ti
ply
theser
ati
osby100.

Step3: Tofr
eethevaluesfr
om ir
regul
arandcycl
i
cal
mov ement
s,thefi
guresgi
venforvar
ious
yearsforJanuar
y,Februar
y,et
c.areaver
agedusi
nganyoneoftheusualmeasureofcent
ral
tendency.

Step4:Theseasonali
ndexforeachmonthi
sexpr essedasapercent
ageoft heav
eragemonth.
Thesum ofthetwelv
ev al
uesmustbeequalto1200or100%.I fi
tdoesnot,anadj
ustmenti
s
1200
madebymul ti
ply
ingeachindexbyasui
tabl
efactor ×100%togivet
he
sum oft
he12values
seasonali
ndex.

Exampl
e

Fi
ndseasonal
var
iat
ionbyr
ati
otot
rendmet
hodf
rom t
hedat
agi
venbel
ow:

Year 1st 2ndquar

ter 3rdquar
ter 4thquar
ter
quart
er

2004 30 40 36 34

2005 34 52 50 44

2006 40 58 54 48

2007 54 76 68 62

2008 80 92 86 82

Sol
uti
on

Fordet
ermi
ningseasonalv
ariati
onbyrat
iot
otrendmet
hod,
fir
stwedet
ermi
net
het
rendv
alues
fory
earl
ydat
aandt henconverti
ttoquar
ter
lydata

Year Yearl
y Year
ly Devi
ati
ons Tr
endv
alues
tot
al av age(
er Y) fr
om mid-
year
Yc=a+bx
(X)
XY X2

2004 140 35 -
2 -
70 4 32

2005 180 45 -
1 -
45 1 44

2006 200 50 0 0 0 56

2007 260 65 1 65 1 68

2008 340 85 2 170 4 80

 ∑Y=280 ∑X=0 ∑XY ∑x= 2

=120 10

Si
nce
∑Y ∑XY
∑X=0,
a= =56,
b= 2 =12t
her
efor
eYc=56+12x
N ∑x

Thebr
epr
esent
sthey
ear
lyi
ncr
eament
,hencet
hequar
ter
lyi
ncr
eamenti
s3.

Thequar
ter
lyt
rendv
aluesar
easf
oll
ows:

Year 1stquar
ter 2ndquar
ter 3rdquar
ter 4thquar
ter

2004 27.
5 30.
5 33.
5 36.
5

2005 39.
5 42.
5 45.
5 48.
5

2006 51.
5 54.
5 57.
5 60.
5

2007 63.
5 66.
5 69.
5 72.
5

2008 75.
5 78.
5 81.
5 84.
5

30
Cal
cul
ati
ngt
heseasonal
indi
cese.
g. ×100%=109.
1
27.
5

Year 1stquar
ter 2ndquar
ter 3rdquar
ter 4thquar
ter

2004 109.
1 131.
1 107.
5 93.
1

2005 86.
1 122.
4 109.
9 90.
7

2006 77.
1 106.
4 93.
9 79.
3

2007 85.
0 114.
3 97.
8 85.
5

2008 106.
0 117.
1 105.
5 97.
0

Tot
al 463.
9 591.
3 514.
6 445.
6

Av
erage 92.
78 118.
26 102.
92 89.
12

403.
08
Theav
eraget
otal
is403.
08,
theav
eragei
s =100.
77
4
Nowt
heseasonal
indi
cesadj
ust
mentar
e:

92.
78
1stquar
ter
= ×400=23.
02
403.08
118.
26
2ndquar
ter
= ×400=29.
34
403.
08
102.
92
3rdquar
ter
= ×400=25.
53
403.
08
89.
12
4thquar
ter
= ×400=22.
11
403.08

i
i
i) Rat
iot
omov
ingav
eragemet
hod
Al
soknownast
heper
cent
ageofmov
ingav
eragesmet
hod.

Step1:El
i
mi nateseasonal
it
yfr
om t
hedatabyi
roningi
toutfr
om theori
ginal
dat
a.Thi
scanbe
achi
evedfrom acentered12mont
hmov i
ngaverageoracent
ered4-quar
termovi
ngaver
agei
n
caseofquarter
lydata.

St
ep2:Expr
esst
heor
igi
nal
dat
aforeachmont
hasaper
cent
ageoft
hecent
ered12mont
h
movi
ngaver
age.

St
ep3: Di
vi
deeachmont
hlyit
em oft
heori
ginal
dat
abythecorr
espondi
ng12monthmov i
ng
av
erageandli
stt
hequot
ientasaper
cent
ageofmov i
ngaver
ages.Thi
seli
minat
est
rendand
cy
cles.

St
ep4:Averagetoel
imi
nat
etheirr
egularvar
iat
ions.Henceweuset
hemedi
anormeanasan
av
erageandobtai
nthet
ypi
calseasonalrel
ati
veforeachmonth.

Step5:ift
het
otalisnot12000r100%anadjust
mentismadetoel
i
minat
ethedi
scr
epancy
.Thi
s
consist
sofmult
ipl
y i
ngaverageofeachmont
hobtai
nedi
nstep4by
1200
total
ofthemodifi
edmeanof12mont hs

Exer
cise

Thet
abl
ebel
owshowst
our
ist
swhov
isi
tedFor
tJesusbet
ween1981and1983gi
venpermont
h

Mont
h 1981 1982 1983

Januar
y 90 100 110

Febr
uar
y 85 89 93

Mar
ch 70 74 78

Apr
il 60 62 66
May 55 55 58

June 45 47 40

Jul
y 30 30 35

August 40 43 45

Sept
ember 70 65 72

Oct
ober 120 127 130

Nov
ember 115 118 118

December 118 120 124

Hint:
arr
angethecol
umnsasf ol
lows,Year/month,numberoftouri
sts,
12-monthmovingtotal
,
12-monthmovingav
erage,centeredmonthmov i
ngaver
ageandt henpercent
ageof12-month
numberoftour
ist
s
mov i
ngaver
agewhichwill
begi venby .Theval
ueswillbe
center
edmont hmov i
ngaverage
betweenJul
y1981andJuly1983.

i
v) Li
nkr
elat
ivemet
hod
Step1:Cal
cul
atethel
inkrel
ati
vesoft
heseasonal
figur
es.Li
nkr el
ati
vesar
ecal
cul
atedbydivi
de
thefi
guref
oreachseasonbythefi
gurei
ntheimmediatel
yprecedi
ngseasonandmulti
plyby
100.

St
ep2:Calculatet
heaver
ageofthel
inkr
elat
ivef
oreachseason.Wecanei
theruset
he
ar
it
hmeti
cav erageort
hemedian.Medi
anisbett
er.

St
ep3:
Nowconv
ertt
heseav
eragesi
ntot
hei
rchai
nrel
ati
vesont
hebaseoft
hef
ir
stseason.

St
ep4:
Cal
cul
atet
hechai
nrel
ati
veoft
hef
ir
stseasonont
hebaseoft
hel
astseason.

Step5: Forcorrecti
on,thechai
nr el
ati
veofthefi
rstseasoncal culat
edbyt hefi
rstmethodis
deductedf r
om t hechai
nr el
ati
veofthefi
rstseasoncalculatedbyt hesecondmet hod.The
di
fferenceisdi v
idedbyt henumberofseasons.Ther esult
ingfigureist
henmul ti
pli
edby1,2,
3…
nd rd t
h
i
sdeduct edr especti
vel
yf r
om thechainr
elati
vesofthe2 , 3, 4 …..
seasons.Thesearethe
correctchainrelat
ives.

St
ep6:
Expr
esst
hecor
rect
edchai
nrel
ati
veasaper
cent
ageoft
hei
rav
erages.

Exampl
e

Applythemet
hodofl
i
nkr
elat
ivet
othef
oll
owi
ngquar
ter
lydat
aandcal
cul
atet
heseasonal
i
ndices.
 2004 2005 2006 2007 2008

1 6.
0 5.
4 6.
8 7.
2 6.
6

2 6.
5 7.
9 6.
5 5.
8 7.
3

3 7.
8 8.
4 9.
3 7.
5 8.
0

4 8.
7 7.
3 6.
4 8.
5 7.
1

Sol
uti
on

Year Quar
ter

1 2 3 4

2004 - 108.
3 120.
0 111.
5

2005 62.
1 146.
3 106.
3 86.
9

2006 93.
1 95.
6 143.
1 68.
8

2007 112.
5 80.
6 129.
2 113.
3

2008 77.
6 110.
6 109.
6 88.
8

Ar
ithmetic
av
er age
86.
35 108.
28 121.
66 93.
86

Chai
nrel
ati
ve 100 108.
28×100 121.
66×108.
28 93.
86×131.
73
=108.
28
100 100 100
=131.
73 =123.64

Corr
ected 100 108.
28-
1.69=106.
59 131. (
73- 69)=128.
2×1. 123.
64-( 69)
3×1.
chai
nrelat
ive 35 =118.57

Seasonal
index 100 106.59 128.
35 118.
57
×100=94.
00 ×100=113.
21 ×100=104.
60
113.4 113.4 113.4

Thecor
rect
ionf
act
orhasbeencal
cul
atedasf
oll
ows:

1.Thechai
nrel
ati
veoft
hef
ir
stquar
tercal
cul
atedont
hebasi
soft
hef
ir
stquar
ter=100

2.Chai
nrel
ati
veoft
hef
ir
stquar
tercal
cul
atedont
hebasi
soft
hel
astquar
ter
.

86.
35
i
) ×100=100
86.
35
 86.35
i
i
) ×123.
64=106.
76314
100
6.
76
106.
76-
100=6.
76, =1.
69
4

3.Theseasonal
var
iat
ioni
ndi
ceshav
ebeencal
cul
atedasf
oll
ows

106.
59+128.
35+118.
57
=113.
3775≅113.
4
4

SI
MPLEDESCRI
PTI
VEMETHODSOFANALYSI
S

I
nstati
sti
cs,random sampli
ngprocedur
esenableust
oobt ai
nrepl
i
cat
edobser
vat
ionsunder
i
denti
calconditi
ons.Theseobser
vati
onsshoul
dbeindependent
.

Bycont
rast
,int
imeseri
esanal
ysi
swearefocusedwi
thonl
yasi
ngl
eobser
vat
ionateachpoi
nt
i
ntimeandobserv
ati
onswhichar
edependent
.

I
nordert
odevel
opinf
erenti
alprocedur
es,
wer
ecr
eat
eanot
ionofr
epl
i
cabi
l
ity
.Thi
sisachi
eved
byt
heassumpti
onofstat
ionari
ty.

STATI
ONARI
TY

Loosel
yspeaki
ng,at
imeseriesi
sstat
ionaryi
fther
eisn’
tsy
stemati
cchangeinmean(notr
end)
,
Ift
herei
snosystemat
icchangeinv
arianceandifst
ri
ctl
yperi
odi
cvari
ati
onshavebeenr
emoved.

From thi
sdef i
nit
ion,i
timpl
iesthattheti
meser i
eswil
lbenon-st
ationaryi
fitcont
ainstr
end,
seasonali
ty,
cy cl
iceff
ectsoracombi nat
ionofthesecomponents.Theref
oretochangeanon-
stat
ionar
ypr ocessintoastat
ionaryone,thecomponent
scausingt henon-
stati
onari
tymustbe
removed.

Mat
hemat
ical
l
y,wecanwr
it
eat
imeser
iesXtf
ort=1,
2,
3,
…,ni
ssai
dtobest
ati
onar
yif

E[Xt]=μ andVar(Xt)=σ2 ∀tie.Xtatti

sst
ati
onar
yift
her
eisnosy
stemat
icchangei
nvar
iance
andt heper
iodi
cvari
ati
onshavebeenr emov
ed.

Amodelforst
ati
onar
yti
meseri
esisgiv
enbyXt=μ+εt; t=1,2,
3,….Wher
eXti
stheact
ual
val
ue
oft
imeseri
esatti
metandμistheunderl
yi
ngav
eragel
eveloftheseri
es.

εi
sar
andom v
ari
abl
erepr
esent
ingi
rr
egul
arf
luct
uat
ionsar
oundt
heav
erageatt
imet
.

