Time Series ARIMA Models Example

Ani Katchova

2013 by Ani Katchova. All rights reserved.

Time Series ARIMA Models Example

We have time series data on ppi (producer price index). Data are quarterly from 1960 to 2002.
Summary statistics: Mean(ppi)=64, mean ((ppi)=0.464.
Graphs in Stata
Differenced variable (ppi)

1960q1

-4

20

40

-2

producer price index

60
80

producer price index, D

0
2

100

120

Original variable (ppi)

1970q1

1980q1
time in quarters

1990q1

2000q1

1960q1

1970q1

1980q1
time in quarters

1990q1

2000q1

Original variable does not look stationary.

Differenced variable looks stationary (although the variance increases).

Graphs in R of the original and differenced variable

Graphs in SAS of the original and differenced variable

Dickey-Fuller Test

Const
L1.y or yt-1

Original variable
D.y or yt
0.5036*
-0.0006
(-0.26)

With trend
D.y or yt
0.5861*
-0.0084
(-0.793)

LD.y or yt-1

-0.4452*
(-6.86)

Trend or t
Test stat
p-value
Conclusion

Differenced variable
D2.y or yt
0.2067*

0.0050
-0.26
0.398(Stata)
0.927(SAS)
Variable is
not stationary

-0.793
0.99 (SAS)
0.96 (Stata & R)
Variable is not trend
stationary

-6.86
<0.001
Differenced variable is
stationary

The Dickey Fuller test shows that the original variable is not stationary, but the differences
variable is stationary so we need to use differences d=1 in the ARIMA models.

Correlograms, Autocorrelation function (ACF), and partial autocorrelation function (PACF)

Original variable (ppi)
LAG
ACF
1
0.990
2
0.978
3
0.966
4
0.952
5
0.937
6
0.923
7
0.908
8
0.894
9
0.880
10
0.866

Differenced variable (ppi)

LAG
ACF
1
0.553
2
0.336
3
0.319
4
0.217
5
0.086
6
0.153
7
0.082
8
-0.078
9
-0.080
10
0.023

PACF
0.999
-0.555
-0.069
-0.209
0.023
0.125
-0.153
0.114
0.210
0.049

PACF
0.555
0.066
0.203
-0.031
-0.130
0.149
-0.118
-0.213
-0.051
0.166

-1.00

Partial autocorrelations of ppi

-0.50
0.00
0.50

Autocorrelations of ppi
-0.50
0.00
0.50

1.00

1.00

ACF and PACF of original variable

10

20
Lag

Bartlett's formula for MA(q) 95% confidence bands

30

40

10

20
Lag

30

40

95% Confidence bands [se = 1/sqrt(n)]

For original variable, ACF is a slow decay function (indicating non-stationarity) and PACF cuts off
at lag 1 or 2.
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Partial autocorrelations of D.ppi

-0.200.00 0.20 0.40 0.60

Autocorrelations of D.ppi
-0.200.00 0.20 0.40 0.60

ACF or PACF of the differenced variable

10

20
Lag

Bartlett's formula for MA(q) 95% confidence bands

30

40

10

20
Lag

30

40

95% Confidence bands [se = 1/sqrt(n)]

For differenced variable, ACF tails off and PACF cuts off after lag 1 use AR(1)?
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ARIMA Models

Const
L1.ar
L2.ar
L1.ma
L2.ma
L3.ma
AIC
BIC

ARIMA ARIMA ARIMA ARIMA ARIMA ARIMA ARIMA ARIMA ARIMA

(1,0,0)
(2,0,0)
(0,0,1)
(1,0,1)
(1,1,0)
(0,1,1)
(1,1,1)
(1,1,3)
(2,1,3)
64.37
64.18
64.69* 64.67*
0.46*
0.47*
0.43*
0.43*
0.44*
0.999*
1.64*
0.99*
0.55*
0.72*
0.73*
1.51*
-0.64*
-0.71*
1.00*
0.53*
0.48*
-0.25*
-0.24
-1.05*
-0.10
0.21
0.12
0.32*
502
424
1401
441
393
405
393
392
390
511
426
1420
543
402
414
406
411
412

* These are the Stata results. R has very similar coefficients. In the SAS output, the MA components have reverse
signs than what is reported in this table and some coefficients have different magnitudes.

We know that the variable is not stationary so we need to use differenced variable ARIMA
(p,1,q). But here we also include models with the original variable ARIMA (p,0,q).
The coefficient on the lagged dependent variable is close to 1 indicating non-stationarity.
To select a model to use, look at the significance of the coefficients and also low AIC or BIC.
Usually, there are a few models that perform similarly, so it is up to the researcher to try a few
models and decide which one to use. The recommendation is to go with the simplest model.
ARIMA(1,1,1) is a good choice based on low AIC and BIC.
ARIMA(2,1,3) is also a good choice based on the significance of the lags.

Forecasting in R
Original variable after ARIMA(1,0,1)

Differenced variable after ARIMA(1,1,1)

The dependent variable is forecasted including the confidence interval.

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