CHAPTER 9

THE BOX-JENKINS
(ARIMA)
METHODOLOGY
 BOX-JENKINS
METHODOLOGY
 It does not assume any particular pattern in
the historical data.
 It uses an iterative approach of identifying a
possible model from a general class of
models.
 The chosen model is checked.
 The model fits well if the residuals are small
and randomly distributed.
 If the specified model is not satisfactory, the
process is repeated using a new model.
 The final model is used for forecasting.
Autoregressive
Models
Yt    1Yt 1   2Yt  2  ...   pYt  p   t

Where:
Yt = the response (dependent) variable at time t

Yt 1 , Yt  2 , ... , Yt  p = the response variable at time lags t-1, t-2,…, t-p

  , 1 ,  2 , . . . ,  p = the coefficients to be estimated

t = the error term at time t, which represents the

effects of variables not explained by the model.
Yt     t  1 t 1  2 t  2  ...  q t q
Where:

Yt = the response (dependent) variable at time t

 = the constant mean of the process

1 , 2 , ..., q = the coefficients to be estimated

t = the error term, which represents the effects of

variables not explained by the model.

 t 1 ,  t 2 , ...,  t q = the errors in previous time periods that, at time t, are

incorporated in the response,
Example 9.1 Table 9-5

60.0 99.0 75.0 79.5 61.5 88.5 72.0 90

81.0 25.5 78.0 64.5 81.0 51.0 66.0 78
72.0 93.0 66.0 99.0 76.5 85.5 73.5 87
78.0 75.0 97.5 72.0 84.0 58.5 66.0 99
61.5 57.0 60.0 78.0 57.0 90.0 73.5 72
78.0 88.5 97.5 63.0 84.0 60.0 103.5
57.0 76.5 61.5 66.0 73.5 78.0 60.0
84.0 82.5 96.0 84.0 78.0 66.0 81.0
72.0 72.0 79.5 66.0 49.5 97.5 87.0
67.8 76.5 72.0 87.0 78.0 64.5 73.5
Session Window: (only part)
Final Estimates of Parameters Forecasts from period 75
Period Forecast
Type Coef
AR 1 -0.5351 76 77.227
AR 2 0.0048
Constant 115.285
Moving Average
Models
Yt     t  1 t 1  2 t  2  ...  q t q
Where:

Yt = the response (dependent) variable at time t

 = the constant mean of the process

1 , 2 , ..., q = the coefficients to be estimated

t = the error term, which represents the effects of

variables not explained by the model.

 t 1 ,  t 2 , ...,  t q = the errors in previous time periods that, at time t, are

incorporated in the response,
Example 9.2

Session Window: (part only)

Final Estimates of Parameters

Type Coef Forecasts from period 75

MA 1 0.5663
MA 2 -0.3549 Period Forecast
Constant 75.414 76 80.626
Yt     t  1 t 1  2 t  2  ...  q t q
Where:

Yt = the response (dependent) variable at time t

 = the constant mean of the process

1 , 2 , ..., q = the coefficients to be estimated

t = the error term, which represents the effects of

variables not explained by the model.

 t 1 ,  t 2 , ...,  t q = the errors in previous time periods that, at time t, are

incorporated in the response,
Example 9.2

Session Window: (part only)

Final Estimates of Parameters

Type Coef Forecasts from period 75

MA 1 0.5663
MA 2 -0.3549 Period Forecast
Constant 75.414 76 80.626
 Summary
Autocorrelation Partial Autocorrelations
s

MA(q) Cut off after the Die out

order q of the
process
AR(p) Die out Cut off after the order p
of the process

ARMA(p, q) Die out Die out

IMPLEMENTING THE
MODEL-BUILDING
STRATEGY
 Postulate General Class of Models

Step 1 Identify Model to Be Tentatively Model

Entertained Identification

Estimate Parameters in Tentatively Model

Step 2
Entertained Model Estimation

Diagnostic Checking Model

Step 3 (Is the model adequate?) Checking

Forecasting
Step 4 Use Model for Forecasting with the Model

Flow Diagram for the Box-Jenkins Model-Building Strategy

Example 9-3 Daily Closing Averages of the Transportation Index
Time Closing Time Closing Time Closing Time Closing Time Closing
Period Average Period Average Period Average Period Average Period Average

