Journal of Forecasting

J. Forecast. (2012)
Published online in Wiley Online Library
(wileyonlinelibrary.com) DOI: 10.1002/for.2244

Forecasting UK Industrial Production with

Multivariate Singular Spectrum Analysis
HOSSEIN HASSANI,1,2* SAEED HERAVI3 AND
ANATOLY ZHIGLJAVSKY4
1 The Business School, Bournemouth University, UK
2 Institute for International Energy Studies, Tehran, Iran
3 Cardiff Business School, Cardiff University, UK
4 Cardiff School of Mathematics, Cardiff University, UK

ABSTRACT
In recent years the singular spectrum analysis (SSA) technique has been further
developed and applied to many practical problems. The aim of this research
is to extend and apply the SSA method, using the UK Industrial Production
series. The performance of the SSA and multivariate SSA (MSSA) techniques
was assessed by applying it to eight series measuring the monthly seasonally
unadjusted industrial production for the main sectors of the UK economy. The
results are compared with those obtained using the autoregressive integrated
moving average and vector autoregressive models.
We also develop the concept of causal relationship between two time series
based on the SSA techniques. We introduce several criteria which characterize
this causality. The criteria and tests are based on the forecasting accuracy and
predictability of the direction of change. The proposed tests are then applied and
examined using the UK industrial production series. Copyright © 2012 John
Wiley & Sons, Ltd.

KEY WORDS singular spectrum analysis; forecasting; causality; industrial

production series

INTRODUCTION

Econometric methods have been widely used to forecast the evolution of quarterly and yearly national
account data. However, the standard time series forecasting models may fail to accurately predict
economic and financial time series. This may be due to technological advances, and change in
government policies and consumer preferences, causing structural breaks and non-stationarity in the
data. Furthermore, for standard forecasting methods such as autoregressive integrated moving average
(ARIMA), assuming stationarity for the data, linearity for the model and normality for the residuals
can provide only an approximation of the true situation. Therefore a method that does not depend
on these assumptions could be very useful for modelling and forecasting economic data. Singular
spectrum analysis (SSA) is a very good example of such a technique Golyandina et al. (2001).

* Correspondence to: Hossein Hassani, The Business School, Bournemouth University, Bournemouth BH8 8EB, UK.
E-mail: hhassani@bournemouth.ac.uk

Copyright © 2012 John Wiley & Sons, Ltd.

H. Hassani, S. Heravi and A. Zhigljavsky

In this paper, our aim is to predict the monthly industrial production indices for the UK using
multivariate singular spectrum analysis (MSSA). We are motivated to use MSSA in order to assess the
potential role of cross-industry information for improving forecasts. We also use MSSA to investigate
the causality between these industries. Contrary to the traditional methods of time series forecasting,
SSA is a non-parametric method and makes no prior assumptions about the data.
The eight series examined are interesting and important since they range from traditional indus-
trial sectors (Basic Metals) to Food and Electricity/Gas. These eight time series contribute at least
50% to aggregate industrial production in the UK economy. Previously, these series have been
analysed in linear and nonlinear contexts in Hassani et al. (2009a), Osborn et al. (1999), Heravi
et al. (2004) and Zhigljavsky et al. (2009). They have generally found that these production series
are nonlinear and nonstationary. Osborn et al. (1999) have considered the extent and nature of sea-
sonality in these series. They found that for the UK data seasonality accounts for at least 80% of
variation in all series (except vehicles) in the UK. In our recent research (Hassani et al., 2009a), we
used SSA, ARIMA and Holt–Winters methods for forecasting seasonally unadjusted monthly data
on industrial production indicators in Germany, France and the UK. We have shown that the quality
of one-step-ahead forecasts are similar for ARIMA and SSA, Holt–Winters forecasts being slightly
worse. The quality of SSA forecasts at horizons h D 3, 6 and 12 is much better than the quality of
ARIMA and Holt–Winters forecasts. As h increases, the quality of ARIMA and Holt–Winters fore-
casts becomes worse. Also the standard deviation of the ARIMA and Holt–Winters forecasts increases
almost linearly with h, up to 12 months ahead. The situation was totally different for the SSA fore-
casts: the quality of SSA forecasts was almost independent of the value of h. In Hassani et al.
(2009a) we have also shown that SSA, ARIMA and Holt–Winters methods perform similarly well
in predicting the direction of change for small h. However, SSA outperforms the Holt–Winters and
ARIMA at longer horizons and hence can be considered as a reliable method for predicting recessions
and expansions.
The structure of this paper is as follows. A brief introduction into the SSA method is given in the
next section. The descriptive statistics of the series and the results of various tests (such as normality,
nonlinearity) are presented in the third section. The performance of ARIMA, SSA, MSSA and vector
autoregressive (VAR) is considered in the fourth section. A causality test based on the SSA technique
is considered in the fifth section. Finally, the sixth section presents a summary of the study and some
concluding remarks.

SINGULAR SPECTRUM ANALYSIS

SSA decomposes the original time series into a sum of a small number of interpretable components
such as slowly varying trend, oscillatory components and noise. The basic SSA method consists of
two complementary stages: decomposition and reconstruction; both stages include two separate steps.
At the first stage we decompose the series and at the second stage we reconstruct the original series
and use the reconstructed series for forecasting. The key ideas of SSA can be traced back to the 18th
century (de Prony, 1795). However, the commencement of SSA is usually associated with publica-
tions of the papers by Broomhead and King (1986a,1986b) and Fraedrich (1986), Vautard and Ghil
(1989), Vautard et al. (1992) and Allen and Smith (1996). The three books (Golyandina et al., 2001;
Elsner and Tsonis, 1996; Danilov and Zhigljavsky, 1997) are fully devoted to SSA. For comparison
of the SSA with classical methods, ARIMA, ARAR algorithm, GARCH and Holt–Winters, see Has-
sani et al. (2009a,2009b, 2010), Hassani (2007); Patterson et al. (2010) and Hassani and Zhigljavsky
(2009). For a recent development see Zhigljavsky (2010). A through review of SSA for analysis and

Copyright © 2012 John Wiley & Sons, Ltd. J. Forecast. (2012)

DOI: 10.1002/for
 Forecasting UK Industrial Production with MSSA

forecasting economic and financial time series is given in Hassani and Thomakos (2010), and two
new versions of SSA, based on the minimum variance estimator and perturbation theory, have been
introduced in Hassani (2010) and Hassani et al. (2011). Here, a short description of the SSA technique
is given (for more information see Golyandina et al., 2001).