Thenatur
eoftheerr
orterms/irr
egularmov ement
sεtdependsonthespeci
ficti
meseri
es.They
maybedependentorindependent.General
l
y ,
themeanval
ueofεt i
sassumedt obe
i
ndependentandi
denti
call
ydistr
ibuted(i
i
d)wi t
hmeanequaltozer
oandv ar
ianceequal
toσ2 .
 hatE[
Supposet εt]=0andVar(
εt)=σt2,
thent
het
imeser
iesi
sdependent
.

Ther
ear
etwomai
nfor
msofst
ati
onar
it
y:

i
) St
ati
onar
it
yint
hest
rongorst
ri
ctsense

i
i
) St
ati
onar
it
yint
heweaksense

1.St
ati
onar
it
yint
hest
rongsense

Theser
iesf
orwhi
cht
hepr
obabi
l
itydi
str
ibut
ionofXt,
Xt,
Xt,
…,Xtni
sthesameast
hepr
obabi
l
ity
1 2 3
di
str
ibut
ionofXt ,
Xt ,
Xt ,
…,Xt f
oranyf
ini
tesetofi
nteger
st ,,,
tt…,
1 2 3
t
n
andf
oral
lhi
scal
l
ed
1+h 2+h 3+h n+h
st
ati
onar
yint
hest
rongsense,
thati
s,

F(
Xt,
1
Xt,
Xt,
2
…,Xtn)=F(
3
Xt ,
Xt ,
Xt ,
…,
1+h
Xt
2+h 3+h
)∀{t1,,,
n+h
t t…,
2 3 n}
t

I
fn=1(
onl
yoner
andom v
ari
abl
e)F(
, Xt)=F(
Xt+h)whi
chi
mpl
i
est
hatt
hepr
obabi
l
itydi
str
ibut
ion
ofthepr
ocessdoesnotchangewi
tht
imeE(
Xt)=μandVar
(Xt)=σ2bot
hconst
ant
swhi
chdonot
dependont.

2.St
ati
onar
it
yint
heweaksense

Aprocessissaidtobestati
onar
yint
heweaksensei
fit
smeani
sconst
antandi
tsaut
o-
cov
ariancefunct
iondependsonl
yonthel
og.

Mathemati
cal
l
y,et{
l Xt:
t ±2……}or{
=0,±1, X()
t;
t∈T}bet
hegi
vent
imeser
ies,
thent
imeser
iesXtor
X(
t)issai
dtobeweakl
ystati
onar
yif
:

a)I
tsmeanE(
Xt)orE[
X()
t]i
sconst
antoraf
unct
ioni
ndependentoft
ime

b)I
tsaut
o-covari
ancef
unctonσ(
i h)=Cov( Xt+h)i
Xt, sindependentofti
mebutt
hef
unct
ion
ofhonly,wherehisthedi
stancebet
weenthev ariabl
es(cal
ledlog)

c) Bot
hmeanandaut
o-cov
ari
ancef
unct
ionsar
efi
nit
e.

St
ati
onar
it
yint
heweaksensehasf
ourcases,
thati
s,

i
) E(Xt)i
sconst (
antandVarXt)i
snotconst
ant
.Her
ethepr
edi
cti
onsar
enotr
eli
abl
eor
accurate.

i
i
) E(
Xt)i
snotconst (
antandVarXt)i
sconst
ant
,her
etheti
meseri
esi
sweakl
yst
ati
onar
y
i
nvari
ancebutnoti
nmean.Predi
cti
onsher
eareunr
eli
abl
e.

i
i
i) hE(
Bot Xt)andVar
(Xt)ar
enotconst
ant
,theser
iesi
snotst
ati
onar
yatal
l
.

i
v) hE(
Bot Xt)andVar
(Xt)ar
econst
ant
,thepr
edi
cti
onsher
ear
eaccur
ate.
 Exer
cise

- Def
inet
het
erm st
ati
onar
it
y.

- Dist
ingui
shbet
weenst
ati
onar
it
yint
hest
rongsenseandst
ati
onar
it
yint
heweak
sense.

Exampl
e1

Let{Xt:
t=0,±1,±2……}beasequenceofi
ndependentr
andom v
ari
abl
eswi
thmeanμandv
ari
ance
2
σ, i
sthepr ocessstat
ionar
y?

Sol
uti
on

E[
Xt]=μ whi
chi
ssupposedt
obeconst
ant

h)=Cov(
σ( Xt+h)=E[
Xt, XtXt+h]
-E[ E[
Xt] Xt+h]

Cov(
Whenh=0; Xt)=E[
Xt, XtXt]
-E[
Xt][
EXt]

=E[
Xt2]
-(E[
Xt]
)2

=Var(
Xt)=σ2

σ(
h)= {
σ2,
0,
h=0
h≠0
Recal
lσ(
: h)=Cov( Xt+h)=E[
Xt, XtXt+h]
-E[ E[
Xt] Xt+h]
.Cl
ear
ly,
themeanandv
ari
ancear
eindependent
ofti
meandarefi
nit
ehencest ati
onar y.

Exampl
e2

Lettheti
meseriesbegivenbyXt=Xt-1+εtwher
ethesequenceεt i
sasequenceof
uncorr
elat
edrandom vari
abl
eswit
hmeanμandwi t
hXo=0( arandom walk)
.Showthatt
het
ime
seri
esisnon-
stati
onar
y .

Sol
uti
on

Xo=0

X1=Xo+ε1=0+ε1=ε1

X2=X1+ε2=ε1+ε2

X3=X2+ε3=ε1+ε2+ε3

X4=X3+ε4=ε1+ε2+ε3+ε4

Gener
all
y,Xt=∑t
i
ε
=1 i

Xt]=E[
E[ ∑t
i=1 i] ∑
ε = t=1 [i]
i
Eε
 =∑t
i
=1
μ

=t
μwhi
chdependsonthencenonst
ati
onar
y.

Exampl
e3

Gi
venthatXt=μ+σtεtwhi
chεthavi
ngmeanzer
oanduni
tvar
ianceandσtwhi
chv
ari
eswi
th
t
ime.Fi
ndoutift
heseri
esisst
ati
onary
.

Sol
uti
on

Xt=μ+σtεt

E[
εt]=0andVar[
εt]=1

E[
Xt]=E[
μ+σtεt]

μ]+E[
=E[ σtεt]

=μ+σtE[
εt]

=μ+σt(
0)=μwhi
chi
sconst
ant

Var[
Xt]=Var[
μ+σtεt]

μ]+Var[
=Var[ σtεt]

=0+σt2Var[
εt]=0+σt2(
1)

=σt2 whi
chdependsont
ime,
hencenonst
ati
onar
y.

AUTO-
COVARI
ANCEANDAUTO-
CORRELATI
ON

1.Aut
o-cov
ari
ance

Themeanf
unct
ionofapr
ocessXtt sμt=E[
hati Xt]

Theaut
o-cov
ari
ancef
unct
ioni Xt)=E[
sCov( XtXt+h]
-E[ E[
Xt] Xt+h]

WhenXti
sst
ati
onar
y,t
hesef
unct
ionst
akesi
mpl
efor
ms:

a)Themeanoft
het
imeser
iesi
saconst
ant
,thati
s,μt=μ

b)Theauto-
covar
ianceofanypai
rofel
ement
sofXt andXt+hdependsonl
yont
hedi
stance
hbetweentheelement
s.

Def
ini
ti
on:
Theaut o-cov
ari
ancef
unction{σ(
h)h∈Z}ofast
: at
ionar
yrandom pr sσ(
ocessXti h)=Cov
( Xt+h)
Xt, .Thecommonv ar
ianceoftheel
ementsofastati
onarypr
ocessi
sgivenby
σ(0)=Cov( Xt)=σ2.Whenapr
Xt, ocessi
snon-stat
ionary,
itsaut
o-cov
ari
ancefunct
ionwil
l
dependonti
metandl edbyσ(
oghdenot h,)
t.Howev er
,oneofthemainusesofauto-
covar
iancef
unct i
oni
st odet
ermi
nethetypeofprocessthatwouldbeusedtomodel a
 gi
vensetofdat
a.

2.Aut
o-cor
rel
ati
onf
unct
ion

Theauto-
covar
iancefunct
ioni
saff
ect
edbyunit
sofmeasur
ement.Wecanmaket hi
squant
it
y
i
ndependentonunit
sofmeasurementbydef
ini
ngadi
mensionl
essquant
it
y,t
heauto-
cor
rel
ati
on
funct
ion(
ACF)givenby

σ(
h)
ρ(
h)=
σ(
0)

Not
e:

Theauto-
covar
ianceandauto-
cor
rel
ati
onfunct
ionsofastat
ionar
ypr
ocesshav
eone
i
mportantpr
operty,
thati
s,t
heyar
eevenfuncti
onsofloghie,

σ(
h)=σ(
-h)
ρ(
h)=ρ(
-h)

Pr
oof
Becausetheaut
o-cov
ari
ancef
unct
iondoesn’
tdependont
imebutonl
yonl
ogh,
wehav
eby
defi
nit
ion

h)=Cov(
σ( Xt+h)
Xt,

=Cov( Xt)
Xt-h,

=Cov( Xt-h)=σ(
Xt, -h)

⇒ (
h)=σ(
-h)

Henceσ(
h)i
sanev
enf
unct
ionwhi
chi
ntur
nimpl
i hatρ(
est h)=ρ(
-h)i
sal
soanev
enf
unct
ion.

Thi
sresul
tsal
lowsustoconcent
rat
eonpositi
vel
ogswhenf
indi
ngaut
o-cor
rel
ati
onandaut
o
cov
ari
ancefunct
ionsofst
ati
onar
yprocess.

Sampl
eaut
o-cov
ari
anceandaut
o-cor
rel
ati
onf
unct
ions
Thedefini
ti
onsofauto-
cov
ari
anceandaut
o-cor
rel
ati
onf
unct
ionsgi
venabov
econcer
nthe
processofrandom v
ari e(
abl Xt)
.

Wenowgi vet
hedefi
nit
ionsoft
hesetermswhenwehavethedat
ax1,,,
x2x3…,.
xn Gi
vensomet
ime
ser
iesdat
ax1,,,
x2x3…,,
xn t
hesampleauto-
cov
ari
ancef
unct
ionisgi
venby
 ∑(X-X)(X -X)
n
1 ̅ ̅
R(
h)=
n-
h t t
+h
t
=1

Andt
hesampl
eaut
o-cor
rel
ati
onf
unct
iongi
venby

R(
h)
(
rh)=
R(
0)

( )
2
1 ̅
0)= ∑n
eR(
Wher X- X
n-
1 t=1 t

Theplotoft
hesampl
eauto-
corr
elati
onfunct
ionasaf unct
ionofhi edacor
scal
l rel
ogr
am.Thi
s
usual
l
yshowsthetr
end.Thegeneralt
rendsi
nclude:

1)Random pr
ocess
I
fat
imeser
iesi
scompl
etel
yrandom,
thenf
orl
argent (
henrh)=0f
oral
lnon-
zer
oval
uesofh.

R(
0)
(
r0)= =1
R(
0)
1
Forar
andom pr (
ocessrh)i
snor
mall
ydist
ri
butedwi
thmean0andvar
ianceof .Ther
efor
eifa
n
95 ±2
ti
meseri
esi
sr andom,t
hen val
uesofr(
h)canbeexpect
edt
oli
ebetween
100 n

2)Shor
t-
ter
m cor
rel
ati
on
Stat
ionaryt
imeseri
esoftenlyshowshort-
ter
m cor
rel
ati
onchar act
eri
zedbyaf
air
lyl
argevalue
r(
1)foll
owedbyafewf urt
hercoef f
ici
ent
swhichwhil
egreaterthanzerot
endt
oprogressi
vely
getsmaller
.Val
uesofr(h)forlar
geht endtoappr
oxi
mat ezero.

3)Al
ter
nat
ingser
ies
Ifati
meserieshasatendencytoal
ter
natewit
hsuccessiveobser
vat
ionsondif
fer
entsi
desof
theover
all
mean, t
henthecorrel
ogr
am tendst
oalt
ernate.Thi
scanbemodelledusi
ngsineand
cosi
nefuncti
ons.

4)Non-
stat
ionar
yser
ies
Ifat
imeser
iesi
snon-stat
ionar
y,forexample,
ifi
tcont
ainst
rend,
thent
hev
al (
uesofrh)wi
l
lnot
comedowntozeroexceptforl
argev al
uesofh.

