ARIMA Analysis

The ARIMAⁱ model is an extension of the ARMAⁱ model that applies to non-stationary time series (the kind of time series with one or more integrated unit-roots).By definition, the auto-regressive integrated moving average (ARIMA) process is an ARMA process for the differenced time series:.

$(1-\phi_1 L - \phi_2 L^2 -\cdots - \phi_p L^p)(1-L)^d x_t - \phi_o= (1+\theta_1 L+\theta_2 L^2 + \cdots + \theta_q L^q)a_t$

$y_t = (1-L)^d x_t$

Where:

$x_t$ is the original non-stationary output at time t.
$y_t$ is the observed differenced (stationary) output at time t.
$d$ is the integration order of the time series.
$a_t$ is the innovation, shock or error term at time t.
$p$ is the order of the last lagged variables.
$q$ is the order of the last lagged innovation or shock.
$\{a_t\}$ time series observations are independent and identically distributed (i.e. i.i.dⁱ) and follow a Gaussian distribution (i.e. $\Phi(0,\sigma^2)$ )

notes

The variance of the shocks is constant or time-invariant.
Assuming $y_t$ (i.e. $(1-L)^d x_t$ ) is a stationary process with a long-run mean of $\mu$ , then taking the expectation from both sides, we can express $\phi_o$ as follows:

$\phi_o = (1-\phi_1-\phi_2-\cdots -\phi_p)\mu$
Thus, the ARIMA(p,d,q) process can now be expressed as:

$(1-\phi_1 L - \phi_2 L^2 - \cdots - \phi_p L^p) (y_t-\mu) = (1+\theta_1 L + \theta_2 L^2 + \cdots + \theta_q L^q ) a_t$

$z_t=y_t-\mu$

$(1-\phi_1 L - \phi_2 L^2 - \cdots - \phi_p L^p) z_t = (1+\theta_1 L + \theta_2 L^2 + \cdots + \theta_q L^q ) a_t$
In sum, $z_t$ is the differenced signal after we subtract its long-run average.
The order of an ARIMA process is solely determined by the order of the last lagged variable with a non-zero coefficient. In principle, you can have fewer number of parameters than the order of the model.
Example: Consider the following ARIMA(12,2) process:

$(1-\phi_1 L -\phi_{12} L^{12} ) (y_t-\mu) = (1+\theta_2 L^2 ) a_t$

Files Examples

References

Hamilton, J .D.; Time Series Analysis , Princeton University Press (1994), ISBN 0-691-04289-6
Tsay, Ruey S.; Analysis of Financial Time Series John Wiley & SONS. (2005), ISBN 0-471-690740

ARIMA Analysis

notes

Files Examples

References

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