Univariate SSA
Stage 1: Decomposition
Step 1: Embedding and the trajectory matrix
Consider a univariate stochastic processes fYt gt 2Z and suppose that a realization of size T from this
process is available: YT D Œy1 , y2 , : : : , yT . The single parameter of the embedding is the window
length L, an integer such that 2  L  T . Embedding can be regarded as a mapping operation that
transfers a one-dimensional time series YT into a multidimensional series X1 , : : : , XK with vectors
Xi D Œyi , yi C1 , yi C2 , : : : , yi CL1 0 (1)
for i D 1, 2, : : : , K, where K D T  L C 1 and the prime symbol denotes transposition. These vectors
group together L time-adjacent observations which are supposed to describe the local state of the
underlying process. Vectors Xi are called L-lagged vectors (or, simply, lagged vectors). The result of
this step is the trajectory matrix
0 1
y1 y2 y3 : : : yK
B y2 y3 y4 : : : yKC1 C
B C
X D ŒX1 , : : : , XK  D .xij /L,K D B . . . . . .. C (2)
i ,j D1
@ .. .. .. . . A
yL yLC1 yLC2 : : : yT
Note that the trajectory matrix X is a Hankel matrix, which means that all the elements along the
diagonal i C j D const are equal.

Step 2: Singular value decomposition (SVD)

The second step, the SVD step, makes the singular value decomposition of the trajectory matrix X
and represents it as a sum of rank-one bi-orthogonal elementary matrices. Denote 1 , : : : , L as the
eigenvalues of S D XX0 in decreasing order of magnitude .1  : : : L  0/ and U1 , : : : , UL the
corresponding eigenvectors. p
Set d D max.i, such that i > 0/ D rank X. If we denote Vi D X0 Ui = i , then the SVD of the
trajectory matrix can be written as:
X D X1 C    C Xd (3)
p
where Xi D i Ui Vi 0 (i D 1, : : : , d ). The matrices Xi have
Prrank 1. SVD (3) is optimal in the sense
that among all the matrices X.r/ of rank r < d , the matrix i D1 Xi provides the best approximation
to the trajectory matrix X, so that k X  X.r/ k is a minimum.

Stage 2: Reconstruction
Step 1: Grouping
The grouping step corresponds to splitting the elementary matrices into several groups and summing
the matrices within each group. Let I D fi1 , : : : , ip g be a group of indices i1 , : : : , ip . Then the matrix
XI corresponding to the group I is defined as XI D Xi C    C Xi . The split of the set of indices
1 p

Copyright © 2012 John Wiley & Sons, Ltd. J. Forecast. (2012)

DOI: 10.1002/for
H. Hassani, S. Heravi and A. Zhigljavsky

f1, : : : , Lg into disjoint subsets I1 , : : : , Im corresponds to the representation X D XI C  CXI . The

1 m

procedure of choosing the sets I1 , : : : , Im is called the grouping. For a given group I , the contribution
P Pd
of the component XI is measured by the share of the corresponding eigenvalues: i 2I i = i D1 i .

Step 2: Diagonal averaging

The purpose of diagonal averaging is to transform a matrix to a Hankel matrix which can subse-
quently be converted to a time series. If ´ij stands for an element of a matrix Z, then the kth term of
the resulting series is obtained by averaging ´ij over all i, j such that i C j D k C 1. By performing
the diagonal averaging of all matrix components of XI in the expansion of X above, we obtain
j

another expansion: X D e XI C : : : C e
1
XI , where e
m
XI is the diagonalized version of the matrix XI .
j j

This isPequivalent to the decomposition of the initial series YT D .y1 , : : : , yT / into a sum of m series;
m
yt D j D1 e y .j / e.j /
t , where Y T D .e y .j /
y .j
1 , : : : ,e
/ e
T / corresponds to the matrix XI . In what follows, we
j

use two groups of indices, I1 D f1, : : : , rg and I2 D fr C 1, : : : , Lg and associate the group I D I1
with the signal component and the group I2 with noise.

Forecasting
An important advantage of SSA is that it allows production of forecasts for either the individual com-
ponents of the series and/or the reconstructed series itself. The SSA can be applied in forecasting the
time series that approximately satisfy the linear recurrent formulae (LRF):

X
d

yi Cd D ˛k yi Cd k , 1i T d (4)
kD1

of some dimension d with the coefficients ˛1 , : : : , ˛d . It should be noted that d D rank X D rank XX0
(the order of the SVD decomposition of the trajectory matrix X). An important property of the SSA
decomposition is that, if the original time series YT satisfies the LRF (4), then for any T and L there
are at most d nonzero singular values in the SVD of the trajectory matrix X; therefore, even if the
window length L and K D T  L C 1 are larger than d , we only need at most d matrices Xi to
reconstruct the series. Let us now formally describe the algorithm for the SSA forecasting method.
The SSA forecasting algorithm, as proposed in Golyandina et al. (2001), is as follows:

1. Consider a time series YT D .y1 , : : : , yT / with length T .

2. Fix the window length L.
3. Consider the linear space Lr  RL of dimension r < L. It is assumed that eL … Lr , where
eL D .0, 0, : : : , 1/ 2 RL .
4. Construct the trajectory matrix X D ŒX1 , : : : , XK  of the time series YT .
5. Construct the vectors Ui .i D 1, : : : , r/ from the SVD of X. Note that Ui is an orthonormal
basis in Lr . P
6. Orthogonal projection step: compute matrix X b D ŒX b1 W : : : W X
b K  D riD1 Ui Ui0 X. The vector
b i is the orthogonal projection of Xi onto the space Lr .
X
7. Hankellization step: construct the matrix X e D HX b D ŒXe1 W : : : W X
e K .
2 2 2
8. Set v D 1 C : : : C r , where i is the last component of the vector Ui .i D 1, : : : , r/.
Moreover, assume that eL … Lr . This implies that Lr is not a vertical space. Therefore, v 2 < 1.

Copyright © 2012 John Wiley & Sons, Ltd. J. Forecast. (2012)

DOI: 10.1002/for
 Forecasting UK Industrial Production with MSSA

9. Determine vector A D .˛1 , : : : , ˛L1 /:

1 X
r

AD i UiO
1  v 2 i D1

where U O 2 RL1 is the vector consisting of the first L  1 components of the vector U 2 RL .
It can be proved that the last component yL of any vector Y D .y1 , : : : , yL /T 2 Lr is a linear
combination of the first yL1 components, i.e.

yL D ˛1 yL1 C : : : C ˛L1 y1

and this does not depend on the choice of a basis U1 , : : : , Ur in the linear space Lr .
10. Define the time series YN Ch D .y1 , : : : , yN Ch / by the formula

e
yi for i D 1, : : : , T
yi D PL1 (5)
j D1 ˛ j y i j for i D T C 1, : : : , T C h

where ey i (i D 1, : : : , T ) are the reconstructed series. Then, yT C1 , : : : , yT Ch are the h-step-

ahead recurrent forecasts.

