Arima Word

With the improvement of society, the deepening of theoretical studies and the development of remark
methods, human beings have obtained increasingly statistics collection.

Time series analysis performs vital function in data and forecasting techniques
ARIMA
The ARIMA process is a mathematical model used for prediction. ARIMA means Auto
Regressive(AR), Integrated(I), Moving Average(MA).
AR
This model is used to predict continuous value of an item based on its own past values.
This model shows that how each observation is a function of the previous n observations.
Example:
if n = 1, then each observation is a function of only one previous observation. That is,
Yt = C1yt-1 + C2
where
Yt = the observed value at time t,
Yt-1 represents the previous observed value at time t – 1
C1 & C2 are both constants
if p > 1:
Yt = C + C1Yt-1 +C2Yt-2 + · · · + Cp Yc-n
I
It represents the differencing of actual observation to permit for the time series to come to be
stationary.it is represented by letter ‘d’.
If d = 0, the observations are used directly. If d = 1, the differences between consecutive observations
are used. If d = 2, the differences of the differences are used. In practice.
MA
This model is used to predict future value of a time series using the past errors.
This model shows that how each observation is a function of the previous n errors.
Example:
Yt = C1εt-1 + C2
Stationarity
Conditions for a time series to be stationary:

1. Mean(μ) is constant
2. Standard deviation(σ) is constant
3. Seasonality doesn’t exist
ACF and PACF plots
 Auto-correlation function(ACF) considers both direct and indirect effects. The

autocorrelation function (ACF) plot shows the correlation of the series with itself at different
lags.
 Partial Auto-correlation function(PACF) considers only the direct effects. The partial
autocorrelation function (PACF) plot shows the amount of autocorrelation at lag k that is not
explained by lower-order autocorrelations
Procedure of ARIMA modeling and forecasting
Identification
Stationarity check
Check the stationarity by graph, correlogram and formal tests like ADF, PP, KPSS
If stationary: ARMA Model(p,q)
If non-stationary: ARIMA Model(p,d,q)
Identification step
Check the correlogram to determine p and q
If it is non stationary:
Appropriate transformation (including difference, variance stationarity, logarithm, square root) should
be used to be converted to a stationary sequence. The number of differences is the order of single
integer I
ARIMA model selection
Autocorrelation order p and the moving average order q of the ARIMA model can be estimated by
ACF and PACF plots respectively
Autocorrelation coefficient Autocorrelation coefficient Model order

(ACF) (ACF)
- p-order truncation AR(p)
q-order truncation - MA(p,q)
trailing trailing ARMA(p,q)
Table. Basic principle of determining the order of ARMA (p,q).
Estimation
Estimation of all possible candidate models
Objective : find a stationary and parsimonious model that fits the data well
Model selection criteria:
Significance of the ARMA components
Compare akalike, Schwartz and Hannan, Ouinn. Smaller value of these parameter is better
Diagnostic and Forecasting
Model can be optimized and diagnosed by performing white noise test on residual. If residual is not a
white noise then, re-select the model. If residual is white noise create multiple models and choose
optimal model from all candidate model of the test.
Forecasting
In equation menu of Eviews software, select the forecast menu where static or dynamic can be
selected. Then select the sequence of forecasting value, and click OK.
Example
Data description:
The number of cars in Delhi from 1952 to 2015 is listed in Table
Fig. Number of cars in Delhi from 2006 to 2019

