Time Series 3 - Model Trend

Time Series
Lecture 3: Trend
Semester 6A
Program Studi Matematika
Fakultas Sains dan Teknologi
UIN Syarif Hidayatullah Jakarta
2015/2016
Time series model
Stationary model
Non-stationary model
Deterministic vs. stochastic trend

Let us consider two of the simplest versions:
Deterministic trend (DT):
= +
Stochastic trend (ST):
= + 1 +
where ~ 0, 2 .
Deterministic vs. stochastic trend

Let us consider two of the simplest versions:
Deterministic trend (DT):
= +
Stochastic trend (ST):
= + 1 +
where ~ 0, 2 .
It is easy to see that
= =
but
= 2 and = 2
Simulated DT and ST time series
60
40
20
0
y(t)
80
100
120
y(t) = 0.5*t + e
y(t) = 0.5 + y(t-1) + e
50
100
Time
150
200
Simulated DT and ST time series
20
40
y(t)
60
80
y(t) = 0.5*t + e
y(t) = 0.5 + y(t-1) + e
50
100
t
150
200
Simulated DT and ST time series (R Code)

##stochastic time trend
yt <- c(1:200)*0
e <- rnorm(200)
yt <- e + yt
for (i in 2:200) {
yt[i] <- 0.5 + yt[i - 1] + e[i]
}
yt <- ts(yt)
plot(yt, type = "l", col = "red", ylab = "y(t)")
for (j in 1: 100) {
yt <- c(1:200)*0
e <- rnorm(200)
yt <- e + yt
for (i in 2:200) {
yt[i] <- 0.5 + yt[i - 1] + e[i]
}
lines(yt, type = "l", col = "red")
}
##deterministic time trend
t <- c(1:200)
beta <- 0.5
yt <- beta*t + rnorm(100)
for (j in 1:100) {
yt <- beta*t + rnorm(100)
lines(t,yt, type = "l")
}
Deterministic trend
Linear deterministic trend:

= 0 + 1 +
Quadratic deterministic trend:
= 0 + 1 + 2 2 +
In general:
= +
The mean is time dependent, but the variance is constant, can

be any stationary series (does not have to be a white noise).
Regression Analysis
Consider the following linear deterministic trend:

= 0 + 1 +
The classical least square (or regression) method is to choose

an estimates of 0 and 1 values that minimizes:
0 , 1 =
0 + 1
=1
We find that:
1 =
=1
=1
0 = 1
where =
+1
2
is the average of 1,2, ,
Example 1
Consider a time series data with random walk process.

Suppose we (mistakenly) treat this as a linear time trend:
= 0 + 1 +
Generate and fit the data in R:
library(TSA)
data(rwalk)
plot(rwalk, type = "o")
model1 <- lm(rwalk~time(rwalk))
summary(model1)
2
0
-2
>
>
>
>
>
10
20
30
Time
40
50
60
Example 1
R Output:
Example 1
R Output:
= 1.01 + 0.13
-2
Fitting a line to these data

is not appropriate!
10
20
30
40
50
60
Example 2
Consider now modeling and estimating seasonal trends, such

as the average monthly temperature data. Here we assume that
the observed series can be represented as
= +
where E = 0 for all
10
20
30
40
50
60
70
The most general assumption for is (seasonal means model)
Temperature
1964
1966
1968
1970
Time
1972
1974
1976
Example 2 (fit a model without an intercept term)
R Code:
>
>
>
>
data(tempdub)
month. <- season(tempdub) # period added to improve table display
model2 <- lm(tempdub ~ -1 + month.) # -1 removes the intercept term
summary(model2)
R Output:
Example 2 (fit a model with an intercept term)
R Code:
> model3 <- lm(tempdub ~ month.) # January is dropped automatically
> summary(model3)
R Output:
Reliability and efficiency of regression estimates
Assuming that the series can be represented as = +

where is a deterministic trend and is a zero-mean
stationary process with autocovariance and autocorrelation .
If = 0 + 1 , then the least square estimate of the slope:
1 =
=1
2
=1
And the estimate variance of the slope, where 1 0 but = 0,

> 1:
120
3
(1 ) =
1 + 21 1
2
( 1)
For large :
120 (1 + 21 )
(1 ) =
(2 1)
Reliability and efficiency of regression estimates
If is a white noise:
1
120 1 + 21
120
=
=
2
( 1)
(2 1)
If is a moving average process with 1 = 0.4:

1
120 1 + 21
120 (0.2)
=
=
2
( 1)
(2 1)
the variance of 1 is only 20% of what it would be if is

a white noise.
If 1 > 0, then 1 would be larger than for white noise.