Multivariate singular spectrum analysis

Multivariate (or multichannel) SSA is an extension of the standard SSA to the case of multivariate
time series. The use of MSSA for multivariate time series was proposed theoretically in the context
of nonlinear dynamics in Broomhead and King (1986a), and examples of successful application of
MSSA are given in Hassani et al. (2009b) and Patterson  et al. (2010).

Assume that we have an M -variate time series yj.1/ , : : : , yj.M / , where j D 1, : : : , T and let L be
window length. Similar to univariate version, we can define the trajectory matrices X.i / .i D1, : : : , M /
of the one-dimensional time series fyj.i / g .i D 1, : : : , M /. The trajectory matrix X can then be defined
 0
as X D X.1/ : : : X.M / . Now, it is straightforward to expand the univariate approach of SSA to the
multivariate domain. The other stages of MSSA are similar to the stages of the univariate SSA; the
main difference is in the structure of the trajectory matrix X and its approximation; these matrices are
now block-Hankel rather than simply Hankel.

THE DATA

The data in this study are taken from the Office for National Statistics (ONS) and represent eight major
components of industrial production in the UK. The series examined in this research are seasonally
unadjusted monthly indices for real output in Food Products, Chemicals, Basic Metals, Fabricated
Metals, Machinery, Electrical Machinery, Vehicles and Electricity/Gas Industries.
The same eight series, ending in 1995 and 2007, have been previously analysed in Osborn et al.
(1999), Heravi et al. (2004) and Hassani et al. (2009a). As explained in these papers, these indus-
tries have been chosen primarily because of their importance. Here we have updated the data and in
all cases the sample period starts from January 1978 and ends in July 2009, giving a long series of
380 observations. The movements in the series are dominated by seasonality and broadly represent
periods of growth in the 1980s and during 2000–2007 and periods of stagnation or recessions during
the early 1990s and 2008–2009.

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H. Hassani, S. Heravi and A. Zhigljavsky

In line with the usual convention for the economic time series and for comparability, all series are
analysed in the logarithmic form. To investigate short-term movements and the degree of seasonality,
Table I shows the descriptive statistics for the first difference of each series. Sample means and sample
standard deviations are scaled by 100 and, since the data are logarithmically transformed, they effec-
tively refer to monthly percentage changes in the original series. Table I shows that, with the exception
of Food, Chemicals and Electricity/Gas, the production series have declined over the period. In par-
ticular, Chemicals show substantial growth over the period, with an average increase of about 0.2%
per month (2.24% per year) and Basic Metals and Vehicles show an average decline of 0.17% per
month or 2% per year. The sample standard deviations indicate that the series have broadly similar
variability, with Food less volatile and Vehicles more volatile than the others. In the table, R2 is a
measure of seasonality and is calculated from a regression of the first differences against 12 monthly
dummy variables. The highest seasonality for these series is for production of Electricity and Gas.
These values, which are obtained on longer time series, are lower than the R2 reported in Osborn
et al. (1999).
A detailed and comprehensive statistical analysis of the data (such as various tests of normality,
nonlinearity and cross-correlation analysis) can be found in Zhigljavsky et al. (2009). The results
indicate that there is strong evidence of non-normality and there is a significant degree of nonlinear
dependence among the series. The cross-correlation analysis of these series shows that the strongest
correlations are generally at lag zero or at a very short lags.

FORECASTING RESULTS

In this section, the performance of the SSA and MSSA techniques is assessed by applying it to the
UK industrial production series. The results are compared with those obtained using ARIMA and
VAR models.

Comparison of the accuracy of the forecasts

We consider the forecasting performance of SSA (univariate and multivariate), with ARIMA and
VAR techniques at different horizons h, up to 1 year. The results are provided for h D 1, 3, 6 and 12
(months). We use the data up to the end of 2007 as in-sample (to perform SSA decomposition and to
estimate parameters of ARIMA and VAR models). Thus, with approximately 2 years and 8 months
of the out-of-sample data, we have N D 32, 30, 27 and 21 out-of-sample forecast errors at horizons
h D 1, 3, 6 and 12, respectively.

Table I. Descriptive statistics of the data

Series Weight Mean SD Seasonality R2 Non-normality Nonlinearity

Food Products 7.6 0.07 6.99 0.52 X X
Chemicals 8.6 0.19 8.10 0.55 X X
Basic Metals 4.5 0.17 11.98 0.74 X X
Fabricated metal 7.2 0.08 10.06 0.63 X
Machinery 13.6 0.09 10.05 0.72 X X
Electrical Machinery 5.6 0.06 10.46 0.68 X X
Vehicles 10.4 0.17 15.69 0.68 X X
Electricity and Gas 6.5 0.01 10.36 0.79 X X

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 Forecasting UK Industrial Production with MSSA

