INFORMATION

CRITERIA FOR
SELECTION OF
APPROPRIATE
MODELS

AIC, SIC, AND HQIC

NEED FOR AN INFORMATION CRITERIA

 As we increase the order of AR (Auto Regression), MA(Moving Average) or I (Integrating

parameters)
 Greater p, or d or q will result in an overfit model of the timeseries.

 High variance is caused due to overfitting

 Resulting in an ineffective model for forecasting

 There needs to be check on how many parameters are to be taken

 For this Information criteria are used

WHY INFORMATION CRITERIA OVER ADJUSTED R-SQUARED?

 Adjusted R-Squared looks at non relevant variables being added

 In a time series no lag is insignificant so every time adjusted R-squared will not be a good
measure.
 Information Criteria were introduced because of this

 Information Criteria are based on Maximum Likelihood Estimate

 Maximum Likelihood Estimate is given by LLmax, i.e maximum log likelihood

AIC (AKAIKE INFORMATION CRITERIA)

 Similar to adjusted R-square but works on a Log-likelihood function

  
 It can have errors for a higher dimensional model
BAYESIAN/SCHWARTZ INFORMATION CRITERIA

 Works on the principle of Bayesian Inference, stating that more the number of observations less
  
parameters to be used
 Helps selecting a lower dimensional model
HANNA QUINN INFORMATION CRITERIA

 ]

 Close to SIC but considers higher dimensional models wherever necessary, which is not possible
  
in cases of BIC
WHEN TO CHOOSE AIC, BIC OR HQIC

 AIC is chosen when we need to form higher dimensional models

 BIC is chosen when the complexity of the model has to be kept low, whereas underfitting has to
be avoided
 HQIC is similar to BIC but it gives less penalty with respect to the number of observations

 99% of the times resultant model will be same if we are using AIC,BIC and HQIC.

 Minimisation of these terms is preferred.