5)Seasonal
var
iat
ions
Not
e:

I
faseri
escontai
nsseasonalf
luct
uat
ions,
thent
hecor
rel
ogr
am wi
l
lal
soexhi
bitan
osci
l
lat
ionatt
hesamef r
equency.

USEOFFI
LTERSI
NTI
MESERI
ESANALYSI
S

I
ntr
oduct
ion

Thetimeseriest
hatyouobtai
ninpracti
cei
snon-st
ationar
y.Toconvertiti
ntoast
ati
onar
y
seri
es,weneedtoeli
minatetr
end.Withdat
acontai
ningseasonali
ty,
it’
sagoodideatost
artby
cal
culat
ingsuccessi
veyear
lyaver
agesortotal
sasthiswil
lprov
ideasi mpl
edescri
pti
onf
orthe
underl
yi
ngtrend.

Ther
ear
ethr
eeway
sofanal
yzi
ngaser
iest
hatcont
ainst
rends:

(
i) Cur
vef
it
ti
ng

(
ii
) Fi
l
ter
ing

(
ii
i) Di
ff
erenci
ng

Weconcent
rat
eonuseofl
i
near
-t
imei
nvar
iantf
il
ter
s.I
fYt,
Yt ar
etheout
putcor
respondi
ngt
o
1 2
Xt,
Xt r
espect
ivel
y,t
hesy
stem i
ssai
dtobel
i
neari
fandonl
yifal
i
nearcombi
nat
ionoft
hei
nput
s
1 2
λ1X +λ2Xt pr
oducest
hesamel
i
nearcombi
nat
ionsoft
heout
put
snamel
yλ1Y +λ2Yt wher
eλ1
t
1 2 t
1 2

andλ2ar
econst
ant
s.

I
fthei
nputXtproducesout
putYt,
thenthesyst
em i
ssaidtobeti
me-invar
ianti
fadel
ayofti
meτ
i
nthei
nputproducesthesamedelayintheout
put(
input
-out
putrel
ati
ondoesnotchange)
.

Al
i
nearf
il
terconv
ert
sonet
imeser
ies{
Xt}i
ntoanot
herser
ies{
Yt}byal
i
nearoper
ator
.

Exampl
e

Let{
Xt:
t ±2……}bet
=0,±1, heobser
vedser
ies.Yt=∑∞
j
=-∞aX-jwher
jt
eaj'
sar
econst
ant
swhi
chdo
notdependont
ime.Yti
sthet
ransf
ormedser
ies.

Consi
dert
hespeci
alcasewher
e

Xt=eiλt⇒cosλt+i
sinλt
λ(
i t
-)
j
Yt=∑∞
j
=-∞aX-j=∑∞
jt j
=-∞ae
j

-
iλj
=∑∞
j
=-∞aeiλt.
j
e
 -
iλj
=eiλt∑∞
j
=-∞ae
j

=eiλt∑∞
j
=-∞a(
j
cosλj
-i
si )
nλj

=eiλt[
∑∞
j ∞a
=- cosλj
j
-∑∞
ij
=-∞asi
j ]
nλj

=eiλt[
A1(
λ)-
iA2(
λ)]say
Whi
chi
sacompl
exnumber
, eA1(
wher λ)=∑∞
j
=-∞a andA2(
cosλj
j
λ)=∑∞
j
=-∞asi
j
nλj

Recal
l
:

Acompl
exnumberz=x+i
ycanbeexpr eiθ
essedasz=r

x=r
cosθandy=r
sinθ

x+i
y=r
cosθ+i
rsi
nθ
(
=rcosθ+i
sinθ)

eiθ
=r

r=|
x+i
y|= x2+y2

an-1
θ=t (xy)whichisphaseangle.
λ)=|
Letg( A1(
λ)-
iA2(
λ)|
= A12(
λ)+A22(
λ)

ϕ( an-1
λ)=t ( ) A2(
λ)
A1(
λ)

NowYt=A(
λ)eiλtwher
eA(
λ)=A1(
λ)-
iA2(
λ)

(
A1(
λ))+(
2
A2(
λ))×e 2 i
t ( )
an-1
A2(
λ)
A1(
λ)

=| | ϕ(
i λ) ϕ(
i λ)
A(λ)e =g(
λ)e
i
λt ϕ(
+i λ)
Ther
ef eA(
or λ)eiλt=g(
λ)e
[
i +ϕ(
λt λ)]
=g(
λ)e

Wher λ)= A12(

eg( λ)+A22(
λ)i
scal
l hegai
edt nfunct
ionoft
hef
il
terandϕ(
λ)i
sthephaseangl
eof
t
hef
il
ter
.

Mov
ingav
eragef
il
ter
 {
1
,j
=0,
±1,±2,
…,±m
LetYt=∑∞
j
=- aX
∞ jt
-j
wi
thaj
= 2m+1
0, elsewhere
1 ∞
ThenYt= ∑ Xi sal
i
nearf
il
terof2m +1poi
ntswhi
chi
scal
l
edasi
mpl
emov
ingav
erage
2m+1 j=-∞ t-j
fi
l
ter
.

LetXt=eiλt

1 ∞ iλ(t-j) 1
⇒Yt= ∑j=-∞e t sYt=∑∞
hati j
=-∞aXt-jwi
thaj=
2m+1 j 2m+1
1
2m+1[t-m
⇒Yt= X +…+Xt-1+Xt+…+Xt+m]

Sother
eare2m +1val
uesinthesum.Theref
oreYtisasimplemovi
ngaverage.Takeanyval
ue
ofaandbyusingt
hetr
ansf
ormati
on,gener
ateanotherseri
esthusr
esul
ti
ngintoamov ing
aver
ageser
ies.

1
I
faj= ,t
henf
orm =1;
2m +1=3andt
hemov
ingser
iesi
sasf
oll
ows
2m+1
1
ForXt-3,
Xt-2, eYt= (
Xt-1wehav X +X +X )
3 t-3 t-2 t-1
1
Xt-2, Xt⇔Yt= (
Xt-1, X +X +X)
3 t-2 t-1 t
1
Xt Xt+1⇔Yt= (
Xt-1,, X +X+X )
3 t-1 t t+1
1
Xt, Xt+2⇔Yt= (
Xt+1, X+X +X )
3 t t+1 t+2
1
Xt+1, Xt+3⇔Yt= (
Xt+2, X +X +X )
3 t+1 t+2 t+3

Goi oXt=eiλtweknowt
ngbackt hat

1 m
Yt= ∑ X
2m+1 j=-m t-j
1 m iλ(t-j)
=Yt= ∑ e
2m+1 j=-m
1 m iλt -iλj
= ∑ e. e
2m+1 j=-m
1 iλm
=
2m+1
[
e +…+eiλ+1+e-iλ+…+e-iλm]
eiλt
 1
=
2m+1
[
1+(
eiλ+e-iλ)(
+ei2λ+e-i2λ)
+…+( ]
eimλ+e-imλ)eiλt

Buteiλt=cosλt+i
sinλtande-iλt=cosλt
-i
sinλt

1
=
2m+1
[1+cosλ+i
sinλ+cosλ-
isi
nλ+cos2λ+i
si
n2λ+cos2λ-
isi
n2λ+…+cosmλ+i
sinmλ+cosmλ-
i nmλ]
si
eiλt

1
2m+1[
= 1+2∑m
=1c
j λ]
osj eiλt

1
2m+1[
NowA1(
λ)-
iA2(
λ)= 1+2∑m
=1c
j λ]
osj

i= - ∴A2(
1≠0; λ)=0

1
2m+1[
Ther
ef e A1(
or λ)= 1+2∑m
=1c
j λ]
osj

ϕ(
λ)=t
an (xy)=tan (AA((λλ)))whichisthephaseangle
-
1 2

ϕ( an-1
λ)=t ( )
A2(
λ)
A1(
λ)
nceA2(
=0si λ)=0

∴ϕ(
λ)=0
λ)=|
g( A1(
λ)-
iA2(
λ)|
= A12(
λ)+A22(
λ)= A12(
λ)=A1(
λ)

λ)=|
⇒g( A1(
λ)|=A1(λ)
1
2m+1[
= 1+2∑m
=1c
j λ]
osj

Nextconsi
der
,=∑m
=1c
j λ;
osj mul
ti
plybot
hsi
desbysi
n (2λ)
[ ()]
⇒Ssi
n
λ
2
=∑m
=1c
j λsi
osj
λ
n whi
2
chr()
equi
rest
ober
ewr
it
tenasasum/di
ff
erenceoft
wosi
ne
f
unct
ions.

1 1
Recal
l
: nA-
si sinB=2cos (
A+B)
sin (
A-B)
2 2

Usi
ngt
hisweobt
ain
[ ()] [ ( ) ( )]
Ssi
n
λ 1m
= ∑j=1si
2 2
nj
1
+ λ-
2
sinj
1
-λ
2
1 1 1
(
sinAsnB)=cos (
-i A+B)
sin (
A-B)
2 2 2

Put
ti
ngt
hev
aluesofj=1,
2,
…,m

1
= si
2 [
3
2() () () () () ()
n λ-si
1
n λ+si
2
5
n λ-
2
si
3
n λ+si
2
7
n λ-
2
si
5
n λ+…+si
2
n
2m+1
2
λ-
sin
2(
2m-
1
λ ) ( )]
1
= -
2
si[
n( λ)
1
2
+sin(
2 )
2m+1
λ]

⇒Ssi [2] 2[
n( )
λ 1
= -
sin(1
2
λ )
+ si
n ( 2 )
2m+1
λ]

{
n(
2 )
}
2m+1
si λ
1
⇒S= -1
n( )
2 λ
si
2

[ { }]
n(
2 )
2m+1
si λ
1 1
()
gλ = 1+2. -1
n( )
2m+1 2 λ
si
2

[ ]
n(
2 )
2m+1
si λ
1
g(
λ)=
n( )
2m+1 λ
si
2

[ ]
n(
2 )
2m+1
si λ
1 i
λt
Y= e
n( )
t 2m+1 λ
si
2

Whenλ=0;
Yt=0.

Whati
stheef
fectoft
hisf
il
terondi
ff
erentcomponent
sofXt.

Case1:Whenλ=0(
wear
econsi
der
ingt
het
rend)

Her
ewef
ir
stf
indt
het
rendcomponentofXt

Xt=eiλt=cosλt+i
sinλt

l
i
m X =cosλtwhi
chi
sthet
rendcomponent
λ→0 t

Nextwef
indt
het
rendcomponentofYt
 [ ]( 2 )
2m+1
si
n λ
1 i
λt
Y= e
n( )
t 2m+1 λ
si
2

n(
2 )
2m+1
si λ
1 i
λt
l
im Y= .l
im .li
me
n( )
λ→0 t 2m+1 λ→0 λ λ→0
si
2

cos(
2 )
2m+1 2m+1
λ
1 2 i
λt
= l
.i
m .l
ime
cos( )
2m+1 λ→0 1 λ λ→0
2 2

cos(
2 )
2m+1
λ
1 i
λt
= .(
2m+1). l
im .li
me
cos( )
2m+1 λ→0 λ λ→0
2

l
i m eiλt=cosλt
m Yt=l
i
λ→0 λ→0

ThetrendofXti
sthesameast hetrendcomponentofYt.Thi
simpli
esthatthetr
endcomponent
i
sinvari
ant,
meaningthatt
he2m +1poi ntsmovingaveragef
il
terr
eproducesthetr
end
componentofXtori
tdoesn’taf
fectthet
rend.

Case2:Whenλ≠0
I
nthi
scase,
wear
econsi
der
ingot
hercomponent
sot
hert
hant
het
rend.

[ ] (2m+
2 )
1
si
n λ
1 i
λt
Yt= e
n( )
2m+1 λ
si
2
2m+1
I
fwet
ake λ=kπ,
thenYt=0si
ncesi
nkπ=0
2

⇒2m +1=k
2π
λ
or=()
2πk
2m+1
,
thi
siscal
l
edt
hewav
elengt
hoft
heosci
l
lat
ion.

Thusifwechoosem sucht
hat2m +1ispropor
ti
onaltothewavel
engthofosci
l
lat
ionof
i
nter
est,t
henthe2m +1point
smov i
ngav
eragewil
ldestr
oytheosci
ll
ati
on.