The OLS estimates can be used to estimate the unknown
parameters in the trend function, but the estimated standard
deviation may not be correct.
Interpreting regression output
Consider the time series = + , where is a linear time

trend:
= 0 + 1
For each , the unobserved stochastic component can be

estimated (predicted) by
If the process has constant variance, then the standard
deviation of (residual standard deviation):
=1
where is the number of parameters estimated in and

is the degrees of freedom for .
is an absolute measure of the goodness of fit of the estimated

trend the smaller the value of , the better the fit.
Another measure of the goodness of fit is the coefficient
determination, 2 - the square of the sample correlation
coefficient between the observed series and the estimated
trend.
R output:
81% of the variation in the random walk series is explained by

the linear time trend.
The standard deviation of the coefficients (Std. Error) are
appropriate when the stochastic component is white noise.
t-values = estimate / std. error are only appropriate if the
stochastic component is normally distributed white noise.
Residual analysis
The unobserved stochastic component can be estimated

(predicted) by the residual
=
We call the residual corresponding to the th observation.

If the trend model is reasonably correct, then the residuals
should behave roughly like the true stochastic component, and
various assumptions about the stochastic component can be
assessed by looking at the residuals.
Example: Seasonal Model

R Code:
-2
-1
> plot(y=rstudent(model3),x=as.vector(time(tempdub)), xlab='Time',ylab='Standardized

Residuals',type='o')
Standardized Residuals
1964
1966
1968
1970
Time
1972
1974
1976

R Code:
> plot(y=rstudent(model3),x=as.vector(time(tempdub)),xlab='Time', ylab='Standardized
Residuals',type='l')
> points(y=rstudent(model3),x=as.vector(time(tempdub)), pch=as.vector(season(tempdub)))
-2
-1
J
JO
F O
M
D
S
JM N
A
F
M
N M
A
A
D
DJ
A A
A
J
J M
A
O A
M J D AO
S
S
J
N
A
S
AJ
D
A M S JJ
J
N
NF
J J
D
N J
S J J O J SN J S F J S
AJ
N
F
O
O
F
JN
M
F
AJAS
AO
F
MJJ A
A
M AO F
JO
M
A
A
N
M
M DJM D
M
A
D MJ S
O
N
D
J JF N
S
MA
M
O
A
J
J
F
J
D
M
J
M
FM
1964
1966
1968
1970
Time
1972
1974
1976

R Code:
> plot(y=rstudent(model3),x=as.vector(fitted(model3)), xlab='Fitted Trend Values',
ylab='Standardized Residuals',type='n')
> points(y=rstudent(model3),x=as.vector(fitted(model3)), pch=as.vector(season(tempdub)))
-1
J
J
J
J
J
J
J
J
-2
J
J
D
F
F
F
F
F
F
F
D
D
D
D
D
D
D
D
M
M
M
M
M
O
O
N
N
N
N
N
N
N
N
N
N
A
A
A
A
A
A
A
A
A
A
O
O
O
O
O
O
O
M
M
S
M
M
S
M S
S
S
S
M
M
M S
M S
M
J
A
A
J
J
A
J
A
J
A J
J
J
J
J A
A J
J
A J
J A J
J
M
M
J
20
30
40
50
Fitted Trend Values
60
70
R Code:
> hist(rstudent(model3),xlab='Standardized Residuals, main = )
> qqnorm(rstudent(model3))
> shapiro.test(rstudent(model3))
1
0
-2
-1
Sample Quantiles
20
15
10
5
0
Frequency
25
30
35
Normal Q-Q Plot
-3
-2
-1
-2
-1
Theoretical Quantiles

Sample autocorrelation function, , at lag as
R Code:
-0.15
-0.05
ACF
0.05
0.15
> acf(rstudent(model3))
10
15
Lag
20
Example: Random Walk Process