1 222.34 15 223.07 29 246.74 43 249.76 57 268.21

2 222.24 16 225.36 30 248.73 44 251.66 58 272.16
3 221.17 17 227.60 31 248.83 45 253.41 59 272.79
4 218.88 18 226.82 32 248.78 46 252.04 60 275.03
5 220.05 19 229.69 33 249.61 47 248.78 61 278.49
6 219.61 20 229.30 34 249.90 48 247.76 62 281.75
7 216.40 21 228.96 35 246.45 49 249.27 63 285.70
8 217.33 22 229.99 36 247.57 50 247.95 64 286.33
9 219.69 23 233.05 37 247.76 51 251.41 65 288.57
10 219.32 24 235.00 38 247.81 52 254.67
11 218.25 25 236.17 39 250.68 53 258.62
12 220.30 26 238.31 40 251.80 54 259.25
13 222.54 27 241.14 41 251.07 55 261.49
14 223.56 28 241.48 42 248.05 56 264.95
 Time Series Plot of Closing Average
290

280

270

Closing Average
260

250

240

230

220

210
1 6 12 18 24 30 36 42 48 54 60
Day

Autocorrelation Function for Closing Average

(with 5% significance limits for the autocorrelations)

1.0
0.8
0.6 Time Series is nonstationary
0.4
Autocorrelation

0.2
0.0
-0.2
-0.4
-0.6
-0.8
-1.0

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
Lag
 Time Series Plot of First Differences

3
First Differences

-1

-2

-3

-4
1 6 12 18 24 30 36 42 48 54 60
Day
 Autocorrelation Function for First Differences

1.0
0.8
0.6

0.4

Autocorrelation
0.2
0.0

-0.2
-0.4

-0.6
-0.8

√ -1.0

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
Lag

Partial Autocorrelation Function for First Differences

1.0
0.8
0.6

Partial Autocorrelation
0.4
0.2
0.0

-0.2
-0.4

-0.6
-0.8
-1.0

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
Lag

ARIMA(1, 1, 0)
√
Partial Autocorrelation Function for First Differences

1.0
0.8
0.6

Partial Autocorrelation
0.4
0.2
0.0

-0.2
-0.4

-0.6
-0.8
-1.0

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
Lag

ARIMA(0, 1, 1)
 ???

Residual Autocorrelations: ARIMA(1, 0, 0)

1.0
0.8
0.6

0.4
Autocorrelation

0.2
0.0

-0.2
-0.4

-0.6
-0.8
-1.0

2 4 6 8 10 12 14 16 18 20
Lag
ARIMA(1, 1, 0) Model for Transportation Index
Final Estimates of Parameters

Type Coef SE Coef T P

AR 1 0.2844 0.1221 2.33 0.023
Constant 0.7408 0.2351 3.15 0.003

Differencing: 1 regular difference

Number of observations: Original series 65, after differencing 64
Residuals: SS = 219.223 (backforecasts excluded)
MS = 3.536 DF = 62

Modified Box-Pierce (Ljung-Box) Chi-Square statistic

Lag 12 24 36 48
Chi-Square 11.8 29.1 37.1 48.1
DF 10 22 34 46
P-Value 0.297 0.141 0.328 0.389

Forecasts from period 65

95% Limits
Period Forecast Lower Upper Actual
66 289.948 286.262 293.634
If the p-value associated
with the Q statistic is small
(say, p-value < .05), the
model is considered
inadequate. The analyst
should consider a new or
modified model and
continue the analysis until a
satisfactory model has been
determined.
ARIMA(0, 1, 1) Model for Transportation Index
Final Estimates of Parameters

Type Coef SE Coef T P

MA 1 -0.2913 0.1226 -2.38 0.021
Constant 1.0381 0.3035 3.42 0.001

Differencing: 1 regular difference

Number of observations: Original series 65, after differencing 64
Residuals: SS = 219.347 (backforecasts excluded)
MS = 3.538 DF = 62

Modified Box-Pierce (Ljung-Box) Chi-Square statistic

Lag 12 24 36 48
Chi-Square 11.6 32.0 41.0 51.4
DF 10 22 34 46
P-Value 0.310 0.077 0.189 0.270

Forecasts from period 65

95% Limits
Period Forecast Lower Upper Actual
66 290.053 286.366 293.740
Both models fit the data equally well.
Autocorrelation Function:
RESI1

Lag ACF T LBQ ACF of Residuals for Closing Average ARIMA(1,1,0)

