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    Predictive Analytics: QM901.1x Prof U Dinesh Kumar, IIMB

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    Shayan Sen Gupta
    The document discusses predictive analytics and the ARIMA model. It explains the components of ARIMA including autoregressive, integration, and moving average. It also covers differencing, identifying ARIMA orders, and the Box-Jenkins methodology for building ARIMA models.

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    Predictive Analytics: QM901.1x Prof U Dinesh Kumar, IIMB

    Uploaded by

    Shayan Sen Gupta
    58 views9 pages
    The document discusses predictive analytics and the ARIMA model. It explains the components of ARIMA including autoregressive, integration, and moving average. It also covers differencing, identifying ARIMA orders, and the Box-Jenkins methodology for building ARIMA models.

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    ARIMA Model 1

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    The document discusses predictive analytics and the ARIMA model. It explains the components of ARIMA including autoregressive, integration, and moving average. It also covers differencing, identifying ARIMA orders, and the Box-Jenkins methodology for building ARIMA models.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    58 views9 pages

    Predictive Analytics: QM901.1x Prof U Dinesh Kumar, IIMB

    Uploaded by

    Shayan Sen Gupta
    The document discusses predictive analytics and the ARIMA model. It explains the components of ARIMA including autoregressive, integration, and moving average. It also covers differencing, identifying ARIMA orders, and the Box-Jenkins methodology for building ARIMA models.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    of 9

    Predictive Analytics : QM901.

    1x
    Prof U Dinesh Kumar, IIMB

    © All Rights Reserved, Indian Institute of Management Bangalore


    Predictive Analytics : QM901.1x

    ARIMA
    Prof U Dinesh Kumar, IIMB

    ARIMA has the following three components:

    • Auto-regressive component: Function of past values of the time series.

    • Integration Component: Differencing the time series to make it a stationary process.

    • Moving Average Component: Function of past error values.

    © All Rights Reserved, Indian Institute of Management Bangalore


    Predictive Analytics : QM901.1x

    Integration (d)
    Prof U Dinesh Kumar, IIMB

    • Used when the process is non-stationary.

    • Instead of observed values, differences between observed values are considered.

    • When d=0, the observations are modelled directly. If d = 1, the differences


    between consecutive observations are modelled. If d = 2, the differences of the
    differences are modelled.

    © All Rights Reserved, Indian Institute of Management Bangalore


    Predictive Analytics : QM901.1x

    ARIMA (p, d, q)
    Prof U Dinesh Kumar, IIMB

    • The q and p values are identified using auto-correlation function (ACF)


    and Partial auto-correlation function (PACF) respectively. The value d
    identifies the level of differencing.

    • Usually p+q <= 4 and d <= 2.

    © All Rights Reserved, Indian Institute of Management Bangalore


    Predictive Analytics : QM901.1x

    Differencing
    Prof U Dinesh Kumar, IIMB

    • Differencing is a process of making a non-stationary process into


    stationary process.

    • In differencing, we create a new process Xt, where Xt = Yt – Yt-1.

    © All Rights Reserved, Indian Institute of Management Bangalore


    Predictive Analytics : QM901.1x

    ARIMA(p,1,q) Process
    Prof U Dinesh Kumar, IIMB

    X t   0  1 X t 1   2 X t  2  ...   p X t  p 
      0  1 t 1   2 t  2  ...   q t  q  t

    Where Xt = Yt – Yt-1

    © All Rights Reserved, Indian Institute of Management Bangalore


    Ljung-Box Test
    Predictive Analytics : QM901.1x
    Prof U Dinesh Kumar, IIMB

    • Ljung-Box is a test on the autocorrelations of residuals. The test statistic is:

    rk2
    m
    Qm  n(n  2)
    k 1 n  k
    n = number of observations in the time series.
    k = particular time lag checked
    m = the number of time lags to be tested
    rk = sample autocorrelation function of the kth residual term.

    H0: The model does not exhibit lack of fit


    HA: The model exhibits lack of fit

    Q statistic is approximate chi-square distribution with m – p – q degrees of freedom if ARMA orders


    are correctly specified.
    © All Rights Reserved, Indian Institute of Management Bangalore
    Predictive Analytics : QM901.1x

    AR(2) Ljung-Box Test


    Prof U Dinesh Kumar, IIMB

    P-value is 0.740, thus the model doesn’t show


    lack of fit

    © All Rights Reserved, Indian Institute of Management Bangalore


    Predictive Analytics : QM901.1x

    Box-Jenkins Methodology
    Prof U Dinesh Kumar, IIMB

    • Identification: Identify the ARIMA model using ACF & PACF plots. This
    would give the values of p, q and d.

    • Estimation: Estimate the model parameters (using maximum likelihood)

    • Diagnostics: Check the residual for any issue such as not providing White
    Noise.

    © All Rights Reserved, Indian Institute of Management Bangalore

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