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ARIMA ( 0,1,0) is
(1-L)yt = +et
ARIMA ( 0,1,1) is
ARIMA ( 0,1,2) is
ARIMA ( 1,1,0) is
(1-L)yt = + L yt + et
ARIMA ( 2,1,0) is
ARIMA ( 1,1,1) is
ARIMA ( 2,1,2) is
Theoretical Pattern: In time series models, the basic assumption is weakly stationary or
Stationary. In weakly stationary time series, the mean and variance are constant and
covariance is time invariant. But in practical situation/reality, many econometric time series
are non-stationary that is they are integrated. Now if the time series is integrated of order 1or
I (1), then its first difference is stationary.
Now if a time series is I (2), then its second differences are stationary. In general if a time
series is I(d), after differencing it d times we obtained I(0) series.
To difference a time series d times to make it stationary and then apply the ARMA (p,
q) model; we can say the original time series model is ARIMA (p, d, q).
The important point to note is that to use the Box-JenKins Methodology, we must
have either a stationary time series or a time series that is stationary after one or more
differencing.
The Box-JenKins (BJ) methodology comes in handy in answering the preceding question.
This method consists of four steps;
Step 1:
Identification.
That is find out the appropriate values of p, d and q. Correlogram ACF graph helps to do
this task.
Step 2:
Estimation of the parameters.
Having identified the appropriate p and q values, the next stage is to estimate the parameters
of the auto regressive and moving average terms included in the model. To estimates the
parameters, we can use OLS but NLS is common to use.
Step 3:
Diagnostic checking.
Having chosen a particular ARIMA model and having estimated its parameters, then check
the chosen model fits the data reasonably well. If we see the residuals estimated from this
model are white noise or pure random error term then chosen model is to accept the particular
fit, if not, we must start from step1. Thus the BJ methodology is an iterative process.
Step 4:
Forecasting.
By using ARIMA modeling, the forecast obtained by this method are more reliable than some
other traditional method.
Flowchart
Step1: Identification of the model (choosing tentative p,d,q)
Forecasting
Patterns of ACF
Patterns of PACF
MA (q)
Declines exponentially
AR (p)
Decays Exponentially
ARMA (p, q)
Exponential Decay
Exponential Decay
ACF and PACFS of AR (p) and MA (q) process have opposite patterns; in the AR (p) case
the ACF declines geometrically or exponentially but the PACF cuts off after a certain number
of lags, whereas the opposite happens to an MA (q) process.
Since we do not observe the theoretical ACFS and PACFS and rely on their sample counter
parts, the estimated ACF and PACFS with not match exactly with their theoretical counter
parts.
SEASONAL PROCESSES
Sometime time series data exhibit strong periodic patterns, say
Yt= St+Nt
St is the deterministic component with periodicity s and Nt is the stochastic component that
may be modeled as an ARMA process.
Since St is the deterministic and has periodicity s, so
St=St+s=St-s
St - St-s= (1-Ls) St=0
And ARIMA(0,1,1) model with s=4can be defined as
(1-L) (1-L4)yt= (1- L- *L4+
*L5) et
*L13) et
1=
1=
1=
0.5
0.5 and
0.5 and
2=0.3.
2=0.3.