2π
I
fXtconsi
stsofosci
l
lat
ionswi
thwav
elengt
hs =2,
3,
4,
6,t
hent
ake2m +1t
obeequal
tot
he
λ
i
ntegral
multipl
eoftheLCM ofwav
elengt
hswhi
chi
sequalt
o12.Thati
s,take12pointssi
mpl
e
mov i
ngaverageofXtort
ake24point
ssimpl
emovi
ngaver
ageofXtal
loscil
lat
ionswil
lbe
destr
oyed.

I
naddi t
ion,the4thcomponentεt(r
andom component)willal
sobedest
roy
edbytaking2m +1
l
arge.Thust odetrermi
nethetrendoftheori
ginalser
iesXtwetake2m +1poi
ntssimple
movingav erageofXtwhere2m +1i sequaltotheint
egralmult
ipl
eoft
heLCM ofthe
wavelengths.

DI
FFERENCI
NG

Aspecial
typeoffi
l
terwhichispart
icul
arl
yusef
ulf
orr
emov
ingat
rendi
stodi
ff
erenceat
ime
ser
iesunti
li
tbecomesstati
onary.

Forexampl
e,l
etXt=a+bt+etwhi
leeti
swhi
tenoi e.asequence{
sei et}whi
chi
snor
mal
l
y
2
di
stri
but
edwit
hmean0andvari
anceσ.

{et}~N(0,σ2)
ΔXt=Xt-
Xt-1=Yt

=( +et)
a+bt -(a+b(
t1)
- +et-1)

=b+et+et-1whi
chisal
soasequenceofwhi
tenoi
sehencet
het
rendi
sremov
ed.Thi
simpl
i
es
t
hatt
hefi
rstdif
fer
enci
ngremovestr
ends.

Exampl
e
2
LetXt=a+bt+ct +et(
quadr
ati
ctr
end)

Yt=ΔXt=Xt-
Xt-1

=(
a+bt 2
+ct+et)
-(a+b(
t1)
- +c(
t1)
- 2
+et-1)

Openi
ngt
hebr
acket
sandsi
mpl
i
fyi
ng,
weobt
ain

Yt=b+2ct
-c+et-
et-1

ΔYt=Yt-
Yt-1

=(
b+2ct
- et-1)
c+et- -(b+2c(
t1)
- - et-2)
c+et-1-

=2c+et-
2et-1+et-2

Hencet
oremov
ethequadr
ati
ctr
end,
weneedt
odi
ff
erencet
hequadr
ati
ctwi
ce.
2 r r
Ingeneral
,ift
rendisequal
toao+a1t+a2t +…+artt
henadi
ff
erenceΔXti
sequal
toa
constantandtrendisel
imi
nat
ed(dest
royed).

Fur
ther
,letXt=eiλt=cosλt+i
sinλtf
orλ=0,
Xtr
epr
esent
sthet
rend.
 2π
Foranyot
herλ,
Xtdenot
eshar
moni
cosci
l
lat
ionswi
thwav
elengt
h .
λ

LetYt=ΔXt=Xt-
Xt-1∀t
λ(
i t
-1)
⇒Yt=eiλt-
e

=eiλt-
eiλt.
e-iλ

=eiλt(
1-e-iλ)wher
e1- (
e-iλ=1-cosλs
-
iinλ)=1-
cosλ+i
sinλ

Fr
om t
ri
gonomet
ri
cident
it
ies

n2
=2si (2λ)+2isin(2λ)cos(2λ)
=2sin( )
λ
2 [
sin( )
λ
2
cos( )]
+i
λ
2

n( ) n ()
+cos ( )=1
λ i
θ λ 2 λ 2
=2si .
re wherer= si
2 2 2

cos( )
λ
an [
2]
=cot( )orθ=t cot( )
2 λ λ -
1
tanθ=
n( )
λ 2
si
2

an [
2]
n( ) cot( )
-
iλ λ ϕ(
i λ) λ -
1
Ther
efor e1-e =2si e wher eϕ(λ)=t
2

n( )
λ ϕ(
i λ) i
λt
ThusY =2si e . e
t 2

n( )
λ (
iϕ(
λ) )
+λt
=2si e
2

Thati
s,

1.Theampl
i
tudeoft
het
ransf
ormedser
iesi
s2si
n (2λ)timestheamplitudeoftheobserved
ser
ies.

2.Thewav
elengt
hoft
heosci
l
lat
ionr
emai
nsi
nvar
iant
,i.
e.,
itdoesn’
tchange.

3.Thephaseangl
echangesf
r oϕ(
om 0t λ)

I
nconclusion,
from λ=0,Xtisatr
endandYt=0.Secondly
,allhar
monicoscil
l
ati
onsremain
i
nvari
antinwavelengt
hbutthei
ramplit
udesandphaseangleschangehencebysuccessf
ul
di
ff
erenci
ngofXt, weobt
ainastat
ionaryser
ies.

USEFULTI
MESERI
ESMODELS

Wenowdescr
ibesev
eral
dif
fer
entt
ypesofst
ochast
icpr
ocesseswhi
char
esomet
imesusef
uli
n
set
ti
ngupamodel
forat
imesser
ies.

Not
e:

Astochasti
cpr
ocessisacol l
ect
ionofrandom var
iabl
esthatareor
deredinti
meandar e
defi
nedatasetofpointst
hatareconti
nuousordiscret
e.Forexample,t
helengthofa
queue,si
zeofabacteri
acolony,
airt
emper at
ureonsuccessiv
edaysatapar ti
cul
arsi
te.

1.PURERANDOM PROCESS(
WHI
TENOI
SE)

Thesearerefer
redtoasthebui
ldi
ngblocks.Adi
scret
estochast
icprocessiscall
edwhitenoi
se
i
fitconsi
stsofasequenceofrandom var
i es{
abl et}whicharemutuall
yindependentand
i
denti
call
ydistr
ibut
ed.

Fr
om t
hedef
ini
ti
on,
itf
oll
owst
hatt
hepr
ocesshasconst
antmeanandconst
antv
ari
ance.

E[
et]=μandVar
[et]=σ2.

Aut
o-cov
ari
ancef
unct
ion

σ(
h)= { σ2, h=0
0,el
sewher
e
(
from i
ndependence)

h)=E[
σ( XtXt+h]
-E[ E[
Xt] Xt+h]whenh=0wehav
e,E[
XtXt][
-E[Xt]
]2
=σ2

Theaut
o-cor
rel
ati
onf
unct
ion

ρ(
h)= {10,,hh=≠00
σ(h) σ2
ρ(
h)= = =1
σ0 σ2

0
ρ(
h≠0)= =0
σ0

I
ngeneralt
heref
ore,whi
tenoi
sei
sapr
ocesst
hathasnomemor
y,t
hati
s,y
oucan’
tpr
edi
ctor
f
orecastf
utur
evalues.

2.RANDOM WALK

Supposet
hateti
sadiscr
etepur
elyr
andom pr
ocesswi
thmeanμandv
aranceσ2.Apr
i ocessXt
i
ssaidtobearandom wal
kif

Xt=Xt-1+et;
wit
hX0=0

X1=X0+e1=e1

X2=X1+e2=e1+e2

X3=X2+e3=e1+e2+e3
⋮
Xt=e1+e2+e3+e4+…+et

⇒Xt=∑t
i
e
=1 i

Xt]=E[
E[ e1+e2+e3+e4+…+et]

e2]+E[
e1]+E[
=E[ e3]+…+E[
et]

=t
μ
Var[ [
Xt]=Vare1+e2+e3+e4+…+et]

=Var[ e2]+Var[
e1]+Var[ e3]+…+Var
[et]

σ2
=t

Therefor
etheprocessisnon-st
ati
onar
ysincemeanandvar
iancedependsont
.Howev
er,
we
notethat,
thef
init
ediff
erenceofthi
sprocessi
sgiv
enby

ΔXt=Xt-
Xt-1=et

Forexampl
e,X2-
X1=e1+e2-
e1=e2

Thi
sissi
mpl
yapur
erandom pr
ocesswhi
chi
sther
efor
est
ati
onar
y.

3.MOVI
NGAVERAGERANDOM PROCESS(
M.A)

Supposet
hateti
swhi t
enoisewithmean0andv
aranceσ2,
i thent
hepr
ocessXti
ssai
dtobea
movingav
erageprocessofor edMA(
derqdenot q)i
f

Xt=β0et+β1et-1+β2et-2+…+βqet-q t
hati
s

Xt=∑q
=0β
j e-jwher
jt
eβjar
econst
ant
s.

Xt]=E[
E[ β0et+β1et-1+β2et-2+…+βqet-q]

=E[
β0et]+E[ β2et-2]+…+E[
β1et-1]+E[ βqet-q]=0+0+0+…+0=0whi
chi
sindependentoft
.

Xt]=Var[
Var[ ∑j=0βjet-j]
q

=∑q
=1β
j
2
j
Var(
et-j)=∑q
=0β
j
2 2
j
σ

= σ2∑q
=1β
j
2
j
whi
chi
sindependentoft,
Henceasecondor
derst
ati
onar
ypr
ocess.

Aut
o-cov
ari
ancef
unct
ion

h)=E[
σ( XtXt+h]
-E[ E[
Xt] Xt+h]butE[
Xt]=0

Ther
efor h)=E[
eσ( XtXt+h]

=E[
∑j=0βjet-j.∑k=0βket+h-k]
q q
 k=0 j k [t
=∑q
=0∑
j
q
ββ Ee-j.et-(k-h)]

Whenj=k-
h;⇒k=j+h

E[ et-(k-h)]=E[
et-j. et-j2]=σ2=Var(
et)

Whenj≠k-
h

E[ et-(k-h)]=0duet
et-j. oindependence.

{
0 ,h>q
2 q-
h
h)= σ∑j=0βjβj+h
Henceσ( ,
0≤h≤q f
orh=0,
1,
2,
3,
…,q
σ(-h) ,
h<0

Ther
efor
ethepr
ocessi
sst
ati
onar
y,hencet
heaut
o-cor
rel
ati
onf
unct
ionofMA(
q)i
sgi
venby

σ(
h)
ρ(
h)=
σ(
0)

{
0 ,
h>q
q-
h
∑ ββ
j
=0 j j
+h
ρ(
h)= q 2 ,
0≤h≤q
∑βj
=0 j

ρ(
-h) ,
h<0

Theaut
o-corr
elat
ionf unct
ioncut
soffatl
ogqf orlogh>q.Thi
sisanimport
antpr
oper
tyofa
movi
ngav er
agepr ocess.Thecureofρ(
v h)againsthi
scal
ledacorr
elogr
am.

nanMA(
I q)
,thecor
rel
ogr
am wi
l
losci
l
lat
ebet nt(
weenpoi 0,1)
and(
q,0)andt
hencoi
nci
dewi
th
t
heh-
axi
swhenh>q.

Norestr
ict
ionsonβiar erequi
redf
oramov i
ngaverageprocesstobest
ati
onar
y,howeveri
tis
gener
all
ydesirabletoimposerest
ri
cti
onsontheβitoensurethatt
hepr
ocesssati
sfi
esa
condi
ti
oncalledinvert
ibi
l
ity.

Weexpl
aint
hisconceptasf
oll
ows:

Consi
dert
hef
oll
owi
ngt
wof
ir
stor
dermov
ingav
eragepr
ocesses,

A:Xt=et+θet-1 ;
β0=1,
β1=θ

1 1
B:Xt=et+ et-1 ;
β0=1,
β1=
θ θ

Formodel
A;β0=1,
β1=θ

{
1 ,
h=0
β1 θ
ρ(
h)= 2= ,
h=±1
1+β1 1+θ2
0,
foranyot
herv
alueofh
 1
Formodel
B;β0=1,
β1= ,hence
θ

{
1 ,
h=0
1
β1 θ θ
ρ(
h)= = = ,
h=±1
1+β12
()
1+
1 2 1+θ2
θ
0 ,el
sewher
e
Ther
efor
e,thetwoprocesseshavet
hesameautocorrel
ati
onfuncti
on.Thuswecan’
tident
if
y
movi
ngav eragepr
ocessuniquel
yfr
om agi
venautocorr
elat
ionfunct
ion.