Here, we use the ratio of the root mean squared error (RRMSE) and the percentage of forecasts
that correctly predict the direction of change to measure the forecast accuracy. We also computed
other measures based on the magnitude of forecast errors, such as relative root mean absolute errors.
These measures yield similar results to RMSE; we therefore do not report them.
In computing Box–Jenkins ARIMA forecasts, we need to choose the lags, the degree of
differencing and the degree of seasonality .p, d , q/, .P , D, Q/s , where s D 12. To do that we use
the maximum order of lags, set by the software (we used computer packages SPSS and EViews), and
apply the Bayesian information criterion (BIC). The SSA parameters, the window length L and the
number of eigentriples r are chosen based on the eigenvalue spectra and separability. The parameters
.L, r/ of the SSA and the orders .p, d , q/, .P , D, Q/s of the ARIMA models are given when the
models are estimated using data up to the end of 2007. In SSA and MSSA, we used L D 24 and
r D 14 for all series.
Table II shows the out-of-sample RMSE ratios. Some summary statistics are also given at the
bottom of the table. The summary statistics are the average RRMSE and the score. The score is
the number of times when the first forecasting technique yields lower RMSE than the second. For
the VAR model, we use the same series as a supportive series which provides the minimum RMSE
in forecasting one step ahead; these series are shown in parentheses. For example, for forecasting
the Food products series in the VAR model the Chemical series was used. This series was chosen
as the results of the one-step-ahead forecasts for the Food series give minimum RMSE if we use
the Chemical series as the second series. The same series is also used for MSSA. Note also that the
Granger causality test confirms that there exists a Granger causality between the two series considered
here. We have indicated this by the  symbol in Table II.
Table II shows that SSA forecasts are much better than the forecasts obtained by ARIMA model.
The averages and the scores for one- and three-step-ahead forecasts show that the VAR forecasts are
also much better than the forecasts obtained by the ARIMA model. However, the advantage of the
VAR, relative to ARIMA, reduces for forecasting at horizons greater than 3. The scores also confirm
that the SSA forecasts outperform forecasts produced by the ARIMA model, at all horizons. For all
the series (eight cases), SSA outperforms ARIMA 7, 7, 7 and 6 times at h D 1, 3, 6 and 12 horizons
respectively, while the VAR outperforms the ARIMA 8, 5, 3 and 2 times. MSSA also outperforms the
ARIMA model 7, 7, 8 and 8 times and outperforms the VAR model 5, 8, 8 and 7 times at h D 1, 3 ,6
and 12 horizons.
As can be seen from Table II, MSSA outperforms ARIMA much more than the VAR model. On
average, the results obtained by MSSA are up to 43%, 38%, 24% and 18% better than the ARIMA
model. The results also indicate that MSSA outperforms the VAR model. On average, the results
obtained by MSSA are up to 15%, 37%, 34% and 26% better than the VAR model.
The results of Table II confirm that the quality of SSA forecasts (both univariate and multivariate)
at horizons h D 1, 3, 6 and 12 are much better than the quality of ARIMA and VAR forecasts. This
observation serves as a confirmation of the following facts: (i) most of the series considered here have
a complex structure of trend and seasonality and this structure is well recovered by SSA; (ii) SSA
forecasts are more robust than ARIMA and VAR forecasts with respect to the presence of shocks in
the series. Note that the current recession has started at the period which we have considered as the
out-of-sample forecast period.
Using the modified Diebold–Marino statistics, given in Harvey et al. (1997), we test for the
statistical significance of the results of the forecasts. The asterisk indicates the results at the 5%
level of significance or less. Comparing the SSA forecasts with the ARIMA, at 5% significance level
or less, SSA outperforms the ARIMA significantly 6, 5, 3 and 5 times at h D 1, 3, 6 and 12 horizons,

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DOI: 10.1002/for
H. Hassani, S. Heravi and A. Zhigljavsky

Table II. Forecasting results for the UK industrial production

series using ARIMA, SSA, VAR and MSSA methods

Series RRMSE
SSA VAR MSSA MSSA
h ARIMA ARIMA ARIMA VAR

Food Products 1 1.01 0.98 1.07 1.09

(Chemical) 3 1.00 1.36 1.03 0.75
 6 0.96 1.37 0.95 0.70*
12 0.95 1.32 0.94 0.71*

Chemicals 1 0.81* 0.54* 0.56* 1.03

(Electricity and Gas) 3 0.89 0.90 0.54* 0.60*
 6 0.96 1.19 0.68* 0.57*
12 1.03 1.38 0.52* 0.38*

Basic Metals 1 0.68* 0.54* 0.51* 0.94

(Fabricated Metal) 3 0.61* 1.28 0.53* 0.41*
 6 0.87 1.49 0.60* 0.40*
12 1.00 1.42 0.65* 0.45*

Fabricated Metal 1 0.46* 0.82* 0.44* 0.54*

(Vehicles) 3 0.48* 0.76* 0.46* 0.61*
 6 0.59* 0.76* 0.58* 0.77*
12 0.74* 0.79* 0.65* 1.17

Machinery 1 0.62* 0.65* 0.44* 0.78*

(Electrical Machinery) 3 0.68* 0.90 0.52* 0.58*
 6 0.77* 0.92 0.67* 0.73*
12 0.77* 0.80* 0.72* 0.90

Electrical Machinery 1 0.56* 0.46* 0.48* 1.04

(Machinery) 3 0.65* 0.79* 0.61* 0.78*
 6 1.04 1.26 0.97 0.77*
12 0.94 1.03 0.94 0.91

Vehicles 1 0.69* 0.78* 0.66* 0.84*

(Basic Metal) 3 0.86 1.14 0.82* 0.72*
 6 0.99 1.22 0.92* 0.75*
12 0.86* 1.06 0.90 0.85*

Electricity and Gas 1 0.35* 0.34* 0.33* 0.97

(Chemicals) 3 0.46* 0.74* 0.49* 0.70*
 6 0.60* 0.79* 0.56* 0.76*
12 0.66* 1.08 0.60* 0.61*

Average 1 0.61 0.63 0.53 0.85

3 0.69 0.99 0.62 0.63
6 0.86 1.14 0.76 0.66
12 0.89 1.11 0.82 0.74

Score 1 7 8 7 5
3 7 5 7 8
6 7 3 8 8
12 6 2 8 7

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DOI: 10.1002/for
 Forecasting UK Industrial Production with MSSA

respectively. MSSA also outperforms VAR significantly 3, 7, 8 and 5 times at h D 1, 3, 6 and 12

horizons, respectively.

Descriptive statistics of the errors

We also use descriptive statistics to describe the main features of the forecast errors, obtained by
ARIMA, VAR, SSA and MSSA, in quantitative terms. We have considered two types of descriptive
measures: measures of central tendency (mean and median) and measures of dispersion (standard
deviation, minimum and maximum). Table III represents summary statistics of the out-of-sample
absolute forecast errors for ARIMA, VAR, SSA and MSSA at horizons up to 1 year. The first column
shows that the results obtained by MSSA have a smaller bias than those obtained using the VAR
model. For example, for the one-step-ahead forecast, the average out-of-sample forecast errors for
MSSA is 0.0015, whereas this is 0.0021 for the VAR model. The performance of MSSA for
h D 3, 6 and 12 is much better than the VAR model. The results also show that the SSA bias fore-
cast is smaller than for the ARIMA model at all horizons. Therefore we can conclude that SSA and
MSSA outperform the ARIMA and VAR models in terms of bias criterion. It should be noted that the
forecast bias has been reduced from ARIMA to VAR and also from SSA to MSSA. For example, for
the one-step-ahead forecast, the bias of the ARIMA forecasts is 0.0623, whereas this value has been
reduced to 0.0021 for the VAR model. Similarly, the bias of the SSA forecast errors is 0.0105,
whereas this has been reduced to 0.0015 for MSSA. A similar pattern can also be seen for the other
horizons. This confirms that the multivariate forecasting has better performance than the univariate,
at least for these series.

Table III. Descriptive statistics for out-of-sample absolute forecast-

ing errors

Method N Mean SD Min. Median Max.