1 -0.002164 -0.02 0.00 1.0

2 -0.054880 -0.44 0.21 0.8

3 0.126703 1.01 1.32 0.6

4 0.192990 1.52 3.94 0.4

Autocorrelation
5 0.053912 0.41 4.15 0.2
0.0
6 -0.069976 -0.53 4.50
-0.2
7 0.215477 1.62 7.94
-0.4
8 -0.062525 -0.45 8.24
-0.6
9 -0.155310 -1.12 10.09
-0.8
10 0.119656 0.85 11.21
-1.0
11 -0.087686 -0.61 11.82
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
12 0.005717 0.04 11.83 Lag
13 -0.024945 -0.17 11.88
14 0.052536 0.37 12.11
15 -0.083232 -0.58 12.71
16 -0.170800 -1.18 15.28
 ACF of Residuals for Closing Average ARIMA(0, 1, 1)
(with 5% significance limits for the autocorrelations)

1.0
0.8
0.6
0.4
Autocorrelation

0.2
0.0
-0.2
-0.4
-0.6
-0.8
-1.0

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
Lag
 Example 9.4
Readings for the Atron Process
60.0 99.0 75.0 79.5 61.5 88.5 72.0 90
81.0 25.5 78.0 64.5 81.0 51.0 66.0 78
72.0 93.0 66.0 99.0 76.5 85.5 73.5 87
78.0 75.0 97.5 72.0 84.0 58.5 66.0 99
61.5 57.0 60.0 78.0 57.0 90.0 73.5 72
78.0 88.5 97.5 63.0 84.0 60.0 103.5
57.0 76.5 61.5 66.0 73.5 78.0 60.0
84.0 82.5 96.0 84.0 78.0 66.0 81.0
72.0 72.0 79.5 66.0 49.5 97.5 87.0
67.8 76.5 72.0 87.0 78.0 64.5 73.5
 Readings for the Atron Process
110

100

90

80
Atron Readings

70

60

50

40

30

20
1 7 14 21 28 35 42 49 56 63 70
Time Period

Seams to be stationary
 Autocorrelation Function for Yt

1.0
0.8
0.6

0.4

Autocorrelation
0.2
0.0

-0.2
-0.4

-0.6
-0.8
-1.0

2 4 6 8 10 12 14 16 18
Lag

Partial Autocorrelation for Atron Readings

1.0

√ Partial Autocorrelation
0.8
0.6

0.4
0.2
0.0

-0.2
-0.4

-0.6
-0.8
-1.0

2 4 6 8 10 12 14 16 18
Lag
 Partial Autocorrelation for Atron Readings

1.0
0.8
0.6

Partial Autocorrelation
√ 0.4
0.2
0.0

-0.2
-0.4

-0.6
-0.8
-1.0

2 4 6 8 10 12 14 16 18
Lag
ARIMA(0, 0, 2) Model 1: Atron readings
Final Estimates of Parameters
Type Coef SE Coef T P
MA 1 0.5663 0.1108 5.11 0.000
MA 2 -0.3549 0.1147 -3.09 0.003
Constant 75.414 1.060 71.13 0.000
Mean 75.414 1.060
Number of observations: 75
Residuals: SS = 9729.53 (backforecasts
excluded)
MS = 135.13 DF = 72
Modified Box-Pierce (Ljung-Box) Chi-Square
statistic
Lag 12 24 36 48
Chi-Square 7.0 23.7 31.8 46.9
DF 9 21 33 45
P-Value 0.639 0.305 0.528 0.394
Forecasts from period 75
95% Limits
Period Forecast Lower Upper Actual
76 80.626 57.837 103.415
77 78.164 51.975 104.353
78 75.414 48.005 102.823
 Residual Autocorrelations: ARIMA(0, 0, 2)

1.0
0.8
0.6

0.4
Autocorrelation

0.2
0.0

-0.2
-0.4

-0.6
-0.8
-1.0

2 4 6 8 10 12 14 16 18
Lag
ARIMA(1, 0, 0) Model 1: Atron readings
Final Estimates of Parameters

Type Coef SE Coef T P

AR 1 -0.5376 0.0986 -5.45 0.000
Constant 115.829 1.356 85.42 0.000
Mean 75.3310 0.8818

Number of observations: 75
Residuals: SS = 10065.8 (backforecasts excluded)
MS = 137.9 DF = 73
Modified Box-Pierce (Ljung-Box) Chi-Square statistic