R Output:
= 1.01 + 0.13
-2
10
20
30
40
50
60
Residual plots:
1
0
-1
-2
> plot(y=rstudent(model1),x=as.vector(time(rwalk)), ylab='Standardized

Residuals',xlab='Time',type='o')
10
20
30
40
50
60
time
The plot is too smooth and hang
together too much for white
noise.
Residual plots:
0
-1
-2
residuals
> plot(y=rstudent(model1),x=fitted(model1), ylab='Standardized Residuals',xlab='Fitted Trend

Line Values', type='p')
fitted trend line values
Similar pattern! Larger residuals associated with larger fitted

values.
Check for normality:
Normal Q-Q Plot
0
-1
8
6
4
-2
2
0
Frequency
10
Sample Quantiles
12
14
Histogram of rstudent(model)
-3
-2
-1
rstudent(model)
-2
-1
0
Theoretical Quantiles

Sample autocorrelation of residuals:
0.2
0.4
0.6
Series rstudent(model)
-0.4
-0.2
0.0
ACF
10
Lag
15
Example: Wages Data
Example: Wages Data
8.0
8.5
9.0
9.5
Plot of wages data over time
Wages
1982
1983
1984
1985
Time
1986
1987
Example: Wages Data
8.0
8.5
9.0
9.5
Fit a linear trend to wages data:
Wages
1982
1983
1984
1985
Time
1986
1987
Example: Wages Data
-3
-2
-1
Residual plot:
standardized residuals
10
20
30
40
Index
50
60
70
Example: Wages Data

Sample autocorrelation of residuals:
-0.2
0.0
0.2
0.4
0.6
0.8
Series r
ACF
10
Lag
15

Time Series 3 - Model Trend

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Time Series

Time series model

Deterministic vs. stochastic trend

Deterministic trend (DT):

Stochastic trend (ST):

Deterministic vs. stochastic trend

Deterministic trend (DT):

Stochastic trend (ST):

Simulated DT and ST time series

Simulated DT and ST time series

Simulated DT and ST time series (R Code)

Linear deterministic trend:

Quadratic deterministic trend:

The mean is time dependent, but the variance is constant, can

Consider the following linear deterministic trend:

The classical least square (or regression) method is to choose

is the average of 1,2, ,

Consider a time series data with random walk process.

Fitting a line to these data

Consider now modeling and estimating seasonal trends, such

The most general assumption for is (seasonal means model)

Example 2 (fit a model without an intercept term)

Example 2 (fit a model with an intercept term)

Reliability and efficiency of regression estimates

Assuming that the series can be represented as = +

And the estimate variance of the slope, where 1 0 but = 0,

Reliability and efficiency of regression estimates

If is a moving average process with 1 = 0.4:

the variance of 1 is only 20% of what it would be if is

If 1 > 0, then 1 would be larger than for white noise.

Interpreting regression output

Consider the time series = + , where is a linear time

For each , the unobserved stochastic component can be

where is the number of parameters estimated in and

Interpreting regression output

is an absolute measure of the goodness of fit of the estimated

Interpreting regression output

81% of the variation in the random walk series is explained by

The unobserved stochastic component can be estimated

We call the residual corresponding to the th observation.

Example: Seasonal Model

> plot(y=rstudent(model3),x=as.vector(time(tempdub)), xlab='Time',ylab='Standardized

Example: Seasonal Model

Example: Seasonal Model

Fitted Trend Values

Example: Seasonal Model

Normal Q-Q Plot

Example: Seasonal Model

Example: Random Walk Process

Example: Random Walk Process

> plot(y=rstudent(model1),x=as.vector(time(rwalk)), ylab='Standardized

Example: Random Walk Process

> plot(y=rstudent(model1),x=fitted(model1), ylab='Standardized Residuals',xlab='Fitted Trend

fitted trend line values

Similar pattern! Larger residuals associated with larger fitted

Example: Random Walk Process

Check for normality:

Normal Q-Q Plot

Example: Random Walk Process

Example: Wages Data

Example: Wages Data

Plot of wages data over time

Example: Wages Data

Fit a linear trend to wages data: