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Stephen G Hall
Time Series Forecasting
Introduction
These are a body of techniques
which rely primarily on the statistical
properties of the data, either in
isolated single series or in groups of
series, and do not exploit our
understanding of the working of the
economy at all.
The objective is not to build models
which are a good representation of
the economy with all its complex
interconnections, but rather to build
simple models which capture the
time series behaviour of the data and
may be used to provide an adequate
basis for forecasting alone.
See `Applied Economic Forecasting
Techniques' ed S G Hall, Simon and
Schuster, 1994.
Some basic concepts
Two basic types of time series
models exist,
these are autoregressive and moving
average models.
What information do we have to forecast a series?
time
The basic autoregressive model for a series X is,
X
...
X
+
X
=
X
(L) and
process error noise white a is where
+
X
(L) =
X
n - t n 2 - t 2 1 - t 1 1 - t
t 1 - t t
u u u
u
c
c
u
This would be referred to as an nth order autoregressive
process, or AR(n).
The basic moving average models represents X as a
function of current and lagged values of a white
noise process.
e
,
e
,
e e
,
e
e
,
q - t
q
1 - t
1
t t
t t
+ ... + + = (L)
process error noise white a is where
(L) =
X
This would be referred to as a qth order moving average
process, or MA(q).
ARMA models
A mixture of these two types of
model would be referred to as an
autoregressive moving average
model (ARMA)n,q, where n is the
order of the autoregressive part and
q is the order of the moving average
term.
WOLD'S Decomposition
for any series (x) which is a covariance stationary
stochastic process with E(x) = 0, the process
generating x may be written as,
s t f or 0 = )
1, = where
d
+ =
x
s
t
2 2
t t j
j=0
0
t j - t
j
j=0
t
E( and
)= E( 0, )= E( , <
=
c c
o c c o o
c o
d
t
is termed the linearly deterministic part of x while
is termed the linearly indeterministic part.
c o
j - t j
0 = j
c
So the first order AR process has been recast as an infinite
order MA one.
The Correlogram and partial
autocorellation function
Two important tools for diagnosing the time
series properties of a series
The correlogram shows the correlation between a variable
X
t
and a number of past values.
X
T
1
=
X
where
)
X
-
X
(
T
1
)
X
-
X
)(
X
-
X
(
T
1
=
C
t
T
1 = t
*
2
*
t
T
1 = t
*
t
*
k + t
k - T
1 = t
i
o
o