Lag 12 24 36 48
Chi-Square 9.3 29.8 37.2 58.2
DF 10 22 34 46
P-Value 0.508 0.124 0.324 0.107
Forecasts from period 75
95% Limits
Period Forecast Lower Upper Actual
76 77.122 54.102 100.142
77 74.368 48.232 100.504
78 75.849 48.879 102.818
According to the principle of parsimony : ARIMA(1, 0, 0)

Residual Autocorrelations: ARIMA(1, 0, 0)

1.0
0.8
0.6

0.4
Autocorrelation

0.2
0.0

-0.2
-0.4

-0.6
-0.8
-1.0

2 4 6 8 10 12 14 16 18
Lag
 Example 9.5
Errors from Atron Quality Control
0.23- 0.20- 1.93- 0.97- 0.10
0.63 0.21- 1.87 0.83 0.62-
0.48 0.91 0.97- 0.33- 2.27
0.83- 0.36- 0.46 0.91 0.62-
0.03- 0.48 2.12 1.13- 0.74
1.31 0.61 2.11- 2.22 0.16-
0.86 1.38- 0.70 0.80 1.34
1.28- 0.04- 0.69 1.95- 1.83-
0.00 0.90 0.24- 2.61 0.31
0.63- 1.79 0.34 0.59 1.13
0.08 0.37- 0.60 0.71 0.87-
1.30- 0.40 0.15 -.84 1.45
1.48 1.19- 0.02- 0.11- 1.95-
0.28- 0.98 0.46 1.27 0.51-
0.79- 1.51- 0.54- 0.80- 0.41-
1.86 0.90 0.89 0.76- 0.49
0.07 1.56- 1.07 1.58 1.54
0.09 2.18 0.20 -.38 -.96
 Errors (Deviation) from Target): Atron Quality Control
3

1
Errors

-1

-2

1 9 18 27 36 45 54 63 72 81 90
Time Period

Seams to be stationary
 Autocorrelations for Atron Quality Control Errors

1.0
0.8
0.6

√ √ 0.4

Autocorrelation
0.2
0.0

-0.2
-0.4

-0.6
-0.8
-1.0

2 4 6 8 10 12 14 16 18 20 22
Lag

Partial Autocorrelations for Atron Quality Control Errors

1.0
0.8
0.6
Partial Autocorrelation
0.4
0.2
0.0

-0.2
-0.4

-0.6
-0.8
-1.0

2 4 6 8 10 12 14 16 18 20 22
Lag
ARIMA (0, 0, 1) Model: Atron Quality Control
Final Estimates of Parameters
Type Coef SE Coef T P
MA 1 0.5875 0.0864 6.80 0.000
Constant 0.15128 0.04022 3.76 0.000
Mean 0.15128 0.04022
Number of observations: 90
Residuals: SS = 74.4934 (backforecasts excluded)
MS = 0.8465 DF = 88

Modified Box-Pierce (Ljung-Box) Chi-Square statistic

Lag 12 24 36 48
Chi-Square 9.1 10.8 17.3 31.5
DF 10 22 34 46
P-Value 0.524 0.977 0.992 0.950

Forecasts from period 90

95% Limits
Period Forecast Lower Upper Actual
91 0.43347 -1.37022 2.23716
92 0.15128 -1.94065 2.24321
 Residual Autocorrelations: ARIMA(0, 0, 1)

1.0
0.8
0.6

0.4
Autocorrelation

0.2
0.0

-0.2
-0.4

-0.6
-0.8
-1.0

2 4 6 8 10 12 14 16 18 20 22
Lag
 Example 9.6
Errors for Ed Jones’ Quality Control
0.77 1.04 2.46- 0.73- 0.23-
0.33 1.02 0.37- 0.10 1.05
2.15 2.03- 0.80 1.47- 0.66-
2.50 2.54- 0.49 0.89- 0.25
1.36 0.23- 0.50 0.53- 0.63-
0.48 0.49 0.07 0.20- 0.91
2.05 0.87- 1.92 0.70- 0.21-
1.46- 0.61 1.00 0.27- 0.24
1.13- 0.20 2.16 0.39 0.05
2.85- 0.98 0.04 0.07- 0.85
2.67- 0.78 1.91 0.89 1.55
2.71- 0.80 0.43 0.37 0.40
1.30- 0.86 0.32- 0.75- 1.82
0.88- 1.72 0.48- 1.24- 0.81
0.07- 0.15 0.13- 0.62- 0.28
1.47- 1.15- 2.26- 0.54- 1.06
 Errors (Deviations from Target): Ed Jones' Quality Control
3
The time series
2
appear to vary
1
about a fixed level
Errors