I
nver
ti
ngmodel
sAandB,
weobt
ain

ForA;et=Xt- θ3Xt-3+θ4Xt-4-
θXt-1+θ2Xt-2- …

Xt=et+θet-1

et=Xt-θet-1

=Xt- θ3et-3+θ4et-4-
θet-1+θ2et-2- …

1 1 1 1
ForB;et=Xt- Xt-1+ 2Xt-2- 3Xt-3+ 4Xt-4-
…
θ θ θ θ

1
et=Xt- et-1
θ
1 1 1 1
=Xt- et-1+ 2et-2- 3et-3+ 4et-4-
…
θ θ θ θ

f|
I θ|
<1,t
heser
iesofAconver
geswhi
let
hatofBdi
ver
ges.Thusanest
imat
ionpr
ocedur
ewhi
ch
i
nvol
vest
her
esi
dualswi
lll
eadnat
ural
l
ytomodelA.

If|
θ|<1, modelAissai
dt obeinv
ert
ibl
ewhi
lemodelBisnot
.Theimposi
ti
onofinver
ti
bil
it
y
condi
tionsensur
esthattherei
sauniquemovi
ngaver
ageprocessf
oragivenaut
ocorr
elat
ion
funct
ion.

Usingthebackwar
dshi
ftoper
ator
,thei
nvert
ibi
l
itycondi
ti
onf
ort
hegener
alor
dermov
ing
averagepr
ocessofor
derqcanbeexpressedasf ol
l
ows:
j j
LetβXt=Xt-j andβet=et-j,
theMA(
q)pr
ocesscanbeexpr
essedas

Xt=β0et+β1et-1+β2et-2+…+βqet-q
q
=B0β0et+B1β1et+B2β2et+…+Bβqet

=(
1β0+B1β1+B2β2+…+Bβq)
q
et
 =ϕ(
B)et

Whereϕ(B)isapol
ynomialofor nB.ThenMA(
derqi q)i
sinv
ert
ibl
ewitht
herootsoft
he
equatonϕ(
i B)=0alll
yi
ngoutsidetheuni
tci
rcl
e.I
nthi
scaseweareregar
dingi
tasacompl
ex
var
iabl
eandnotasanoperator.

NOTE:
ther sofϕ(
oot B)=0bei
ngout
sidet
heuni
tci
rcl
esi ymeans|
mpl B|>1.

Exampl
e1

Consi
dert
hemodel
AandBabov
e;

Formodel
A

Xt=et+θet-1

=B0et+B1θet

=(
B0+B1θ)
et=ϕ(
B)et

1
⇒1+θB=0andhenceB=-
θ

For|
B| hen|
>1t θ|<1.Thi
srootl
i
esout
sidet
heuni
tci
rcl
e.

Formodel
B

1
Xt=et+ et-1
θ

B1
=B0et+ et
θ

( )
0B1
= B+ et=ϕ(
θ
B)et

B θ+B
⇒1+ =0whi
chi
s =0andhenceB=-
θ
θ θ

Ther
ooti
sB=-
θwhi
chi
scl
ear
lynotout
sidet
heci
rcl
eif|
θ|<1.

Mov i
ngav er
agemodel shavebeenusedinmanyareaspar
ti
cul
arl
yineconometr
ics.For
example,economicindi
catorsar
eaffect
edbyavari
etyofr
andom ev
entssuchasstrikes,
governmentdecisi
ons,short
agesofkeymater
ial
setc.

Exampl
e2

Det
ermi herMA(
newhet 2)gi
venbel
owi
sinv
ert
ibl
e.

Xt=et-
0.5et-1-
0.4et-2

Sol
uti
on

Xt=B0et-
0.5B1et-
0.4B2et
=(
B0-
0.5B1-
0.4B2)
et

ϕ(
B)=1-
0.5B-
0.4B2=0

Sol
vi
ngf
orB,

0.
5±0.
25-4(-
0.4)
(1)
B= =-
2.3252or1.
07518
2(
-0.4)

|
B|=2.
3252or|
B|=1.
07518hencebot
hroot
sar
eout
sidet
heuni
tci
rcl
e.Thust
hepr
ocessi
s
i
nver
ti
ble.

Exer
cise

Det
ermi
newhet
hert
hef
oll ngMA(
owi 2)gi
venbel
owi
sinv
ert
ibl
e.

a) Xt=et-
0.4et-1+0.
7et-2

b) Xt=et-
0.8et-1+0.
2et-2

AUTOREGRESSI
VEPROCESS

Def
ini
ti
on:

Letetbeapur
elyrandom pr
ocesswit
hmean0andv ar
ianceσ2,t
henapr
ocessXti
ssai
d
tobeanautor
egressi
veprocessofor edbyAR(
derpdenot p)i
f

Xt=α1Xt-1+α2Xt-2+α3Xt-3+…+αpXt-p+et
p

=∑αX +e
j
=1
jt
-j t

Forsi
mpl
i
cit
ywebegi
nbyexami
ningt
hef
ir
stor
derpr
ocess

Xt=αXt-1+et,
| <1
α|

Wecansuccessf
ull
yrepl
acet
heXt’
sint
hef
ir
stor
deraut
oregr
essi
vepr
ocess,
weobt
ain

Xt=α(
αXt-2+et-1)+etwher
eXt-1=αXt-2+et-1

Xt=α2 Xt-2+αet-1+et

Xt-2=αXt-3+et-2

NowXt=α2(
αXt-3+et-2)+αet-1+et

=α3 Xt-3+α2et-2+ αet-1+et

=α3(
αXt-4+et-3)+α2et-2+ αet-1+et
 =α4Xt-4+α3et-3 +α2et-2+ αet-1+et

⋮
s
Xt=et+ αet-1+α2et-2+α3et-3+α4Xt-4+…+α Xt-s+αs+1Xt-(s+1)
j
⇒Xt=∑s
=0αX
j t
-j
+αs+1Xt-(s+1)
j
∑s
Xt- =0αX
j t
-j
=αs+1Xt-(s+1)

Squar
ingbot
hsi
desandt
aki
ngexpect
ati
ons,
weobt
ain

[
E( ]
) =E[α2s+2X2t-(s+1)]=α2s+2E[X2t-(s+1)]
j 2
∑s
Xt-j=0αXt
-j

Xt]=αE[
NOTE:E[ Xt-1]+E[
et]

Xt]=αE[
E[ Xt-1]

E[
Xt]
-αE[
Xt-1]=0

Assumi
ngt
hepr
ocessi
sst
ati
onar
y, Xt]=E[
E[ Xt-1]

ThenE[
Xt]
-αE[
Xt-1]=E[
Xt]
-αE[
Xt]=0

=(
1- E[
α) Xt]=0

Butα≠1,
hencei
ti heE[
st Xt]=0

hatE( [
) =α2s+2Var(Xt)]
j 2
Thi
simpl
i
est ∑s
Xt-j=0αXt
-j

X)=E[
Var( X2]
-(E[
X])
2

Xt)=E[
Var( Xt2]
-(E[
Xt]
)2

Xt)=E[
⇒Var( Xt2]

SinceXti
sassumedstat
ionar
y,henVar(
t Xt)i
saconst
anti
ndependentoftandbecause|
α|<1,
theri
ghthandsi
deofequati
on(i
)tendst
o0asst endstoi
nfi
nit
y.
j
Thi
simpl
i
est
hatwhen|
α|<1,
Xtconv
ergesi
npr
obabi
l
it o∑∞
yt =0αe
j t
-
,
j
thati
s,
∞

Xt= ∑αe
j
=0
j
t
-j

Ther
efore,
thefir
storderaut
oregr
essiveprocesscanbeexpressedasaninfi
nit
emovi
ng
aver
ageprocess.Hencethefir
storderofautoregr
essi
vepr
ocessconvergestoani
nfi
nit
e
movingaverageofwhitenoi
se.

Fr
om t
his,

Xt]=E[ ]=0 j
E[ ∑∞
j=0αet
-j
 Xt]=Var[ ] j
Var[ ∑∞
j=0αet
-j

ar(et-j)
2j
=∑∞
=0α V
j

2j
2
=∑∞
=0α σ
j

2j
=σ2∑∞
=0α
j

=σ2(
1+α2+α4+…)
1
: =1+x+x2+x3+…
Recal
l
1-
x

Ther
efor
e,σ2(
1+α2+α4+…)=σ2 ( )
1
1-2 =
α 1-
σ2
α2
h)=E[
σ( XtXt+h]
-E[ E[
Xt] Xt+h]

h)=E[
σ( XtXt+h]si
nceE[
Xt]=0

{
=E∑∞
i
=0
αiet-i∑∞
j
j
=0αet
+h-
j }
When=j
-h,
⇒j=i+h,
then

E[et-i.ei+h-j]=σ2whi sVar[
chi Xt]

For≠j
-h,
then

E[et-i.et-(j-h)]=0duet
oindependence.

Ther
efor
e
2 h
2 h ∞ 2i σα
h)={
σ( σ2∑∞ αii
α+h
=σ α ∑ α =
i
=0 i
=0
1-α2
σ(
h)
Ther
efor
etheaut
ocor
rel
ati
onf
unct
ionρ(
h)=
σ(
0)

σ2αh σ2
÷ =αh
1-α2 1- α2

h)=αh
ρ(

Thecorrel
ogr
am inthi
scasei
sseentobeamonot onical
lydecl
ini
ngfuncti
onforα<0,
the
funct
ionisal
ter
nati
ngposi
ti
veandnegat
ive.Theabsolut
evalueisdecl
ini
ngatageometr
icr
ate.

Exer
cise

a)Gi
venaf
ir
stor
deraut
oregr
essi
vepr
ocessXt=αXt-1+etwi
th|
α|<1,
expr
esst
he
 aut
oregr
essi
vepr
ocessasani
nfi
nit
emov
ingav
eragepr
ocess.(
4mar
ks)

b)Fi
ndt
hemeanandv
ari
anceoft
heaut
oregr
essi
vepr
ocess.(
2mar
ks)

c) Wor
koutt
heaut
o-cov
ari
anceandt
heaut
o-cor
rel
ati
onf
unct
ion.(
6mar
ks)

Alt
ernat
ivel
y,r
athert
hantheuseofsuccessi
vesubst
it
uti
on,
it’
ssi
mpl
ert
ouset
hebackwar
d
j
shi
ftoperat
orBsot hatwethenhav
e:

AR(
1)
Xt=αXt-1+et

⇒Xt-
αXt-1=et

⇒B0Xt-
αB1Xt=et

=(
1-αB)
Xt=et

e
⇒Xt= t
1-
αB
Xt=et(
1-αB)
-1

1
: =1+x+x2+x3+…
Recal
l
1-
x

⇒Xt=(
1+αB+α2B2+α3B3+…)
et

Xt=et+αBet+α2B2et+α3B3et+…

Recal
l
:Bet=et-1

B2et=et-2

B3et=et-3

Xt=et+αet-1+α2et-2+α3et-3+…
j
⇒Xt=∑∞
=0αe
j t
-j

Wecanal
soobtai
ntheaut
ocorr
elat
ionf unct
ionmor
esi
mpl
ybyassumi
ngatt
heout
sett
hatt
he
pr
ocessi
sst
ati
onaryi
nwhichcaseE[Xt]=0

NowXt=αXt-1+et |
α|<1

Mul
ti
plybot
hsi
desbyXt-h h>0andt
aki
ngex
pect
ati
ons,
wehav
e

E[
XtXt-h]=αE[
Xt-1Xt-h]+E[
etXt-h]
 h)=E[
Butσ( XtXt+h]
-E[ E[
Xt] Xt+h]

σ(
h)=ασ(
h-1)+ E[
etXt-h]

But

etXt-h]=E[ ]=0duetoindependence
j
E[ et∑∞
=0αe
j t
-h-
j

Forh>0,
etandal
let-h-jar
edi
ff
erentandt
her
ef eE[
or etXt-h]=0hence

σ(
h)=ασ(
h-1)

=α(
ασ(
h- )=α2σ(
2) h-2)

=α2(
ασ(
h- )=α3σ(
3) h-3)

=α3(
ασ(
h- )=α4σ(
4) h-4)

h)=αhσ(
⇒ ( 0)

h) αhσ(
σ( 0) h
⇒ (
h)= = =α
σ(
0) σ( 0)

AUTOREGRESSI
VEPROCESSOFGENERALORDER

Anaut
oregr
essi
vepr
ocessi
sgi
venbyt
hel
i
nearnon-
homogeneousdi
ff
erentequat
ion

Xt=α1Xt-1+α2Xt-2+α3Xt-3+…+αpXt-p+et……………………….
.(
i)

Asint hef
ir
stordercase,wecanexpressanautor
egressiv
eprocessasamovingav
erage
processofinf
init
eorder.Thismaybedonebysuccessivesubst
it
uti
onorbyusi
ngbackward
shif
toperat
or,thusequation(i
)canberewr
it
tenas:

(1- αpB)
p
α2B2-
α1B- …- Xt=et

(1- αpB)et=Xt
p-1
α2B2-
α1B- …-

(
Xt=fB)
etsay

={
1+β1B+β2B2+…+βiBi+…}
et

Xt=∑∞
=0β
j e-jwi
jt
thβ0=1

Ther
elat
ionshi
pbet
weent
heαi’
sandt
heβ’
smayt
henbef
ound.

