THE BOX-JENKINS (ARIMA) METHODOLOGY

Several approaches for analyzing and forecasting time series have been discussed. In Chapter 4, smoothing was introduced and time series forecasts were generated by a particular smoothing (averaging) mechanism. In Chapter 5, time series were decomposed into trend, seasonal, and irregular components, and forecasts were produced by extrapolating the estimated trend and seasonality. In Chapter 8, regression models appropriate for time series data were considered. Forecasts of the dependent variable Y generated from these models ordinarily require forecasts of future values of the independent variables, the X's. This cha . odels that can produce accurate forecasts based on a description of historical atterns in the a a. u oregressive integrate moving average A) models are a class of linear models that is capable of representing stationary as well as nonstationary time series. Recall that stationary processes vary about a fixed level, and nonstationary processes have DO natural constant mean level. The autoregressive models discussed in Chapter 8 are actually a special subset of ARIMA models that are useful for modeling stationary time series. ARIMA models do not involve independent variables in their construction. Rather, they make use of the information in the series itself to generate forecasts. For example, an ARIMA model for monthly sales would project the historical sales pattern to produce a forecast of next month's sales. _ ARIMA models rely heavily on autocorrelation patterns in the data. The methodology for identifying, fitting, and checking appropriate ARIMA mOdels was reat! advanced by the work of two statisticians, G. E. P. Box a reason, A modeling an orecasting is often referred to as the Box-Jenkins methodology.

BOX-JENKINS METHODOLOGY
The Box-Jenkins methodology of forecasting is different from most methods because it does not assume any particular pattern in the historical data of the series to be forecast. It usesan neiative approach of Idenhtymg a pOSSIble model from a general class of models. The chosen model is then checked against the historical data to see whether it accurately describes the series. The model fits well if the residuals are generally small, randomly distributed, and contain no useful information. If the specified model is not satisfactory, the process is repeated using a new model designed to improve on the original one. This iterative rocedure continues until a satisfactor model is found. At that point, the model can be use or forecasting. Figure 9-1 illustrates the Box-Jenkins model-building strategy.

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