0
of zero, and the
-1
autocorrelations die
-2
out rather quickly.
-3
1 8 16 24 32 40 48 56 64 72 80
Time Period Autocorrelations for Ed Jones' Quality Control Errors

1.0
0.8
0.6

0.4
Autocorrelation

0.2
The graphs 0.0

suggest that the -0.2

-0.4

series is -0.6
-0.8
stationary -1.0

2 4 6 8 10 12 14 16 18 20
Lag
 Autocorrelations for Ed Jones' Quality Control Errors

1.0
0.8

√ √ 0.6

0.4

Autocorrelation
0.2
0.0

-0.2
-0.4

-0.6
-0.8
-1.0

2 4 6 8 10 12 14 16 18 20
Lag

Partial Autocorrelations for Ed Jones' Quality Control Errors

1.0
0.8
0.6

Partial Autocorrelation
0.4
0.2
0.0

-0.2
-0.4

-0.6 Attributed to
-0.8
sampling errors
-1.0

2 4 6 8 10 12 14 16 18 20
Lag
Minitab Output for AR(1) Model for Ed Jones’ Quality Control Errors
Final Estimates of Parameters

Type Coef SE Coef T P

AR 1 0.5008 0.0980 5.11 0.000

Number of observations: 80
Residuals: SS = 86.8808 (backforecasts excluded)
MS = 1.0998 DF = 79
Modified Box-Pierce (Ljung-Box) Chi-Square statistic

Lag 12 24 36 48
Chi-Square 10.7 19.5 36.2 44.2
DF 11 23 35 47
P-Value 0.468 0.669 0.410 0.591

Forecasts from period 80

95% Limits
Period Forecast Lower Upper Actual
81 0.53088 -1.52498 2.58673
82 0.26588 -2.03340 2.56515
 Residual Autocorrelations: ARIMA(1, 0, 0)

1.0
0.8
0.6

0.4
Autocorrelation

0.2
0.0

-0.2
-0.4

-0.6
-0.8
-1.0

2 4 6 8 10 12 14 16 18 20
Lag
 Example 9.7
Closing Prices for ISC Corporation Stock
235 200 250 270 275
320 290 225 240 205
115 220 125 275 265
355 400 295 225 245
190 275 250 285 170
320 185 355 250 175
275 370 280 310 270
205 255 370 220 225
295 285 250 320 340
240 250 290 215 190
355 300 225 260 250
175 225 270 190 300
285 285 180 295 195
 ISC Corporation Closing Stock Prices

400

350

300
Price

250

200

150

100
1 6 12 18 24 30 36 42 48 54 60
Time Period

The plot tends to vary about a fixed level (Stationary)

 Autocorrelations for ISC Stock Prices

1.0
0.8
0.6

0.4

Autocorrelation
0.2
0.0

-0.2
-0.4

-0.6
-0.8
-1.0

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
Lag

Partial Autocorrelations for ISC Stock Prices

1.0
0.8
0.6

Partial Autocorrelation
0.4
0.2
0.0

-0.2
-0.4

-0.6
-0.8

√
-1.0

√ 1 2 3 4 5 6 7 8
Lag
9 10 11 12 13 14 15 16
Minitab Output for AR(2) Model for ISC Closing Stock Prices
Final Estimates of Parameters

Type Coef SE Coef T P

AR 1 -0.3243 0.1246 -2.60 0.012
AR 2 0.2192 0.1251 1.75 0.085
Constant 284.903 6.573 43.34 0.000
Mean 257.828 5.949
Number of observations: 65
Residuals: SS = 174093 (backforecasts excluded)
MS = 2808 DF = 62
Modified Box-Pierce (Ljung-Box) Chi-Square statistic

Lag 12 24 36 48
Chi-Square 6.3 13.3 18.2 29.1
DF 9 21 33 45
P-Value 0.707 0.899 0.983 0.969

Forecasts from period 65

95% Limits
Period Forecast Lower Upper Actual
66 287.446 183.565 391.328
67 234.450 125.244 343.656
 Residual Autocorrelations: ARIMA(2, 0, 0)

1.0
0.8
0.6

0.4
Autocorrelation

0.2
0.0

-0.2
-0.4

-0.6
-0.8
-1.0

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
Lag
Model Selection
Criteria
It is possible that two (or more) initial models may be
consistent with the patterns of the sample autocorrelations
and partial autocorrelations.