1-step-ahead
ARIMA 256 0.0623 0.1246 0.549 0.0223 0.252
SSA 256 0.0105 0.0854 0.419 0.0071 0.216
VAR 256 0.0021 0.0838 0.410 0.0180 0.193
MSSA 256 0.0015 0.0704 0.293 0.0002 0.159
3-step-ahead
ARIMA 240 0.0760 0.1290 0.582 0.0259 0.246
SSA 240 0.0217 0.1053 0.468 0.0112 0.225
VAR 240 0.0492 0.1513 0.584 0.0221 0.261
MSSA 240 0.0172 0.1001 0.463 0.0048 0.121
6-step-ahead
ARIMA 216 0.0779 0.1367 0.6082 0.0289 0.177
SSA 216 0.0424 0.1274 0.5938 0.0251 0.154
VAR 216 0.0670 0.1795 0.6816 0.0271 0.279
MSSA 216 0.0382 0.1182 0.3880 0.0125 0.124
12-step-ahead
ARIMA 168 0.1280 0.1559 0.6922 0.0670 0.134
SSA 168 0.0952 0.1496 0.6310 0.0579 0.129
VAR 168 0.0869 0.2045 0.7128 0.0474 0.283
MSSA 168 0.0759 0.1323 0.5740 0.0412 0.117

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H. Hassani, S. Heravi and A. Zhigljavsky

The second column represents the standard deviation (SD) of the forecast errors. As the results
show, MSSA results provide the minimum SD, at all horizons, among others. For example, for one-
step-ahead forecasts, the SD of the out-of-sample forecast errors for MSSA is 0.0704, whereas this
is 0.0838 for the VAR model. Note also that the performance of the MSSA is much better than the
VAR model at longer horizons. Similar results are obtained for SSA compared to the ARIMA model.
Median, minimum and maximum values are also reported in the table, showing similar results. The
overall conclusion is that, without exception, SSA outperforms ARIMA in the univariate forecasting,
and MSSA outperforms VAR model in multivariate forecasting.

Empirical cumulative distribution function of the forecasting errors

Let us now examine the empirical cumulative distribution function (c.d.f.) for the absolute value of the
forecasting errors for all the methods considered. If the c.d.f. graph produced by one method is strictly
above the graph of another c.d.f., then we can conclude that the errors obtained by the first method are
stochastically smaller than the errors of the second method. Note also that the Kolmogorov–Smirnov
test based on cumulative distribution functions can be used to test whether two empirical distribu-
tions are different. The c.d.f. of the absolute values of the out-of-sample errors (for all eight series)
obtained by ARIMA, SSA, VAR and MSSA forecasts are presented in Figure 1. We can see from
Figure 1 that for h D 1, 3, 6 and 12 the SSA forecasting errors are stochastically smaller than the
errors of the ARIMA model. In addition, it can be seen that the MSSA forecast errors are much
smaller than the VAR forecast errors. The results obtained from the empirical cumulative distribution
function are in line with those concluded from the descriptive statistics. That is, the SSA outperforms
the ARIMA model in the univariate approach, and the MSSA outperforms the VAR model in the
multivariate approach.

Direction of change predictions

As another measure of forecast accuracy, in addition to the above criteria we also compute the
percentage of forecasts that correctly predict the direction of change.
Table IV provides the percentage of forecasts that correctly predict the direction of change, at
h D 1, 3, 6 and 12 horizons. It also shows whether they are significantly greater than pure chance
(p D 0.50). The asterisk in the table indicates the 5% level of significance. A set of summary results
is also given at the bottom of the table. The summary statistics are the average of correct signs for all
eight series at h D 1, 3, 6 and 12 horizons. The percentage of correct signs are generally smaller than
those reported in Hassani et al. (2009a). This is due to the fact that the results for directional change
are particulary sensitive to structural change in the out-of-sample period. The overall percentage of
correct signs for MSSA are 82%, 80%, 80% and 73% at h D 1, 3, 6 and 12, respectively, while
these values are 74%, 76%, 76% and 72% for SSA. For ARIMA, these results are 68%, 74%, 77%
and 63%, respectively, which are slightly lower than the SSA and significantly lower than MSSA.
The VAR model has also produced lower values than MSSA. For all 32 cases (h D 1, 3, 6 and 12
horizons) MSSA has produced 28 significant cases at the 5% level, while this value for VAR is 16
significant cases. The results indicate that MSSA has improved the predictability of direction of
change relative to SSA at all horizons. However, this is not the case for the VAR model. There-
fore, the overall conclusion from the direction of change results is that the relation between the series
movement in a multivariate system is captured much better by MSSA than by the VAR model.

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 Forecasting UK Industrial Production with MSSA

ARIMA-SSA (one-step-ahead) VAR-MSSA (one-step-ahead)

ARIMA-SSA (three-step-ahead) VAR-MSSA (three-step-ahead)

ARIMA-SSA (six-step-ahead) VAR-MSSA (six-step-ahead)

ARIMA-SSA (12-step-ahead) VAR-MSSA (12-step-ahead)

Figure 1. Empirical cumulative distribution functions for absolute forecasting errors of ARIMA, SSA, VAR
and MSSA

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H. Hassani, S. Heravi and A. Zhigljavsky

Table IV. Direction of change results for the UK industrial pro-

duction series using ARIMA, SSA, VAR and MSSA methods

Series h ARIMA SSA VAR MSSA

Food Products 1 0.87* 0.77* 0.77* 0.84*
3 0.77* 0.83* 0.77* 0.77*
6 0.89* 0.89* 0.93* 0.93*
12 0.67 0.71* 0.76* 0.76*
Chemicals 1 0.71* 0.55 0.77* 0.71*
3 0.70* 0.67 0.53 0.70*
6 0.74* 0.74* 0.52 0.81*
12 0.67 0.62 0.62 0.81*
Basic Metals 1 0.68* 0.81* 0.74* 0.81*
3 0.80* 0.80* 0.50 0.83*
6 0.70* 0.67 0.44 0.70*
12 0.71* 0.76* 0.29 0.76*
Fabricated Metal 1 0.61 0.71* 0.81* 0.81*
3 0.70* 0.83* 0.60 0.83*
6 0.70* 0.67 0.59 0.70*
12 0.48 0.71* 0.90* 0.81*
Machinery 1 0.74* 0.77* 0.74* 0.87*
3 0.80* 0.73* 0.57 0.90*
6 0.74* 0.74* 0.70* 0.89*
12 0.52 0.67 0.76* 0.67
Electrical Machinery 1 0.68* 0.74* 0.77* 0.77*
3 0.77* 0.70* 0.70* 0.80*
6 0.67 0.70* 0.56 0.59
12 0.71* 0.76* 0.48 0.67
Vehicles 1 0.65 0.71* 0.68* 0.81*
3 0.77* 0.67 0.70* 0.67
6 0.74* 0.70* 0.67 0.74*
12 0.67 0.81* 0.67 0.71*
Electricity and Gas 1 0.48 0.87* 0.81* 0.94*
3 0.63 0.87* 0.53 0.93*
6 0.96* 1.00* 0.52 1.00*
12 0.57 0.71* 0.62 0.67*
Average 1 0.68 0.74 0.76 0.82
3 0.74 0.76 0.61 0.80
6 0.77 0.76 0.62 0.80
12 0.63 0.72 0.64 0.73

SSA-BASED CAUSALITY TESTS

A question that frequently arises in time series analysis is whether one economic variable can
help in predicting another economic variable. One way to address this question was proposed by
Granger (1969), in which he formalized the causality concept. Here, we develop new tests and
criteria which will be based on the forecasting accuracy and predictability of the direction of change
of the SSA algorithms.