Stationarity of data:
Fig. The cars data during 2006 to 2019

Figure presents the time series graph of the data. Based on Figure 1, it appears that the number of cars
has increased from year to year. Shows that the spread of data (means) is not constant. Therefore, the
data is not stationary.
Fig. Augmented Dickey-Fuller unit root test on cars at level(d=0)
It can be seen that ADF= 0.098212 is greater than the critical value of the significance level of 0.01,
0.05 and 0.1, that is to say, the original GDP sequence is non-stationary.
Fig. Augmented Dickey-Fuller unit root test on cars at the first order difference(d=1)
It can be seen that ADF=-3.603986 is less than the three critical values of the test level. That is to say,
the cars sequence after the logarithmic change and the first-order difference is a stationary series, and
the significance test of the stationarity is passed. It can be seen that the original sequence is a first-
order single-order sequence, that is, d=1.
Model identification:
With the EViews software, the autocorrelation and partial autocorrelation function graphs of cars
series are plotted in Figure.
Fig. Autocorrelation and partial autocorrelation function graphs of the cars data
The temporary models obtained are ARIMA (1,1,1) , ARIMA (1,1,2) , ARIMA (2,1,2) , ARIMA
(2,1,3), ARIMA (1,1,3) and ARIMA (2,1,1) .
Estimation:
The temporary models are tested for its parameters to get the best model. We have taken 2 models
ARIMA(1,1,1) and ARIMA(2,1,1) for comparison to demonstrate.
We have compared the models based on the significance of the ARMA components and Akalike,
Schwartz and Hannan, Ouinn. Smaller value of these parameter is better.
Estimation results of the ARIMA(1,1,1) model
Estimation results of the ARIMA(2,1,1) model
Based on Table 1 and Table 2, it can be seen that ARIMA (1,1,1) is the best model as its variables C,
AR, MA are around 0.05 and the values of Akalike, Schwartz and Hannan-Ouinn are smaller
compared to the other models.
Diagnostic and Forecasting:
Fig. Autocorrelation and partial autocorrelation function graphs of the residual series.
A white noise test is performed on the residual after fitting the ARIMA (1, 1, 1) model. The
autocorrelation and partial autocorrelation function graphs of the residual series are shown in Figure.
It can be seen that the residual is a white noise, indicating that the model is valid.
The final step is forecasting using a model that has been tested before. Forecasting used for the
number of cars is the ARIMA model (1,1,1) and the results are as follows:
Fig. Forecasted numbers of cars from 2020 to 2030
Fig. Graph of forecasted numbers of cars from 2020 to 2030

Fig. Combine graph of numbers of cars from 2006 to 2030
Similarly, we have followed the same procedure for other types of vehicles as well. The results are
shown below.
2w
Fig. Forecasted numbers of 2W from 2020 to 2030
Fig. Combine graph of numbers of 2W from 2006 to 2030

Bus
Fig. Forecasted numbers of buses from 2020 to 2030
Fig. Combine graph of numbers of buses from 2006 to 2030
Summary
ARIMA model forecast is comparatively superior time series prediction method. It can realistically
describe the dynamic alternate rules. It may be used to carry out statistical evaluation and forecast for
time series beneath neath sure conditions. Specially, the model is appropriate for short-time period
predictions. Large deviations arise while the forecasting time scale is long. Based on EViews
software, this work offers time series modelling and forecasting with the ARIMA model. It needs to
be referred to that as for a particular time series this is problem to many factors, model predictions
that depend totally on modern-day values and historical information once in a while have a sure
degree of deviation from the actual situation.
Results
 The best ARIMA model for estimating the number of cars is ARIMA (1,1,1).
 The best ARIMA model for estimating the number of 2W is ARIMA (1,1,0).
 The best ARIMA model for estimating the number of buses is ARIMA (3,0,0).
 Forecasting results on the number of cars and 2W shows that the number of the vehicles is
increasing from year to year.

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With the improvement of society, the deepening of theoretical studies and the development of remark

methods, human beings have obtained increasingly statistics collection.

Conditions for a time series to be stationary:

2. Standard deviation(σ) is constant

3. Seasonality doesn’t exist

ACF and PACF plots

 Auto-correlation function(ACF) considers both direct and indirect effects. The

Procedure of ARIMA modeling and forecasting

Autocorrelation coefficient Autocorrelation coefficient Model order

Fig. Number of cars in Delhi from 2006 to 2019

Fig. The cars data during 2006 to 2019

Fig. Augmented Dickey-Fuller unit root test on cars at level(d=0)

Estimation results of the ARIMA(2,1,1) model

Fig. Graph of forecasted numbers of cars from 2020 to 2030

Fig. Combine graph of numbers of 2W from 2006 to 2030

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