Fr
om abov
e,expect
edv
alueofXti
sequal
tozer
o

E[
Xt]=0

Var[
Xt]=σ2∑∞
=0β
j
2
j
I
npri
ncipl
e,theaut
ocorr
elati
onfuncti
onforaut
oregr
essi
vepr
ocesscanbefoundfrom t
his
pr
ocedurebutitmaybealgebrai
cal
lyhar
dt oworkwit
hamovingaver
ageofaninf
init
eorder.

Analt
ernat
ivesimplermethodist
oassumeatt
hestar
tthatthepr
ocessisstat
ionar
y.Mul
ti
ply
thr
oughbyXt-h,
takeexpect
ati
onsanddi
vdebyσ(
i 0)
.Doingthi
sweobtainthat

ρ(
h)=α1ρ(
h-1)+α2ρ(
h-2)+α3ρ(
h-3)+…+αpρ(
h-p)…………………….
(i
i)

Thesetofequat
ioni
scal
l heYul
edt e-wal
kerequat
ion.

h)=mh,
Let( m ≠0beat
ri
alsol
uti
on.Then,
h-
p
mh=α1mh-1+α2mh-2+α3mh-3+…+αpm
h-
p
⇒mh-
α1mh-1- α3mh-3-
α2mh-2- …-αpm =0

⇒m
h-
p
(mp- p-
1
α1m -
p-
2
α2m -
p-
3
α3m - αp)=0
…-
h-
p
Si
ncem ≠0,
then
p p-
1 p-
2 p-
3
⇒m -
α1m -
α2m -
α3m -
…-αp =0

Thegener
alsol
uti
onoft
heYul
e-wal
kerequat
ioni
s

ρ(h)=A1π1h+A2π2h+A3π3h+…+Apπphwher
eπ1,
π2,
π3,
…,πpar
ether
eal
root
soft
heauxi
l
iar
y
equati
on.

TheconstantsA1,A2,
A3,
…,Apar
echosent
osat
isf
ythei
nit
ial
condi
ti ngonρ(
onsdependi 0)=1
p
andρ(h)=∑i=1Ai=1.

Thefist(
r p-1)Yul
e-wal
kerequat
ionspr
ovi
dep-
1fur
therr
est
ri
ctonson{
i Ai}usi
ngρ(
0)=1and
ρ(h)=ρ(h)
- .

From t
hegeneralform ofρ( h)=A1π1h+A2π2h+A3π3h+…+Apπph,
iti
scl
earthatρ(h)t
endsto0
ashtendstoinfi
nityprovidedthat|πi|
<1 ∀i ,thatis,
ther
oot
softheauxi
l
iaryequati
ons
shoul
dbewithintheuni tcir
cle.

Thi
sisanecessaryandsuffi
cientcondit
ionforautor
egressiveprogressi
veprocesstobe
st
ati
onar
y,t
hatis,thenecessaryandsuffici
entcondi
ti
onf ortheautoregr
essiveprocesst
obe
st
ati
onar
yisthatallr
ootsoftheauxili
aryequati
onshouldl i
ewithinaunitci
rcl
e.

Al
ter
nat
ivel
y,anequi
val
entwayofexpr
essi
ngt
hest
ati
onar
ycondi
ti
oni
stosayt
hatt
her
ootof

Xt=[
α1Xt-1+α2Xt-2+α3Xt-3+…+αpXt-p]+et

(1- αpB)
p
α1B- α3B3-
α2B2- …- Xt=et

ϕ(
B)Xt=et

B)={ αpB}=0mustl
p
ϕ( 1-α1B- α3B3-
α2B2- …- i
eout
sideauni
tci
rcl
e.
Speci
alcase:
derAR(
Consi 2)

Thi
sisgi
venbyt
hedi
ff
erenceequat
ion Xt=α1Xt-1+α2Xt-2+et

Yul
e-wal
kerequat
ions

XtXt-h=α1Xt-1Xt-h+α2Xt-2Xt-h+etXt-h

Taki
ngexpect
ati
onsanddi
vi
dingbyσ(
0)

σ(
h)=α1σ(
h-1)+α2σ(
h-2)

⇒ (
h)=α1ρ(
h-1)+α2ρ(
h-2);
h>0

Exampl
e

h)=mhbet
Letρ( het
ri
alsol
uti
on

mh=α1mh-1+α2mh-2

mh-
α1mh-1-
α2mh-2=0

mh-2(
m2- α2)=0
α1m-

⇒m2-
α1m-
α2=0

Lett
her
oot
soft
heauxi
l
iar
yequat
ionsbeπ1andπ2.Thegener
alsol
uti
onsoft
heYul
e-wal
ker
equat
ionsi h)=A1π1h+A2π2h
sρ(

Ther
oot
soft
heauxi
l
iar
yequat
ionar
egi
venby

α1±α12+4α2
m=
2

Hencef
ort
hegi
venpr
ocesst
obest
ati
onar
y| <1,
m| thati
s,

|
α1±α12+4α2
2 |<1or|
πi|
<1

α12+4α2>0
Case1:

α12+4α2<0
Case2:

α12+4α2=0
Case3:

MI
XEDARMAMODEL
Anot
herusefulcl
assofmodelsfort
imeser
iesi
sfor
medbycombi
ningMA(
mov
ingav
erage)
andAR(autoregr
essi
ve)pr
ocesses.

Ami
xedaut
oregr
essi
vemovi
ngaverageprocesscont
aini
ngpARt
ermsandqMAt
ermsi
ssai
d
t
obeanARMApr der(
ocessofor p,q).I
tisgi
venby

Xt=α1Xt-1+α2Xt-2+α3Xt-3+…+αpXt-p+et+β1et-1+β2et-2+…+βqet-q……….
.(
i)

Usi
ngt
hebackwar
dshi
ftoper
atorBont
heequat
ion,
wehav
e

Xt-
α1Xt-1-
α2Xt-2-
α3Xt-3-
…-αpXt-p=et+β1et-1+β2et-2+…+βqet-q

(1- αpB)
Xt=(
1+β1B+β2B2+…+βqB)
p q
α1B- α3B3-
α2B2- …- et

⇒ (
B)Xt=θ(
B)et………(
ii
)

θ(B)et
⇒Xt=
ϕ(B)

Thest
ati
onar
it
yisaf
fect
edbyt
heARpr
ocess(
ther
oot
sli
eout
sideauni
tci
rcl
e).

Theinv
ert
ibi
l
ityi
saf
fect
edbyt ocessθ(
heMApr B)=0.Ther sofθ(
oot B)=0l
i
eout
sidet
heuni
t
ci
rcl
e.

Thepr
ocessi
sst
ati
onar
yandi
nver
ti
ble.

Asf ortheARprocess,t
hevaluesofαiwhichmakestheprocessstati
onar
yaresucht
hatt
he
rootsoftheequatonϕ(
i B)=0allli
eoutsi
deaunitci
rcl
eandt hevaluesofβi f
ort
heMA
processwhichmakest heprocessinv
erti
blear
esuchthattheroot
sofequatonθ(
i B)=0all
li
e
outsidetheuni
tcir
cle.

Fr
om equat
ion(
ii
)wecanwr
it
eanARMAmodel
asanMApr
ocess,
i.
e.,

θ(
B)
Xt=ψ(
B)etwher
eψ(
B=
ϕ(B)

Theni
tiscl
eart
hatt
heexpect
edv
alueofXti
szer
oie.E[
Xt]=0whi
chi
mpl
i
esst
ati
onar
it
y.

Theaut
ocor
rel
ati
onf
unct
ion

deranARMA(
Weconsi 1,1)
,thati
s,

Xt=ϕXt-1+et+θet-1

Xt-
ϕXt-1=et+θet-1

Xt-
ϕBXt=et+θBet

(
1-ϕB)
Xt=(
1+θB)
et

⇒Xt= (11+-ϕθBB)e
t
 1
: =1+x+x2+x3+…
Recal
l
1-
x

⇒Xt=( [
1+θB)1+ϕB+ϕ2B2+ϕ3B3+…]
et

=[
1+ϕB+ϕ2B2+ϕ3B3+…+θB+θϕB2+θϕ2B3+θϕ3B4+…]
et

=[
1+(
θ+ϕ)
B+( ϕB2+(
θ+ϕ) ϕ2B3+(
θ+ϕ) ϕ3B4+…]
θ+ϕ) et

=[
1+φ1B+φ2B2+φ3B3+φ4B4+…]
et

eφs=ϕs-1(
Wher θ+ϕ);
s=1,
2,
3,
…andφ0=1

⇒Xt=∑∞
=0φ
j e-j
jt

Aut
o-cov
ari
ancef
unct
ion

XtXt+h)=E[
E( ∑∞
j=0φe-j∑∞
jt
φe+h-k]
k=0 k t

=∑j∑kφjφkE[
et-jet+h-k]

h)=E(
nceσ(
Si XtXt+h)
-E[ E[
Xt] Xt+h]

Whenj=k-
h

E[
et+h-k]
2
-E[
et+h-k]butE[
et+h-k]=0

E[
et-jet+h-k]=σ2

h)=σ2∑j∑kφjφk
σ(

Whenh=0

h)=σ2∑∞
σ( =0φ
j
2
j

Whenj=0,
j=1,
j=2,
…

h)=σ2[ +{ }+…] 2
σ( 1+(
θ+ϕ)
2
+{
ϕ( }
θ+ϕ)2
ϕ2(
θ+ϕ)

=σ2[ +∑s=1{ }]
s 2
1+(
θ+ϕ)
2 ∞
ϕ(θ+ϕ)

=σ2[
1+(
θ+ϕ)
2
+(
θ+ϕ)∑s=1ϕ ]
2 ∞ 2s

=σ2[
1+(
θ+ϕ)
2
+( {ϕ +ϕ4+ϕ +…}
2 2
θ+ϕ) 6
]
=σ2[
1+(
θ+ϕ)
2
+( {ϕ(
2 2
θ+ϕ) }
1+ϕ2+ϕ4+…)]

[
=σ21+(
θ+ϕ)
2
+(
θ+ϕ)
2
{ }] ϕ2
1-ϕ2

[
=σ21+(
θ+ϕ)
2 ϕ2
1+ 2
1-ϕ{ }]
 [
=σ21+(
θ+ϕ)
2
{ ϕ2+ϕ2
1-
1-ϕ2 }]
[(
θ+ϕ)
]
2
=σ21+
ϕ2
1-

=σ2
[ ϕ2+θ2+2ϕθ+ϕ2
1-
ϕ2
1- ]
0)=σ2
σ(
[ 1+θ2+2ϕθ
1-ϕ2 ]
1)=σ2∑∞
σ( =0φ
j φ+1
j j

=σ2[ ϕ +…]
2 3 5
(θ+ϕ)(
+θ+ϕ)
2
ϕ+(
θ+ϕ)ϕ +(
θ+ϕ)
2

=σ2[
(θ+ϕ)(
+θ+ϕ)
2
{ϕ+ϕ3+ϕ +…}
] 5

=σ2[
(θ+ϕ)(
+θ+ϕ)
2
{ϕ( }
1+ϕ2+ϕ4+…)]
1
But 2 =1+ϕ2+ϕ4+…
1-
ϕ

[ ϕ(
θ+ϕ)
]
2
1)=σ2θ+ϕ+
σ(
ϕ2
1-

[ {
=σ2θ+ϕ 1+
ϕ(θ+ϕ)
1-ϕ2 }]
{
=σ2 θ+ϕ
( )
ϕ2
1- }
ϕ2+θϕ+ϕ2
1-

1)=σ2(
σ( θ+ϕ) { }
1+θϕ
ϕ2
1-
σ(
1)
ρ(
h=1)=
σ(
0)

=σ2(
θ+ϕ) { }
1+θϕ
×
ϕ2 σ2(
1-
ϕ2
1-
1+θ2+2ϕθ)
(
θ+ϕ)
(1+θϕ)
ρ(
1)=
1+θ2+2ϕθ

NowXt=ϕXt-1+et+θet-1,
mul
ti
ply
ingbyXt-handt
aki
ngexpect
ati
ons,
wehav
e

h)=E[
σ( XtXt-h]=E[
ϕXt-1Xt-h+etXt-h+θet-1Xt-h]

Di
vi
ngt
hroughbyσ(
0)

h) E[
σ( X X ] E[ϕXt-1Xt-h]
= t t-h =
σ(
0) σ( 0) σ(0)
 ϕE[
Xt-1Xt-h] ϕσ(
h-1)
ρ(
h)= = =ϕρ(
h-1)
σ(0) σ(
0)

Whi
chi
str
uef
oral
lh≥2,
thati
s

ρ(
2)=ϕρ(
2-1)=ϕρ(
1)

ρ(
3)=ϕρ(
3-1)=ϕρ( 1)=ϕ2ρ(
2)=ϕϕρ( 1)

STATI
ONARYPROCESSI
NTHEFREEQUANCYDOMAI
N

Oneofthel atestmethodsofanaly
zingti
meseri
esisknownasspect
rum anal
ysi
s.Iti
s
assumedt hatt heti
meseriesi
sstati
onar
y(noosci
ll
ati
ons)
.Giv
enanytimeseri
es
Xt={Xt:
t=0,t=±1, t …},
=±2, thef
ir
stthingt
odoistoel
iminat
ethetr
endther
ebyrenderi
ngt
he
remai
ningser iesstat
ionar
y.