After estimation and checking, both models may

adequately represent the data.

If the models contain the same number of parameters, the

model with the smallest mean square error, 2 , is
preferred. s

If the models contain different numbers of parameters, the

parsimony principle leads to the selection of the simpler
model. However, the model with more parameters may
have smaller mean square errors.
 An approach considering the model fit
and the number of parameters
Akaike Information Criteria (AIC)
2 2
Minimize AIC  ln   r
Where
n
ln = the natural log
2
 = the residual sum of squares divided by the number of
observations
= the number of observations (residuals)
= the total number of ARIMA model parameters
(including the constant term).
ARIMA Models
for
Seasonal Data
Example 9.9
 Time Series Plot of SalesSales of the Keytron Corporation

2500

2000
Sales

1500

1000

500
Month Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan
Year 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Seasonal pattern along with a general upward trend (nonstationary)

 Autocorrelation Function for Sales

1.0
0.8
0.6

0.4
Autocorrelation

0.2
0.0

-0.2
-0.4

-0.6
-0.8
-1.0

1 5 10 15 20 25 30 35
Lag

Autocorrelations at the low or small lags (within year

association) appears to cut off after lag 1. Autocorrelations at
seasonal lags (between-year association): 12, 24, and 36 are
large and failed to die out quickly. This suggests the series is
nonstationary.
 Seasonally Differenced Sales
500

400

300

200
Diff12Sales

100

-100

-200

-300
Month Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan
Year 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Differenced data are stationary and seem to vary

about a level of roughly 100.
 Autocorrelation Function for Diff12Sales

1.0
0.8
0.6

√ √ 0.4

Autocorrelation
0.2
0.0

-0.2
-0.4

-0.6
-0.8
-1.0

1 5 10 15 20 25 30 35
Lag

Partial Autocorrelation Function for Diff12Sales

1.0
0.8
0.6
Partial Autocorrelation
0.4
0.2
0.0

-0.2
-0.4

-0.6
-0.8
-1.0

1 5 10 15 20 25 30 35
Lag
 ARIMA model
• ARIMA(0, 0, 0)(0, 1, 1)12 model:
(p, d, q)(P, D, Q)

p = 0 regular autoregressive terms

d = 0 regular differences
q = 0 regular moving average terms
P = 0 seasonal autoregressive terms
D = 1 seasonal difference at lag 12
Q = 1 seasonal moving average term at lag 12
 Time Series Plot for Sales
(with forecasts and their 95% confidence limits)
3000

2500

2000
Sales

1500

1000

500
1 12 24 36 48 60 72 84 96 108 120
Time
 Residual Autocorrelations: ARIMA(0, 0, 0)(0, 1, 1)12

1.0
0.8
0.6

0.4
Autocorrelation

0.2
0.0

-0.2
-0.4

-0.6
-0.8
-1.0

3 6 9 12 15 18 21 24
Lag
Example 9.10
Quarterly Sales for Coastal Marine Corporation
Fiscal Year December 31 March 31 June 31 September 31
1994 147.6 251.8 273.1 249.1
1995 139.3 221.2 260.2 259.5
1996 140.5 245.5 298.8 287.0
1997 168.8 322.6 393.5 404.3
1998 259.7 401.1 464.6 479.7
1999 264.4 402.6 411.3 385.9
2000 232.7 309.2 310.7 293.0
2001 205.1 234.4 285.4 258.7
2002 193.2 263.7 292.5 315.2
2003 178.3 274.5 295.4 286.4
2004 190.8 263.5 318.8 305.5
2005 242.6 318.8 329.6 338.2
2006 232.1 285.6 291.0 281.4
Minitab Solution
1. Enter the data on the worksheet.
Plot the data (a seasonal pattern, with a slight upward
trend)
Minitab Minus:
Stat>Time Series>Time Series Plot
Time Series Plot of Sales
500

400
Sales

300

200

100
Quarter Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1
Year 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
 Trend Analysis Plot for Sales
Linear Trend Model
Yt = 270.3 + 0.510*t
500 Variable
Actual
Fits

Accuracy Measures
400
MAPE 21.55
MAD 54.63
MSD 5571.70
Sales

300

200

100
1 5 10 15 20 25 30 35 40 45 50
Index
High
Quarterly Sales for Coastal Marine: 1994-2006
500
Quarterly Sales (Thousands)

