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Time series analysis

Box-Jenkins method
Chanon Chingchayanurak
Faculty of Business Administration
C.M.U.
Objective
Choose the appropiate model
Analyze by using SPSS
Diagnosis the models
Use model for forecasting
Overview of Box-Jenkins method
Complicate forecasting method, but high
accuracy.
Developed by two statisticians, George
E.P. Box and Gwilym M. Jenkins.
Published in
Time Series Analysis: Forecasting and Control
(1970)
The model is called ARMA (p,q) or ARIMA (p,d,q)
Overview of Box-Jenkins method
The Price of Stock A
Date Price (Y
t
)
1 42.3521
2 43.1256
3 41.8716
4 39.4125
5 39.4589

Time series data analysis need >30 samples
Overview of Box-Jenkins method
ARMA (p,q) model
Stationary time series

ARIMA (p,d,q) model
Non-stationary time series

In this session we will focus on ARMA (p,q)
Overview of Box-Jenkins method
Identify Model to Be
Tentatively Entertained
Estimate Parameters
In Tentatively Entertained
Diagnostic Checking
Use Model for
Forecasting
Overview of Box-Jenkins method
Stationary Time Series
E(Y
t
), V(Y
t
) and Probability distribution
function of Y
t
is constant at different time
period.

Consider
Y
t
, Y
t-1
, Y
t-2
, , Y
t+T-1

and Y
t+j
, Y
t+j-1
, Y
t+j-2
, , Y
t+j+T-1
Overview of Box-Jenkins method
Stationary Time Series
Plot the time series data
if its movement has trend Non-stationary

Consider the correlogram of r
k

(coefficient autocorrelation at lag K) and K
if r
k
die down when K is increasing
Stationary
ARMA (p,q) Models
p is an order of Autoregressive Models
(AR)
q is an order of Moving Average Models
(MA)
Parameter in the model equal to p+q+1
(not more than 3)
AR(p) Models
Autoregressive model of order p


where
Y
t
= dependent variable at time t
= constant
= coefficient (autoregressive parameter)
= error term

t p t p 2 t 2 1 t 1 t
Y ... Y Y Y c + | + + | + | + o =

o
|
c
AR(p) Models
AR(1)
or
and

AR(2)

or
and

t 1 t 1 t
Y Y c + | + o =

t t 1
Y ) B 1 ( c + o = |
1
1
< |
t 2 t 2 1 t 1 t
Y Y Y c + | + | + o =

t
2
2 1
) B B 1 ( c + o = | + |
1 , 1 , 1
2 1 2 2 1
< | < | | < | + |
MA(q) Models
Moving average model of order q


where
Y
t
= dependent variable at time t
= constant
= coefficient (parameter of moving average)
= error term

q t q 2 t 2 1 t 1 t t
... Y

c u c u c u c + =

u
c
MA(q) Models
MA(1)

and

MA(2)

and

1 t 1 t t
Y

c u c + =
1
1
< u
1 , 1 , 1
2 1 2 2 1
< u < u u < u + u
2 t 2 1 t 1 t t
Y

c u c u c + =
ARMA(p,q) Models
Autoregressive and moving average model of
order p and q



ARMA (1,1)

and ,

t p t p 2 t 2 1 t 1 t
Y ... Y Y Y c + | + + | + | + o =

q t q 2 t 2 1 t 1 t
...

c u c u c u
1 1 t 1 t 1 t
Y Y c u c + | + o =

1
1
< | 1
1
< u
r
k
and r
kk
Consider r
k
( Coefficient auto correlation)
and r
kk
( Partial coefficient auto correlation)

to identify the appropiate ARMA (p,q) model
AR(1)
AR(2)
MA(1)
MA(2)
ARMA(1,1)
Coefficient auto correlation: r
k
The correlation of the same time series
data but one with lagging K period



The variance of r
k

=
+


=
n
1 t
2
t
K n
1 t
K t t
k
) Y Y (
) Y Y )( Y Y (
r
1 k ,
n
1
) r ( V
k
= =
,... 4 , 3 , 2 k , ) r 2 (1
n
1
) r ( V
1 - k
1 j
2
j k
= + =

=
Coefficient auto correlation: r
k
Consider
t 1 2 3 4 5 6 7 8 9 10
Y
t
8 5 10 7 12 14 9 15 16 4

Calculate r
1
,r
2
,r
3

V(r
1
),V(r
2
),V(r
3
)
Coefficient auto correlation: r
k
Hypothesis Testing


Test Statistics
Z
calc
=

Accept H
0
when

0 : H
0 : H
k 1
k 0
=
=
k
r n
n
1
. 96 . 1 r
n
1
. 96 . 1
K
s s
Partial coefficient auto correlation: r
kk
The correlation of the same time series
data but different period (e.g. Lag K) when
assume the other different periods remain
constant.




,... 4 , 3 , 2 K ,
r r 1
r r r
r
1 K
1 j
j j , 1 K
1 K
1 j
j K j , 1 K k
kk
=

=

1 K , , r r
1 kk
= =
j K , 1 K KK j , 1 K j , K
r . r r r

=
n
1
) r ( V
KK
=
and
Partial Coefficient auto correlation: r
KK
Hypothesis Testing


Test Statistics
Z
calc
=

Accept H
0
when

0 : H
0 : H
KK 1
KK 0
=
=
k
r n
n
1
. 96 . 1 r
n
1
. 96 . 1
KK
s s
Identify Model with SPSS

Use the SPSS
Graphs Time Series Autocorrelation
Select the appropiate model from
correlogram.

Overview of Box-Jenkins method
Identify Model to Be
Tentatively Entertained
Estimate Parameters
In Tentatively Entertained
Diagnostic Checking
Use Model for
Forecasting
Estimate Parameter with SPSS

Use the SPSS
Analyze Time Series Arima

Or Calculate from the table

Overview of Box-Jenkins method
Identify Model to Be
Tentatively Entertained
Estimate Parameters
In Tentatively Entertained
Diagnostic Checking
Use Model for
Forecasting
Diagnostic Testing

Hypothesis Testing


Test Statistics


Accept H
0
when

0 : H
0 : H
1
0
= u
= u
1 n ,
2
1 n ,
2
t t t

o o
s s
u
u
=

t
Overview of Box-Jenkins method
Identify Model to Be
Tentatively Entertained
Estimate Parameters
In Tentatively Entertained
Diagnostic Checking
Use Model for
Forecasting