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 Forecasting UK Industrial Production with MSSA

Causality criteria based on forecasting accuracy

The first criterion we use here is based on out-of-sample forecasting, which is very common in the
framework of Granger causality. Here, we compare the forecast values obtained by the univariate
procedure, SSA and MSSA. If the forecasting errors using MSSA are significantly smaller than those
of univariate SSA, we can conclude that there is a casual relationship between these series.
Let us consider in more detail the procedure for constructing a vector of forecasting error for an
out-of-sample test. In the first step we divide the series XT D .x1 , : : : , xT / into two separate subseries
XR and XF : XT D .XR , XF /, where XR D .x1 , : : : , xR / and XF D .xRC1 , : : : , xT /. The subseries
XR is used in the reconstruction step to provide the noise-free series XQ R . The noise-free series XQ R
is then used for forecasting the subseries XF with the help of the recursive formula using SSA and
MSSA. The forecast values XO F D .xO RC1 , : : : , xO T / are then used for computing the forecasting errors,
and the vector .xRC2 , : : : , xT / is forecasted using the new subseries .x1 , : : : , xRC1 /. This procedure
is continued recursively up to the end of series, yielding the h-step-ahead forecasts for univariate and
multivariate algorithms. Therefore, the two vectors of h-step-ahead forecasts obtained can be used in
examining the association (of order h) between the two series. Let us now consider a formal procedure
for constructing a criterion of SSA causality of order h between two arbitrary time series.
Let XT D .x1 , : : : , xT / and YT D .y1 , : : : , yT / denote two different time series of length T . Set
the window lengths L common for both series. Using the embedding terminology, we construct the
trajectory matrices X D ŒX1 , : : : , XK  and Y D ŒY1 , : : : , YK  for the series XT and YT .
Consider an arbitrary loss function L. In econometrics, the loss function L is usually selected as
the mean square error. Let us first assume that the aim is to forecast the series XT h steps ahead. Thus
the aim is to minimize L.XKCh  XO KCh /, where the vector XO KCh is an estimate, obtained using a
forecasting algorithm, of the vector XKCh D .xKCh , : : : , xT Ch /. The vector XKCh can be obtained
using either univariate SSA or MSSA. Let us first consider the univariate approach.
Define X KCh
 L.XKCh  XO KCh /, where XO KCh is obtained using univariate SSA; that is,
O
the estimate XKCh is obtained only from the vectors ŒX1 , : : : , XK . Let XT D .x1 , : : : , xT / and
YT Cd D .y1 , : : : , yT Cd / denote two different time series to be considered simultaneously and con-
sider the same window length L for both series. Here d is an integer, not necessarily non-negative.
Now, we forecast xT C1 , : : : , xT Ch using the information provided by the series YT Cd and XT .
Next, compute the statistic X jYKCh KCd
 L.XKCh  XQ KCh /, where XQ KCh is an estimate of XKCh
.h,d /
obtained using MSSA. Now, define the criterion FXjY D X jY =X
KCh KCd KCh
corresponding to the
h-step-ahead forecast of the series XT in the presence of the series YT Cd . Note that d is any given
.h,0/
integer (even negative). For example, FXjY means that d D 0 and that we use the series XT and YT
simultaneously (with zero lag).
.h,d /
If FXjY is small, then having information obtained from the series Y helps us to have better fore-
casts of the series X . This means there is a relationship between series X and Y of order h according
to this criterion, and the predictions using the multivariate SSA are much more accurate than the
.h,d /
predictions by the univariate SSA. If FXjY < 1, then we conclude that the information provided
by the series Y can be regarded as useful or supportive for forecasting the series X. Alternatively,
.h,d /
if the values of FXjY  1, then either there is no detectable association between X and Y or the
performance of the univariate SSA is better than of the MSSA (this may happen, for example, when
the series Y has structural breaks misdirecting the forecasts of X ).
To assess which series is more supportive in forecasting, we need to consider another criterion. We
obtain FY.h,d /
jX in a similar manner. Now, these measures tell us whether using extra information about
time series YT Cd (or XT Cd ) supports XT (or YT ) in h-step-forecasting. If FY.h,d / .h,d /
jX < FXjY , we then

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H. Hassani, S. Heravi and A. Zhigljavsky

.h,d /
conclude that X is more supportive to Y than is Y to X . Otherwise, if FXjY < FY.h,d /
jX , we conclude
that Y is more supportive to X than is X to Y .
However, if FY.h,d / .h,d /
jX < 1 and FXjY < 1, we then conclude that X and Y are mutually supportive. We
shall call this F-feedback (forecasting feedback), which means that the use of a multivariate system
improves the forecasting for both series.
To check whether the discrepancy between the two forecasting procedures is statistically signifi-
cant, we apply the Diebold and Mariano (1995) test statistic, with the corrections suggested in Harvey
et al. (1997).

Direction of change based criteria

The direction of change criterion shows the proportion of forecasts that correctly predict the direc-
tion of the series movement. For forecasts obtained using only XT (univariate case), let ZX i

take theP value 1 if the forecast correctly predicts the direction of change and 0 otherwise. Then
n
ZNX D i D1 ZX i =n shows the proportion of forecasts that correctly predict the direction of the
series. The Moivre–Laplace central limit theorem implies that, for large samples, the test statistic
2.ZNX  0.5/N 1=2 is approximately distributed as standard normal. When ZNX is significantly larger
than 0.5, the method is said to have the ability to predict the direction of change. Alternatively, if ZNX
is significantly smaller than 0.5, the method tends to give the wrong direction of change.
For the multivariate case, let ZXjY ,i take a value 1 if the forecast of the direction of change of
the series X having information about the series Y is correct and 0 otherwise. Then, we define the
following criterion: DXjY .h,d /
D ZNX =ZN XjY , where h and d have the same interpretation as for FXjY .h,d /
.
.h,d /
The criterion DXjY characterizes the improvement we are getting from the information contained in
YT Ch (or XT Ch ) for forecasting the direction of change in the h-step-ahead forecast.
.h,d /
If DXjY < 1, then having information about the series Y helps us to obtain better predictions of
.h,d /
the direction of change for the series X. Alternatively, if DXjY > 1, then the univariate SSA is better
than the multivariate version. Similar to the forecasting accuracy criterion, we can define a feed-
back system and check which series is more supportive based on the predictability of the direction
of change.
.h,d /
To test the significance of the value of DXjY , we use the test developed in Zhigljavsky et al.
(2009). As in the comparison of two proportions, when we test the hypothesis concerning the dif-
ference between two proportions, first we need to know whether the two proportions are dependent.
The test is different depending on whether the proportions are independent or dependent. In our case,
obviously, ZX and ZXjY are dependent. Let us consider the test statistic for the difference between
the forecast values of ZX and ZXjY as shown in Table V.