400

300

200

100
Year 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Low
Time Series Plot of Quarterly Sales for
Coastal Marine
2. Compute the autocorrelations for the variable Sales:
Stat>Time Series>Autocorrelation

3. Complete the Autocorrelation Function dialog box

Autocorrelation Function: Sales

Lag ACF T LBQ Sample Autocorrelations for Coastal Marine sales
1 0.392843 2.83 8.50 Autocorrelation Function for Sales
2 0.153948 0.97 9.83 (with 5% significance limits for the autocorrelations)

3 0.293739 1.82 14.77 1.0

4 0.743533 4.34 47.11 0.8

0.6
5 0.150619 0.67 48.47
0.4
Autocorrelation

6 -0.153014 -0.67 49.90 0.2

7 -0.047049 -0.21 50.04 0.0
8 0.346979 1.51 57.72 -0.2

9 -0.182597 -0.76 59.90 -0.4

-0.6
10 -0.434737 -1.80 72.53
-0.8
11 -0.315090 -1.23 79.33 -1.0
12 0.091175 0.35 79.92 1 2 3 4 5 6 7 8 9 10 11 12 13
13 -0.353272 -1.34 88.90 Lag
The autocorrelation function has (significantly
large spikes at lags 1 and 4. However, the
autocorrelations at lags 4, 8, and 12 decay towards
zero. This may indicate a nonstationary series and
the need for a seasonal difference.
Autocorrelation Function for Sales
(with 5% significance limits for the autocorrelations)

1.0
0.8
0.6
0.4
Autocorrelation

0.2
0.0
-0.2
-0.4
-0.6
-0.8
-1.0

1 2 3 4 5 6 7 8 9 10 11 12 13
Lag
4. Seasonally difference the data:
Stat>Time Series>Differences
5. Complete the Difference dialog box

6. Label the C5 variable Diff4Sales.

Compute the autocorrelations for the
variable Diff4Sales

Autocorrelation Function: Diff4Sales

Lag ACF T LBQ

Autocorrelation Function for Diff4Sales
1 0.768338 5.32 30.15
1.0
2 0.693397 3.25 55.23
0.8
3 0.514832 2.01 69.37
0.6
4 0.303268 1.10 74.38 0.4
Autocorrelation

5 0.152356 0.54 75.68 0.2

6 -0.075501 -0.26 76.00 0.0

7 -0.171203 -0.60 77.72 -0.2

8 -0.333102 -1.16 84.38 -0.4

-0.6
9 -0.338302 -1.14 91.42
-0.8
10 -0.392471 -1.29 101.15
-1.0
11 -0.407624 -1.30 111.93
1 2 3 4 5 6 7 8 9 10 11 12
12 -0.387378 -1.19 121.93 Lag
The autocorrelation for the seasonally differenced
data are large at low lags and decline rather
slowly. The series may still be nonstationary.
A regular difference in addition to the seasonal
difference might be required to achieve
stationarity. Autocorrelation Function for Diff4Sales

1.0
0.8
0.6

0.4
Autocorrelation

0.2
0.0

-0.2
-0.4

-0.6
-0.8
-1.0

1 2 3 4 5 6 7 8 9 10 11 12
Lag
7. Compute the first differences for the Diff4Sales
variable. Store the differences in C6.
8. Label the C6 variable Diff1Diff4Sales
Compute the autocorrelations for
Diff1Diff4Sales variable.

Autocorrelation Function: Diff1Diff4Sales

Lag ACF T LBQ

Autocorrelation Function for Diff1Diff4Sales
1 -0.346864 -2.38 6.02
1.0
2 0.248733 1.53 9.19
0.8
3 0.105922 0.62 9.78 0.6
4 -0.093787 -0.55 10.25 Autocorrelation
0.4
5 0.158157 0.91 11.62 0.2
6 -0.252737 -1.44 15.21 0.0

7 0.146952 0.80 16.45 -0.2

8 -0.398270 -2.14 25.82 -0.4

-0.6
9 0.127245 0.63 26.80
-0.8
10 -0.126554 -0.62 27.80
-1.0
11 -0.053071 -0.26 27.98
1 2 3 4 5 6 7 8 9 10 11 12
12 -0.021962 -0.11 28.01 Lag
Only two significant values, those at lags 1 and 8. The autocorrelations
for the first two lags alternated in sign.
An ARIMA model with a regular autoregressive term and perhaps a
seasonal moving average term at lag 8 (or 4). ARIMA (1,1, 0)(0,1, 2) 4