Timeseri
escanbelookeduponisconsi
stingofaf i
nit
enumberofharmonicosci
ll
ati
onsoft
he
2π
ty
pecosλtorsinλtwithwavel
engthequalto butvi
rt
ual
lyinf
ini
tenumberofsmall
λ
osci
l
lat
ionsspanni
ngaconti
nuousdistr
ibuti
onsofwav el
engthsthati
sover
-π<λ<π.

=1(
akenasXj=∑∞
XtCanbet j ajcosλjt
+bjsi )+etwhereλjarethefrequenci
nλjt esoft
his
osci
l
lat
ions.

Tostudyt
hehar
moni
cosci
l
lat
ionst
heconceptofpowerofspect
rum orspect
rum hasbeen
i
ntr
oduced.

Def
ini
ti
on:
Lett
het
imeser
iesbedenot
edbyXt:
t=0,±1,±2,
…

Def
ineσ( XtXt+h)=E[
h)=Cov( XtXt+h]assumi
ngE[
Xt]=0

TheFour
iert
ransf
or hesequence{σ(
m oft h);
h=0,
±1,±2,
…isgi
venby
∞
1
(
fλ)=
2π ∑σ(h)e
h=-
∞
-
ihλ

Whereλisthefr
equencyoft
heharmoni
coscil
l
ati
onsmeasuredinradians.Thefunct
ionf(λ)as
def
inedabovedenot
esthespect
ral
densi
tyf
uncti
on(s.
d.f
)wheneveritexist
sovertherange
-π≤λ≤π.

Exer
cise

Def
inet
hespect
ral
densi
tyf
unct
ionofat
imeser
iesXtwher
eitexi
sts.
 nceσ(
Si h)=σ(
-h)
,t (
henfλ)=f
(λ)andf
- (λ)exi
sts|
f(
λ)|<∞,t
hati
s,

|1 ∞
2π
∑h=-∞σ(
h) |
e-ihλ <∞ ,
i
1
e. ∑∞
.
2π h=-∞
|
σ( e-ihλ|
h) <∞ but|
e-ihλ|
<∞

∞[
⇒∑∞
h=-
σ(
h)]<∞ f
ini
tef
oral
lh=0,±1,
±2,
±3,
…

Thef
unct
i (
onfλ)canal
sobewr
it
tenas

σ2 1 ∞
(
fλ)= + ∑h=1σ(
h)cosλh…………………………….
.(
**)
2π π

0)=σ2=Var(
nceσ(
Si Xt)

Bydef
ini
ti
on,

1
(
fλ)= ∑∞ σ(
h)e-ihλ
2π h=-∞
1 -1
= {∑ σ( e-ihλ+σ(
h) 0)+∑∞ σ(
h)e-ihλ}
2π h=-∞ h=1

1 ∞
= {∑ σ( h)
- eihλ+σ(
0)+∑∞ σ(
h)e-ihλ}
2π h=1 h=1

1
= { σ(
0)+∑∞ σ(
h)[ }
eihλ+e-ihλ]
2π h=1

1
= { σ(
0)+∑∞ σ(
h)[
coshλ+i
sinhλ+coshλs
-
ii }
nhλ]
2π h=1

1
= { σ(
0)+∑∞ h)2coshλ}
σ(
2π h=1

1
= { σ(
0)cos0+2∑∞ h)coshλ}
σ(
2π h=1

σ2 1
= + ∑∞ σ(
h)cosλh
2π π h=1

1 1
2π
{σ(
0)+∑∞
h=1
h)2coshλ}= {
σ(
2π
σ(
0)cos0+2∑∞
h=1
h)coshλ}
σ(

1 ∞
(
⇒fλ)= {∑ σ( h)coshλ+∑∞ σ(
h)coshλ+σ(
0)cos0}
2π h=1 h=1

1
= ∑∞ σ(
h)coshλ
2π h=-∞

Hencet
hes.
d.fhasbeenexpr
essedi
nter
msofcosi
nes.
Mul
ti
ply
i (
ngfλ)bycoshλandi
ntegr
ati
ngbet
ween–πandπ,
itcanbeshownt
hat
π
σ(
h)=∫
-
π
f(
λ)coshλd(
λ)∀h
π
⇒ (
h)=∫
-
π
f(
λ)coshλd(
λ)h=0,
±1,±2,±3,
…

Thi
srel
ati
onshi
pcanber
egar
dedast
hei
nver
seoft
her
elat
ion

1
(
fλ)= ∑∞ σ(
h)coshλ
2π h=-∞

Whenh=0

λ)=Var(
Xt)=σ2
π π
σ(
0)=∫
-
π
f(
λ)cos0d(
λ)=∫
-
π
f(
λ)d(

σ(
0) (
fλ)
Di
vi
de 2 =1⇒ 2 i
sap.
d.fofλ.
σ σ

SPECI
ALCASES
1.Whi
tenoi
se
I
nthiscase,wewanttof indt
hes.
d.foft he{
et:
t=0,±1,
±2,…}wher
eeti
sst
ati
onar
ywi
thE[
et]=0
[et]=σ andCov[etet]=0wheret≠t(duetoi
2 '
Var ' ndependence)
.

Ther
efor
efe
(λ)=
1 ∞
2π
∑h=-
∞
σ(
h)e-
ihλ
butσe
(h){
=
σ2,
0,
h=0
h≠0
1
Ther
efor
ef (λ)= σ2
e 2π

Thespect
rum oft
hepr
ocessi
sgi
venby

Whichi
mpli
esi
nawhi
tenoi
seal
ltheosci
l
lat
ionshav
eequal
cont
ri
but
iont
othev
ari
anceoft
he
pr
ocess.

2.Li
nearst
ochast
icmodel
s
a)Mov
ingav
eragepr
ocess

SupposeXti
saMApr
ocess

Xt=∑∞
j
=-∞βe-jwher
jt
eβj’
sar
econst
ant
sandβ0=1

E[
Xt]=0, [
VarXt]=σ2∑∞
j
=-∞β
2
j
,∑∞
j
=-∞β
2
j
<∞ (
fi
nit
e).

Thes.
d.fofXtwi
l
lbe

f
x
( |
λ)= ∑∞
j
=-∞βj
-
i
e f
e|
λj2
(λ)

λ)=σ| βe |
2 ∞ -
iλj2
f(
x
∑ j
=-∞ j

Next
,weconsi
deraf
ini
teMApr
ocessgi
venbyXt=∑∞
=0β
j e-j;
j t
β0=1
f
x
( |
λ)= ∑∞
=0β
j j
e f
e
(λ)
-
i
|
λj2

Next
,weconsi
dert
hef
ir
stor
dermov
ingav
eragepr
ocessMA(
1)gi
venby

Xt=et+βet-1=∑1
=0β
j e-jwher
j t
eβ0=1andβ1=β

σ2
f
x
(λ)=|1+βe-
i
|
λ2
fe
(λ)=
2π
|1+βe-iλ|
2

σ2
= | 1+β(
cosλs
-
ii |
nλ)2
2π

σ2
= | 1+(
βcosλβs
-
i i |
nλ)2
2π

σ2
= {(1+βcosλ)
2
+( nλ)
βsi }
22
2π

σ2
= ( n2λ)
1+2βcosλ+β2cos2λ+β2si
2π

σ2
⇒f(λ)= (1+2βcosλ+β2)
x 2π

Theshapeoft
hespect
rum dependsont
hev
aluesofβ.

b)Fi
rstor
deraut
oregr
essi
vepr
ocess

Thi
sisgi
venbyXt=αXt-1+et and |
α|<1

Forst
ati
onar
it
y
s
Xt=∑∞
s=0
αet-s

Thes.
d.fofXtcant
henbegi
venby

f
x
(λ)=f
e
(λ)∑∞
=0αe
j | j -
i
|
λj2

=f
e
( (∑∞j=0αe ∑∞j=0αe )bymultiplyingbytheconjugate
λ)
j -
iλj j i
λj

σ2 ∞ j (-iλ)j ∞ j (iλ)j
= (∑ αe ∑j=0αe )
2π j=0

σ2 ∞
= ( )
j∞ j
∑ ( αe-iλ)
∑j=0(
αeiλ)
2π j=0

σ2
= { [
1+(
αe-iλ)(
+αe-iλ)+(αe-iλ)+…]
[1+(
αeiλ)(
+αeiλ)+( }
αeiλ)+…]
2 3 2 3

2π
1
: =1+x+x2+x3+…
Recal
l
1-
x
=
σ2
{
2π (
1
λ×
αe )(
1- -
i
1
αeiλ)
1- }
=
σ2
{ 1
αeiλ+α2
αe-iλ-
2π 1- }
=
σ2
{ 1
α(e +eλ +α2
2π 1- -
iλ i
) }

=
σ2
{α(
2π 1- cosλs
-
ii
1
nλ+cosλ+i
sinλ)
+α2 }
=
σ2
{
2π 1-
1
αcosλ+α2
αcosλ- }
Thati
s,

f
x
(λ)=
σ2 1
{
2cosα+α2
2π 1-
whi
chi
sthes.}
d.fofAR(
1)

S.
d.ff
orAR(
2)pr
ocess
Xt=ϕ1Xt-1+ϕ2Xt-2+et

et=Xt-
ϕ1Xt-1-
ϕ2Xt-2 or

et=β0Xt-
β1Xt-1-
β2Xt-2wher
eβ0=1;
β1=ϕ1;
β2=ϕ2

s∑2
Thati =0a
j X-j=et wher
jt
ea0=1;
a1=β1;
a2=β2

Usi
ngt
het
ransf
ormat
ionweget
,
2

|∑ ae |f(λ)=2σπ
2
j
=0 j
-
iλj2
x

2
σ
|1+β e +β e |f(λ)=2
1
-
iλ
2
-
2iλ2
π x

σ2
⇒|
1+β1(
cosλs
-
iinλ)
+β2(
cos2λs
-
ii |2fx(λ)=2π
n2λ)

σ2
=[
(1+β1cosλ+β2cos2λ)
2
+(
β1si n2λ)
nλ+β2si 2
]x 2π
f(
λ)=

i
) (
1+β1cosλ+β2cos2λ)
2

=1+2β1cosλ+β12cos2λ+β22cos22λ+2β2cos2λ+2β1β2cosλcos2λ

i
i
) (
β1si n2λ)
nλ+β2si 2
=β12si
n2λ+2β1β2si n2λ+β22si
nλsi n22λ

Combi
ningt
het
wo,
wehav
e,
=1+2β1cosλ+β12cos2λ+β22cos22λ+2β2cos2λ+2β1β2cosλcos2λ+β12si
n2λ+2β1β2si
nλ
2 2
n2λ+β2 si
si n 2λ

=1+2β1cosλ+β12+β22+2β2cos2λ+2β1β2(
cosλcos2λ+si n2λ)
nλsi

Butcos2λ=1- n2λandsi
2si n2λ=2si
nλcosλ

Hence

=1+2β1cosλ+β12+β22+2β2cos2λ+2β1β2{
cosλ(
1- n2λ)
2si nλ(
+si }
nλcosλ)
2si

=1+2β1cosλ+β12+β22+2β2cos2λ+2β1β2{
cosλ- n2λcosλ}
n2λcosλ+2si
2si

=1+2β1cosλ+β12+β22+2β2cos2λ+2β1β2cosλ

=1+β12+β22+2β1(
1+β2)
cosλ+2β2cos2λ

Butwi
thβ1=-
ϕ1andβ2=-
ϕ2

σ2
=[ 2ϕ1(
1+ϕ12+ϕ22- 1-ϕ2) 2ϕ2cos2λ]
cosλ- f (λ)=
x 2π

σ2
f(λ)=
x
2π[ 2ϕ1(
1+ϕ12+ϕ22- 1-ϕ2) 2ϕ2cos2λ]
cosλ-

For-
π<λ<π

FORECASTI
NG

I
NTRODUCTI
ON

Forecasti
ngt
hefutur
evaluesofati
meser i
esisanimport
anti
sanimport
antpr
obl
em inmany
areasincl
udi
ngeconomics,pr
oduct
ion,
planni
ng,sal
esfor
ecast
ingandst
ockcont
rol
.