Table V. An arrangement of ZX and

ZX jY in forecasting n future points
of the series X
ZX jY ZX Number
1 1 a
1 0 b
0 1 c
0 0 d
Total nDaCbCcCd

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 Forecasting UK Industrial Production with MSSA

The estimated proportion of correct forecasts using the multivariate system is PXjY D .a C b/=n,
and the estimated proportion using the univariate version is PX D .a C c/=n. The difference between
the two estimated proportions is
aCb aCc bc
 D PXjY  PX D  D (6)
n n n
Since the two population probabilities are dependent, we then estimate standard error as follows:
r
1
SE./ D
1
n
.b C c/ 
.b  c/2
n
(7)

Let us write the null and alternative hypotheses as

H0 W d D 0
(8)
Ha W d ¤ 0

The test statistic, assuming that the sample size is large enough for having the normal approxima-
tion to the binomial distribution, is
  0  1=n
T D
d
1
SE./
(9)

where 1=n is the continuity correction. In our case 0 D 0, and the test statistic becomes
.b  c/=n  1=n bc1
T D
d
p Dp (10)
2
1=n .b C c/  .b  c/ =n .b C c/  .b  c/2 =n
Under the null hypothesis of no difference between samples ZX and ZXjY , T has standardd

normal distribution.

Empirical results
The results presented in the previous section showed that the VAR model is not the best choice in
predicting the UK industrial production series, as MSSA decisively outperforms the VAR model.
We have also shown that these series are nonlinear, non-stationary and not normally distributed.
The Granger causality test reported in Zhigljavsky et al. (2009) confirms that there is a Granger
causality between certain series considered in the multivariate forecasting approach. The Food and the
Chemical series have been found as the series where Granger causality was most apparent (the linear
and non-linear correlations for these two series are 0.75 and 0.85, respectively).
We performed h D 1, 3,6 and 12-step-ahead forecasts based on the most up-to-date information
available at the time of the forecast. We use d -step-ahead information about the Food series as addi-
tional information in forecasting h steps ahead for the Chemical series and vice versa. We denote the
.h,d / .h,d /
corresponding statistics FFjC and FCjF , respectively. Note that we select window length 24 for both
univariate and multivariate SSA. In model selection for VAR model we use the Akaike information
criterion (AIC) and the Schwarz information criterion (SIC) for the identification of the VAR model
order. An asterisk indicates significant results at the 1% level.
As we mentioned earlier, the Granger causality test results confirm that there is a significant rela-
tionship between the Food and the Chemical series. To examine this using the SSA technique, next

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H. Hassani, S. Heravi and A. Zhigljavsky

we consider MSSA with d additional observations for one series. For example, we use the Food series
up to time t and the Chemical series up to time t C d in forecasting h steps ahead for the Food series
.h,d /
to compute FFjC . We use a similar procedure in forecasting the Chemical series. We expect this
additional information to give better results in both forecasting accuracy and the direction of change
prediction.
Let us first consider the results obtained for the Food series using extra information from the
Chemical series. As can be seen from Table VI, the accuracy of the results obtained using MSSA
.h,d /
is better than that obtained using SSA for h  6 with respect to FFjC column MSSA
SSA
. The MSSA
also improved predictability of the direction of change of the Food series for all considered horizons
.h,d /
(according to DCjF column MSSASSA
in Table VII). The results show that, for the Food series, we have
improved both accuracy and direction of change of the forecasting results for h  6. Furthermore,
prediction of the direction of change has been improved for h  6. This indicates that we can at least
improve the direction of change predictability for the Food series using extra information from the
Chemical series.
.h,d /
Note also that FFjC for h D 1, : : : , 6 is equal to 1 or slightly grater than 1, which indicates that
the multivariate version could not help in short horizon forecasting. To examine this more precisely,
we need to increase our forecasting period. On average, we were able to improve both forecasting
accuracy and direction of change predictability by 4%. As the results show, the VAR model cannot
help us in forecasting the Food series using extra information about the Chemical series according to
the results provided in the second column of Tables VI and VII. We have also compared VAR results
and those obtained by MSSA. As can be seen from the tables, the results obtained by MSSA are much
better than those provided using the VAR model. On average, the MSSA results are up to 50% and
13% better than the VAR model in forecasting accuracy and predictability of the direction of change.
Let us now consider the results of forecasting the Chemical series having extra observations for
.h,d / .h,d /
the Food series. As can be observed from columns FCjF , DCjF , the errors for the MSSA forecast
and direction of change, with d additional observations, are much smaller than those obtained for
the univariate SSA. These results are also better than those obtained using the multivariate approach

Table VI. The value of RRMSE in forecasting h steps ahead

for the Food and Chemical series for d D 12
.h,d / .h,d /
FFjC FCjF
MSSA VAR MSSA MSSA VAR MSSA
h SSA ARIMA VAR SSA ARIMA VAR

1 1.05 1.08 0.62* 0.55* 0.72* 0.83*

2 1.03 1.10 0.55* 0.74* 0.61* 0.86*
3 1.02 1.11 0.50* 0.69* 0.72* 0.85*
4 1.03 1.14 0.52* 0.73* 0.80* 0.86*
5 1.00 1.12 0.53* 0.67* 0.98 0.83*
6 0.90 1.15 0.48* 0.85* 1.00 0.73*
7 0.85* 1.17 0.44* 0.60* 1.06 0.74*
8 0.87* 1.08 0.45* 0.60* 0.95 0.72*
9 0.85* 1.06 0.43* 0.53* 1.08 0.60*
10 0.83* 1.07 0.39* 0.54* 0.97 0.59*
11 0.92 1.09 0.49* 0.42* 0.92 0.68*
12 0.97 1.07 0.66* 0.45* 0.80* 0.78*
Average 0.96 1.10 0.50 0.61 0.88 0.76

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 Forecasting UK Industrial Production with MSSA

Table VII. Post-sample relative percentage of the corrected

forecast sign for Food and Chemical series
.h,d / .h,d /
DFjC DCjF
SSA ARIMA VAR SSA ARIMA VAR
h MSSA VAR MSSA MSSA VAR MSSA

