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ARIMA Modelling and

Forecasting

BY SHIPRA MISHRA
INTERN
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WHAT DOES FORECASTING MEANS?

 Forecasting is a common statistical task in business, where it helps to inform

decisions about the scheduling of production, transportation and personnel,
and provides a guide to long-term strategic planning. At times , Time Series
forecasting is needed in absence of other dependent Variables , for future.

 The basic steps in forecasting are:-

1. Problem definition
2. Gathering information
3. Choosing and fitting models
4. Preliminary analysis
5. Using and evaluating a forecasting model
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WHAT ARE TIME SERIES PATTERNS?

 TREND: A trend exists when there is a long-term

increase or decrease in the data. It does not have to be
linear.
 SEASONAL: A seasonal pattern occurs when a time
series is affected by seasonal factors such as the time
of the year or the day of the week. Seasonality is
always of a fixed and known frequency.
 CYCLIC: A cycle occurs when the data exhibit rises and
falls that are not of a fixed frequency. These fluctuations
are usually due to economic conditions, and are often
related to the “business cycle”. The duration of these
fluctuations is usually at least 2 years.
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WHAT IS ARIMA?

It stands for Autoregressive Integrated Moving Average.

It is a class of statistical models for analyzing and forecasting
time series data.
 AR: Autoregression. A model that uses the dependent
relationship between an observation and some number of
lagged observations.
 I: Integrated. The use of differencing of raw observations in
order to make the time series stationary.
 MA: Moving Average. A model that uses the dependency
between an observation and a residual error from a moving
average model applied to lagged observations.
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ARIMA EQUATION

 let us understand arima equation and how it is dependent on AR and MA.

 y′t=c+ϕ1y′t−1+⋯+ϕpy′t−p+θ1εt−1+⋯+θqεt−q+εt
Where y′t is the differenced series (it may have been differenced more than once).
 The“predictors” on the right hand side include both lagged values of yt and lagged errors.
 Point forecasts can be calculated using the following three steps.
 Expand the ARIMA equation so that yt is on the left hand side and all other terms are on
the right.
 Rewrite the equation by replacing t withT+h.
 On the right hand side of the equation, replace future observations with the forecasts,
future errors with zero, and past errors with the corresponding residuals.
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STATIONARITY OF AR PROCESS

 A stationary time series is one whose properties do not depend on the time at which
the series is observed.
 If an AR model is not stationary, it means that
previous values of the error term will have a
non-declining effect on the current value of
the dependent variable.
 This implies that the coefficients on the MA
process would not converge to zero as the
lag length increases.
 A time series is stationary when it’s mean and variance remains constant.
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What is Autoregression?

 In an autoregression model, we forecast the variable of interest using a linear combination of

past values of the variable. The term autoregression indicates that it is a regression of the variable
against itself.
 The test for stationarity in an
AR model (with p lags)is that
the roots of the characteristic
equation lie outside the unit
circle, where the
characteristic equation is:
1  1 z  2 z 2  ...   p z p  0
 From the curve we see that
value of p is 6.
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WHAT IS DIFFRENCING?

 The way to make a non-stationary time series stationary — compute the

differences between consecutive observations. This is known as
differencing.
 Transformations such as logarithms can help to stabilize the variance of a
time series. Differencing can help stabilize the mean of a time series by
removing changes in the level of a time series, and therefore eliminating
(or reducing) trend and seasonality.
 Since the curve is not stationary as its characteristics are notconstant so
differencing is of order 1.
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WHAT IS MOVING AVERAGE?

 A moving average model uses past forecast errors in a regression-like

model.
 yt=c+εt+θ1εt−1+θ2εt−2+⋯+θqεt−q,
Where εt is white noise.
 Notice that each value of yt can be thought of as a weighted
moving average of the past few forecast errors.
 From the curve, we see that the value of q is 1.
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AIC AND BIC CRITERION

 Akaike’s Information Criterion (AIC)

It is useful in selecting predictors for regression, is also
useful for determining the order of an ARIMA model. It
can be written as
AIC=−2log(L)+2(p+q+k+1),
Where L is the likelihood of the data,
 Bayesian Information Criterion
It can be written as
BIC=AIC+[log(T)−2](p+q+k+1).
 Good models are obtained by minimizing BIC and
AIC.
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FIRST MODEL

 For the first model, we will take the order of p=8, d=1 and q=1. And observe
the BIC value:
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SECOND MODEL

 For the second model, we will take

the order of p=6, d=1 and q=1.
And observe the BIC value:
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THIRD MODEL

 For the third model, we will take the order of p=6, d=1 and q=2. And
observe the BIC value:
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ORDER FOR ARIMA

 From the above three observations we found

that the value of p and q for which BIC is
minimum is 6 and 1.
 So, the order for arima forecasting will be (6,1,1).
 The residual plot and kde plot implies that order
is (6,1,1).
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COMPARING PREDICTION OF TEST DATA
WITH ACTUAL DATA

 Here, we are using train test for prediction.

 We are using 95% of data and predicting the 5% data. On comparing the
two plots of predicted data and actual data we get that predicted data is
approximately equal to actual data.
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PREDICTION FOR NEXT ONE MONTH

 Here, we have shown predicted data with historical data.

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SUMMARY

 In this presentation, we have learned about forecasting and how to use

arima model for forecasting
 When using AR models, whether the series is stationary or not determine
how stable it is.
 Forecasting of time series is an important measure of how well a model
works
 NOTE: Because of the security concern proxy data is
used.