Supposewehaveanobservedti
meseri
esX1,
X2,
X3,
…,Xn,t
henthebasi
cpr
obl
em i
stoest
imat
e
fut
ureval
uessuchasXn+kwher
eint
egerk,
k≥1i scall
edaheadti
me.

̂
Thef orecastofXn+kmadeatt i
menf orkstepsaheadwil
l bedenotedbyX( k)
n, .Awi
dev ar
iety
offorecastingprocedureareavai
l
ableanditisi
mpor t
anttoreal
izethatnosingl
emethodis
universall
yappli
cablerathert
heanalystmustchoosetheprocedurethati
sbestappl
icabl
ef ora
gi
v ensetofcondi t
ions.Weconsideronlyoneoftheseprocedur
escalledtheBoxandJenkins
procedures.

For
ecast
ingmet
hodsmaybebr
oadl
ycl
assi
fi
edi
nto3gr
oups:

(
i)Subj
ect
ivemet
hod
Forecastcanbemadeonasubj
ect
ivebasi
susi
ngj
udgement
,commer
cial
knowl
edge,
experi
ence,et
c.
 (
ii
)Uni
var
iat
emet
hod
Forecastofagivenvari
ablearebasedonamodel fi
ttedonl ytopastobservat
ionsofagiven
̂
ti
meser i
essothatX( k)dependsonl
n, yonXn,
Xn-1,
Xn-2,
…,X1.Forexample,f
orecastoffut
ure
salesofagivenproductwouldbebasedenti
rel
yonpastsal es.Thesemethodsar ecall
ednaï
ve
project
ionmethods.

(
ii
i)Mul
ti
var
iat
emet
hod
Forecastofagivenvari
abl
edependsatl eastpar
tl
yonvaluesofoneormoreotherser
iescal
l
ed
predi
ctiveorexpl
anator
yvariabl
es.Forexample,
salesf
orecastmaydependonstock,
adverti
sement,expendi
tur
e,etc.

Al
socal
l
edt
hecasual
met
hod.

Uni
var
iat
emet
hods

It
’sof
tenuseful
tof itatr
endcurvee.g.
,l
ogist
icorpoly
nomialcurv
est osuccessfulyearlyt
otal
andthenext
rapolate.Therei
snologicalbasi
sforchoosi
ngamongt hediffer
entcurvesexcept
bygoodnessoffit.Unfor
tunat
elyi
tisthecasethatonecanfi
ndsev eralcurveswhichfitagiven
setofdat
aalmostequal l
ywellbutwhichwhenpr oj
ect
edforwardgiveswi delydi
ff
erentforecast
.

Alt
ernati
velyweuseexponentialsmoothi
ng.Exponenti
alsmoot hingshoul
donlybeusedi n
casesofnon-seasonalt
imeser i
esshowingnosy st
ematictrend.Givenanon-seasonal
time
seri
eswi t
hnosy st
ematictr
endX1,X2,
X3,
…,Xn,
it’
snatur
altotaket heesti
mateofXn+1asa
weightedsum ofthepastobservat
ions.
̂
X( 1)=C0Xn+C1Xn-1+C2Xn-2+…+CnX0
n,

I
tseemssensibl
etogivemor eweightt
orecentobser
vat
ionandl
essweight
sfari
nthepast.An
i
ntui
ti
vel
yappeal
ingsetofweightsaregeometri
cweight
s,whi
chi
ncreasewi
thconst
antrat
ios
i
nordert
hattheweightsum equal
sone.

Wet
ake

Ci=α(
1-α)
i
;i=0,
1,
2,
…

C0=α

C1=α(
1-α)

C2=α(
1-α)
2

̂
ThenX( 1)=X1sot
1, hat

̂
e2=X2-X( 1)=X2-
1, X1
̂ ̂
X( 1)=αe2+ X(
2, 1,1)

̂
e3=X3-X( 1)
2,

⋮
̂
en=Xn-X((
n-1)
,1)

Thencompl
etesum ofsquar
esie.∑n
. i
e2.Repeatt
=2 i
hepr
ocedur
eforot
herv
aluesofαbet
ween0
n 2
and1andsel
ecttheval
uethatmini
mizes∑i=2ei.

̂ ̂
X( 1)=αXn+(
n, 1-α)X((
n-1)
,1)

̂ ̂ ̂ ̂
X( 1)=αen+ X(
n, ( 1)
n- 1)butX(
, 1)=X1anden=Xn-X(
1, (
n-1)
,1)

e1=0

̂
e2=X2-X( 1)=X2-
1, X1

̂
e3=X3-X( 1)
2,

BOX-
JENKI
NSPROCEDURE

Thi
sfor
ecasti
ngprocedur
eisbasedontheautoregr
essivei
ntegr
atedmov
ingav
erage(
ARI
MA)
andi
susuall
yknownasBox-Jenkinsf
orecast
ingapproach.

Themai
nst
epsi
nset
ti
ngupaBox
-Jenki
nsf
orecast
ingmodel
sar
easf
oll
ows:

a)Modeli
dent
if
icat
ion
Here,thedatai
sexami
nedt
oseewhi
chmemberoft
heARI
MApr
ocessappear
stobemost
appropri
ate.

b)Est
imat
ion
Af
teranappr
opr
iat
emodel
hasbeenchosen,
thepar
amet
ersoft
hemodel
areest
imat
ed.

c) Di
agnost
icchecki
ng
Her
e,t
her
esi
dual
sfr
om t
hef
it
tedmodel
areexami
nedt
oseei
fthechosenmodel
areadequat
e.

d)Consi
der
ati
onofot
hermodel
sifnecessar
y,t
hati
s,sear
ch
I
ft hef i
rstmodelappearsi
nadequateforsomer eason,t
heotherARIMAmodel smaybetr
ied
untilthesati
sfact
orymodel i
sarri
ved.Whenasat isf
act
orymodel i
sfound,f
orecastmayr
eadi
ly
becomput ed.Giv
endataupt oMnt hi
sforecastwil
li
nvolvet
heobservat
ionandthefi
tt
ed
residualsuptoandincludi
nglineL.
 Exampl
esonexponent
ial
smoot
hing

Quest
ion:di
scusst
heBox-
Jenki
nsf
orecast
ingpr
ocedur
e.

Recall
thatexponenti
alsmoothi
ngisnotappropr
iateforser
ieswithnotrendorseasonal
effect
.
Thi
smet hodisoftenusedtopredi
ctthedemandf oraproductinthenextti
meperiodsothat
suff
ici
entstockcanbekept.Thisi
salsocal
leddemandf orecasti
ng.

Supposethati
tiscur rentl
ytimetandt hatthedemandf ortheproductatthi
stimeisXt,
you
wouldli
ketoforecastt hedemandi nthenexttimeper i
odXt+1.Wewill
callafor
ecastofXt+1
madeatt i
met,Ft+1.Supposef urt
herthatthesamesituati
onhel di
nthelastti
meper i
odsot hat
atti
met -1wemadeaf orecastofXtwhichwecallFt.Whenwehav eobserv
edXt,weknowt hat
theerr
orinthi
sfor ecastiset=Xt-Ft.

Ani nt
uit
ivewayofmakingt henextforecastXt+1,
wouldbetouset
heprevi
ousf
orecastXtbutt
o
adjusti
tslight
lyt
oall
owf ort hef
actthatitwasn’texact
lyr
ight
.Weadj
usti
tbyaddingona
proporti
onoftheerr
or,t
hati s,

Nextf
orecast=l
astf
orecast+apr
opor
ti
onoft
hel
aster
ror
.

Ft+1=Ft+α( Ft)wher
Xt- eαi
sthepr
opor
ti
onsucht
hat0≤α≤1

Exampl
e

Iti
scur r
entlytheendofmont h2.Att
heendonmont h1,themanufactur
erofanestabl
ished
brandoff oodf orecast
edthatthedemandforf
oodinmont h2wouldbe67000t inswhereast
he
actualdemandi nmont h2was76000t i
ns.Cal
cul
atetheexponent
ialf
orecastf
orthedemandin
mont h3usi ngα=0. 2.

Sol
uti
on

Ft+1=Ft+α( Ft)
Xt-

F3=F2+α( F2)
X2-

2(
=67+0. 67)=68.
76- 8

Henceatt
heendofmont
h3,
theexponent
ial
for
ecastdemandi
nmont
h3i
s68.
8thousandt
ins.

Aseachmont
hpassesanddemandbecomesknown,
wecancal
cul
atet
henextf
orecast
s.For
exampl
e,

Amont
hpassesandi
tisnowt
heendofmont
h3,
theact
ual
demandi
nmont
h3t
urnsoutt
obe

X3=83.Cal
cul
atet
heexponent
ial
for
ecastf
ordemandi
nthemont
h4.

F4=F3+α( F3)
X3-

68. 2(
8+0. 83- 8)=71.
68. 64Thousandt
ins.

NOTE:
 West
artt
hecal
cul
ati
onbyusi
ngX1asaf
orecastofX2t
hati
sbyset
ti
ngF2=X1

Di
ff
erentv
aluesf
orα
αiscal
ledt
hesmoothingconst
ant
.Thesmoothi
ngtherefor
eisdet
ermi
nedbytheval
ueofα.
Theval
ueofαthatminimi
zesthemeansquar
eerrororthemeanabsol
uteer
rori
sconsi
der
ed
asthebest
.

t Xt Ft ei |e| i
ei2

⋮ ⋮ ⋮ ⋮ ⋮ ⋮

⋮ ⋮ ⋮ ⋮ ⋮ ⋮

n n

∑|e|
i
=2
i ∑e
i
=2
2
i

1 1
1 i=2|i|
MSE= ∑n e2 MAE= ∑n e
n-
1 i=2 i n-

Exer
cise

Acarhirecompanycalculat
estheexponenti
alforecastoft
henumberofcarswhichwil
lbe
requi
redthefol
lowi
ngdayf oreachofthe11consecut i
vedays.Apr
intoutoft
heresul
tsi
s
shownbel owbutunf
ortunatel
ythepri
ntermangledthepaperandsomeoft heent
ri
esare
missi
ng.

t Xt Ft ei=Xi-
Fi |e|
i
ei2 Ftat Ftat

α=0.
4 α=0.
5

1 110 -

2 115 110.
000

3 109 111.
500

4 108

5 106 109.
925

6 111 108.
748

7 107 109.
423

8 112 108.
696
9 114

10 110 110.
981

11 111 110.
687

12 110.
781

a)Whatv
alueoft
hesmoot
hconst
antαhasbeenused?

b)Recal
cul
atet
hef
orecastf
orday
s4and9andpr
edi
ctt
henumberofcar
srequi
redf
orday
12.

c) Computet
heabsol
uteer
rorandt
hesquar
eder
rort
o3deci
mal
placesandcal
cul
atet
he
val
ueofMSEandMAE.

d)Computethef
orecastwi
thα=0.4andα=0.
5.Hencedet
ermi
net
hebestsmoot
hing
const
antamongtheusedval
uesofα.