ARIMA processes

ARIMA processes
Rob J Hyndman
25 May 2001
ARIMA processes are mathematical models used for forecasting. ARIMA is an
acronym for AutoRegressive, Integrated, Moving Average. Each of these phrases
describes a different part of the mathematical model.
ARIMA processes have been studied extensively and are a major part of time se-
ries analysis. They were popularized by George Box and Gwilym Jenkins in the
early 1970s; as a result, ARIMA processes are sometimes known as Box-Jenkins
models. Box and Jenkins (1970) effectively put together in a comprehensive man-
ner the relevant information required to understand and use ARIMA processes.
The ARIMA approach to forecasting is based on the following ideas:
1 The forecasts are based on linear functions of the sample observations;
2 The aim is to find the simplest models that provide an adequate description
of the observed data. This is sometimes known as the principle of parsimony.
Each ARIMA process has three parts: the autoregressive (or AR) part; the inte-
grated (or I) part; and the moving average (or MA) part. The models are often
written in shorthand as ARIMA(p,d,q) where p describes the AR part, d describes
the integrated part and q describes the MA part.
AR: This part of the model describes how each observation is a function of the
previous p observations. For example, if p = 1, then each observation is a
function of only one previous observation. That is,
Yt = c + φ1Yt−1 + et
where Yt represents the observed value at time t, Yt−1 represents the previous
observed value at time t − 1, et represents some random error and c and φ1
are both constants. Other observed values of the series can be included in
the right-hand side of the equation if p > 1:
Yt = c + φ1Yt−1 + φ2Yt−2 + · · · + φpYt−p + et.
I: This part of the model determines whether the observed values are modelled
directly, or whether the differences between consecutive observations are mod-
elled instead. If 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. In practice, d is rarely more than
2.
MA: This part of the model describes how each observation is a function of the
previous q errors. For example, if q = 1, then each observation is a function
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ARIMA processes
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of only one previous error. That is,
Yt = c + θ1et−1 + et.
Here et represents the random error at time t and et−1 represents the previous
random error at time t − 1. Other errors can be included in the right-hand
side of the equation if q > 1.
Combining these three parts gives the diverse range of ARIMA models.
There are also ARIMA processes designed to handle seasonal time series, and
vector ARIMA processes designed to model multivariate time series. Other vari-
ations allow the inclusion of explanatory variables.
ARIMA processes have been a popular method of forecasting because they have
a well-developed mathematical structure from which it is possible to calculate
various model features such as prediction intervals. These are a very important
feature of forecasting as they enable forecast uncertainty to be quantified.
See entry for Box-Jenkins modelling.
References
BOX, G.E.P. and G.M. JENKINS (1970) Time series analysis: Forecasting and control,
San Francisco: Holden-Day.
MAKRIDAKIS, S., S.C. WHEELWRIGHT, and R.J. HYNDMAN (1998) Forecasting:
methods and applications, New York: John Wiley & Sons.
PANKRATZ, A. (1983) Forecasting with univariate Box–Jenkins models: concepts and
cases, New York: John Wiley & Sons.

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