1 0.89 1.08 0.93 0.65* 0.96 1.00

2 0.96 1.00 0.88 0.90 0.91 1.05
3 0.93 1.29 0.78* 0.95 1.29 0.89
4 0.92 1.14 0.85* 0.90 1.11 0.95
5 0.96 1.25 0.80* 0.81* 1.25 0.76*
6 0.96 1.19 0.84* 1.00 1.67 0.63*
7 0.98 1.21 0.86* 0.57* 1.06 0.74*
8 1.00 1.17 0.78* 0.84* 1.00 0.89
9 0.95 1.05 0.86* 0.88 1.13 0.94
10 1.00 1.00 0.90 0.86* 1.07 1.07
11 1.00 0.93 1.07 0.53* 1.08 0.87*
12 0.92 0.73 0.85* 0.50* 0.67* 1.07
Average 0.96 1.09 0.87 0.78 1.10 0.91

with zero lag difference. This is not surprising as the additional data used are highly correlated with
the series we are forecasting. As the results show, the accuracy performance of MSSA has been
significantly increased. However, it seems that this correlation, either linear and nonlinear, is not
properly captured by the VAR model.
For example, in forecasting one step ahead of the Chemical series having extra information for
the Food series, compared to the univariate case, we have improved the accuracy and the direction of
change of the forecasting results up to 45% and 35% (column 4 of Tables VI and VII), respectively.
On average, the forecasting accuracy results have been improved up to 39% and 22% using MSSA
and the VAR model, respectively. However, the direction of change results, presented in Table VII for
the Chemical series, confirm that even though the VAR model could help us to improve the forecasting
accuracy, it fails to improve the predictability of direction of change. Comparison of MSSA prediction
of the direction of change results and forecasting accuracy results relative to the VAR model indicates
that the MSSA technique is up to 24% and 9% better than the VAR model, respectively.
.h,d / .h,d /
Moreover, FCjF > FFjC indicates that the Food series is more supportive than the Chemical
series in terms of forecasting accuracy. Furthermore, the results of Table VII confirm that there exists
D-feedback between the Food and Chemical series for h D 1, : : : , 12. This means that, considering
both the Food and Chemical series simultaneously and using SSA, we are able to improve the pre-
dictability of the direction of change. On average, the MSSA results have improved the percentage
of correct prediction of the series movement up to 4% and 22% for the Food and the Chemical
series, respectively. Moreover, there exists F-feedback between the Food and the Chemical series for
h D 6, : : : , 12.
Finally, the results obtained by the VAR model and ARIMA, in terms of both forecasting accuracy
and direction of change predictability, confirm that for the Food series VAR models cannot help us to
improve our results while there exists Granger causality between the series. However, as the results
show, the VAR model can improve the results obtained for the Chemical series except for h D 7 and
9 (this probably happened because our out-of-sample size was small). On average, for the Chemical
series, MSSA and VAR model enable us to improve the forecasting accuracy up to 34% and 12%,

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H. Hassani, S. Heravi and A. Zhigljavsky

respectively. However, there is no improvement for the direction of change prediction using the VAR
model for both the Food and the Chemical series.

SUMMARY AND CONCLUSIONS

In this paper, we have described the methodology of SSA and demonstrated that SSA can be suc-
cessfully applied to the analysis and forecasting of the industrial production series for the UK.
This research has illustrated that the SSA technique performs well in the simultaneous extraction of
harmonics and trend components even in circumstances where there is a structural break in the series.
A comparison of forecasting results showed that SSA is more accurate than the ARIMA model, con-
firming the results obtained in Hassani et al. (2009a). We were motivated to use MSSA because these
production series are highly correlated with each other. The multivariate SSA also outperformed the
VAR model in predicting the values and direction of the production series according to the RMSE
criterion and the direction of change results.
The empirical cumulative distribution function and descriptive statistics of the errors were obtained
by SSA, MSSA, ARIMA and the VAR model. The results confirmed that the errors obtained by
SSA were stochastically smaller than those obtained by ARIMA in the univariate case. Similarly,
MSSA forecast errors were stochastically smaller than those obtained by the VAR model. The results
obtained from the empirical cumulative distribution functions were in line with those concluded from
the descriptive statistics. The overall conclusions according to these criteria are that SSA outperforms
the ARIMA model in the univariate case, and MSSA outperforms the VAR model in the multivariate
situation.
We also developed a new approach in testing for causality between two arbitrary univariate time
series. Several test statistics and criteria are introduced in testing for casuality. We believe that
our approach is superior to the criteria used for testing the Granger causality, which are based on
autoregressive integrated moving average .p, d , q/ or multivariate vector autoregressive (VAR) rep-
resentation of the data. The criteria are based on the idea of minimizing a loss function, forecasting
accuracy and predictability of the direction of change.
The performance of the proposed tests was examined using the Food production series and the
Chemical series. It has been shown that, on average, the Chemical series causes the Food series and
the Food series causes the Chemical series considering the predictability of direction of change. We
also found that there exist two-way causality between the Food and the Chemical series in terms of
forecasting accuracy criterion for horizons longer than 6 months. On the other hand, the VAR model
fails to use the dependence between the Food and the Chemical series as the VAR only marginally
improves the accuracy of the forecasts.

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Authors’ biographies:
Hossein Hassani is a Senior Lecturer in Statistics and Econometrics at Business School, Bournemouth University.
His research interests include Singular Spectrum Analysis, time series analysis and forecasting, econometrics, data
mining and applied statistics.

Copyright © 2012 John Wiley & Sons, Ltd. J. Forecast. (2012)

DOI: 10.1002/for
H. Hassani, S. Heravi and A. Zhigljavsky

Saeed Heravi is a Reader in Quantitative Methods at Cardiff Business School, Cardiff University. His research
interests are in time series analysis, forecasting, applied econometrics and index numbers.

Anatoly Zhigljavsky is a Professor in Statistics at school of Mathematics, Cardiff University. His research interests
are in time series analysis, experimental design, stochastic global optimization, dynamical systems in search and
optimization and applied statistics.

Authors’ addresses:
Hossein Hassani, The Business School, Bournemouth University, Bournemouth BH8 8EB, UK; Statistical
Research and Training Center (SRTC), Tehran, Iran.

Saeed Heravi, Cardiff Business School, Cardiff University, Cardiff CF10 3EU, UK.

Anatoly Zhigljavsky, Cardiff School of Mathematics, Cardiff University, Cardiff CF24 4AG, UK.

Copyright © 2012 John Wiley & Sons, Ltd. J. Forecast. (2012)

DOI: 10.1002/for