Autocorrelation Function for Diff1Diff4Sales

√ 1.0
0.8
0.6

0.4

Autocorrelation
0.2
0.0

-0.2
-0.4

-0.6
-0.8
-1.0

√ 1 2 3 4 5 6
Lag
7 8 9 10 11 12
9. Compute the Partial Autocorrelations for the variable
Diff1Diff4Sales:
Stat>Time Series>Partial Autocorrelation
10. Complete the Partial Autocorrelation Function dialog box:
Partial Autocorrelation Function:
Diff1Diff4Sales
Partial Autocorrelation Function for Diff1Diff4Sales
Lag PACF T (with 5% significance limits for the partial autocorrelations)

1 -0.346864 -2.38 1.0

2 0.145982 1.00 0.8
3 0.267429 1.83 0.6

Partial Autocorrelation
4 -0.026932 -0.18 0.4
5 0.036653 0.25 0.2
6 -0.238502 -1.64 0.0
7 -0.020543 -0.14 -0.2

8 -0.376340 -2.58 -0.4

9 -0.043510 -0.30 -0.6

10 0.012796 0.09 -0.8

11 0.124917 0.86 -1.0

12 -0.111998 -0.77 1 2 3 4 5 6 7 8 9 10 11 12
Lag
 The partial
autocorrelations seem
to cut off after the first
lag, consistent with the
AR(1).
• Try this model:
√
(1,1, 0)(0,1, 0)4
Partial Autocorrelation Function for Diff1Diff4Sales
(with 5% significance limits for the partial autocorrelations)

1.0
0.8
0.6
Partial Autocorrelation

0.4
0.2
0.0
-0.2
-0.4
-0.6
-0.8
-1.0

1 2 3 4 5 6 7 8 9 10 11 12
Lag
11. To run an ARIMA (1,1, 0)(0,1, 2)4 model:
Stat>Time Series>ARIMA
12. Complete the ARIMA dialog box:
Final Estimates of Parameters
Type Coef SE Coef T P
AR 1 -0.3505 0.1423 -2.46 0.018
SMA 4 0.2392 0.1340 1.78 0.081
SMA 8 0.6716 0.1404 4.78 0.000
Differencing: 1 regular, 1 seasonal of order 4
Number of observations: Original series 52, after differencing 47
Residuals: SS = 31525.4 (backforecasts excluded)
MS = 716.5 DF = 44
Modified Box-Pierce (Ljung-Box) Chi-Square statistic
Lag 12 24 36 48
Chi-Square 8.4 10.7 22.0 *
DF 9 21 33 *
P-Value 0.493 0.969 0.928 *

Forecasts from period 52

95% Limits
Period Forecast Lower Upper Actual
53 169.401 116.926 221.875
54 230.617 168.047 293.188
55 265.107 190.558 339.656
56 255.493 171.695 339.291
Compute the autocorrelations for the residuals

Autocorrelation Function:
RESI1

Lag ACF T LBQ

Residual Autocorrelations: (ARIMA1,1,0)(010)4
1 -0.013700 -0.09 0.01
1.0
2 0.086685 0.59 0.39
0.8
3 0.203417 1.38 2.56 0.6
4 -0.030659 -0.20 2.61 0.4
Autocorrelation

5 0.085534 0.56 3.01 0.2

6 -0.204846 -1.33 5.37 0.0

7 -0.152741 -0.96 6.71 -0.2

8 -0.042294 -0.26 6.82 -0.4

-0.6
9 -0.060856 -0.37 7.04
-0.8
10 -0.080227 -0.49 7.44
-1.0
11 -0.044193 -0.27 7.57
1 2 3 4 5 6 7 8 9 10 11 12
12 -0.113656 -0.69 8.42 Lag
13. Develop a time series plot including a forecast.
(Click on Graphs on the ARIMA dialog box).
Complete the ARIMA-Graphs dialog box.
 Time Series Plot for Sales
(with forecasts and their 95% confidence limits)
500

400
Sales

300

200

100
1 5 10 15 20 25 30 35 40 45 50 55
Quarter

Forecasts for the Next Four Quarters from the ARIMA (1,1, 0)(0,1, 2)4 Model