The Consequences of Trading Day Variation and

Calendar Effects for ARIMA Model Building and

Seasonal Adjustment
Gerhard Thury*)

Zusammenfassung
Zeitreihenmodelle haben in den letzten Jahren stark an Bedeutung gewonnen. Sie werden
immer h~ufiger zur kurzfristigen Prognose und - - vor allem in jQngster Zeit - - auch zur Sai-
sonbereinigung 8konomischer Zeitreihen herangezogen. Die vorliegende Arbeit besch~f-
tigt sich ausschlieBlich mit dieser neuen AnwendungsmSglichkeit. Die Ausgangsposition
bei deft bisher Qblichen Regressionsans~itzen und bei Zeitreihenmodellen ist v611ig kontr~r.
Regressionsans~tze wollen den EinfluB von unabh~ngigen Variablen auf die zu erkl~rende
Gr88e erfassen. Die Existenz einer Zufallskomponente wird zwar prinzipiell anerkannt, aber
mSgliche, daraus resultierende Schwierigkeiten werden sofort durch heroische Annahmen
verharmlost. Zeitreihenans~itze wieder konzentrieren sich ausschlieBlich auf die Modellie-
rung dieser Zufallskomponente. FQr viele Zeitreihen, mit denen man es in der empirischen
Arbeit zu tun hat, sind nun jedoch sowohl Einflesse von unabh~ngigen Variablen als auch
ZufallseinflQsse von Wichtigkeit. Es sollte daher nicht welter Qberraschen, dab fQr derarti-
gen Zeitreihen keiner der erw~ihnten Ans~tze zu einer wirklich brauchbaren Modellierung
der untersuchten Zeitreihe fQhrt. Im folgenden wird nun am Beispiel der 5sterreichischen
Einzelhandelsums~itze gezeigt, dab in einer derartigen Situation ein "gemischter" Ansatz
weit bessere Resultate liefern kann. Dabei wird der EinfluB der unabh~ngigen Variablen
durch einen Regressionsansatz modelliert, und fQr die verbleibende Zufallskomponente
wird ein ARIMA-Modell gesch~itzt. In theoretischer Hinsicht ist dieser Ansatz jedoch weit
weniger anspruchsvoll als die in jQngster Zeit entwickelten ARMAX-Systeme. Trotzdem
fQhrt er zu einer sprunghaften Verbesserung in der Qualit~it der mit Hilfe dieses Modells be-
rechneten saisonbereinigten Werte.

The publication of the book by B o x - - J e n k i n s (1970) was a catalyst for the propagation of
ARIMA model building. In recent years, ARIMA model-based approaches have been gain-
ing in importance for seasonal adjustment also. But, for this approach to be really success-
ful, it is indispensable that the ARIMA model for the series to be adjusted is adequate. B e l l
- - H i l l m e r ( 1 9 8 3 ) make numerous suggestions for the improvement of ARIMA model build-
ing. In the following, we shall take up these suggestions for modelling Austrian retail sales.
Here special attention is directed to the question whether this leads to a substantial im-
provement of the resulting ARIMA model and whether this in turn has consequences for
ARIMA model-based seasonal adjustment.

*) Financial support by the Jubil~umsfonds der Oesterreichischen Nationalbank under grant No. 2203
is gratefully acknowledged.
1. Introduction

In applied work, it is often assumed that an observed time series Yt follows (perhaps after
transformation) the model

(1) Y t = f(X~;~) + N,.

Here Xt is a vector of fixed independent variables observed at time t, ff a vector of parame-

ters, and Nt a noise series. If Nt is white noise, then (1) is the familiar linear or non-linear
regression model. However, for economic time series, Nt will generally be autocorrelated
and frequently be non-stationary. Many authors have warned against the consequences of
using standard regression techniques when Art is autocorrelated. For a detailed discussion
of this topic see Granger - - Newbold (1977).

In the beginning, as a kind of overreaction, time series analysts concentrated on the cor-
rect modelling of the noise series Nt, i g n o r i n g f ( X t ; ~) altogether. Thus, relation (1) was re-
duced to a pure ARIMA model. But, it was soon found out that ignoring known, independ-
ent variables is to invite difficulties. It was detected that substantial improvements of esti-
mated ARIMA models could be achieved by incorporating relevant independent variables
into these models.

2. A pure ARIMA model for Austrian retail sales

In developing a pure ARIMA model for the index of Austrian retail sales ( D E U T O R ) we fol-
low the three-stage model building procedure of identification, estimation, and diagnostic
checking suggested in Box - - Jenkins (1970). We use monthly observations of retail sales
covering the period 1970 to 1984. For the moment, we d e l e t e f ( X t ; ~) from (1) and assume
that Nt follows the ARIMA model

(2) ~ (B) D (B) Nt = O (B) a,,

where B is the backshift operator (B N t = N t _ I ) , q~ (B) = 1--~1 B - . . . - - ~pBp and

0 (B) = 1 - - 01 B - - . . . - - Oq Bq have all their roots outside the unit circle and have no
common roots, D (B) is the differencing operator (all roots on the unit circle) and tat} is a
sequence of independent, identically distributed (iid) random variables with mean 0 and var-
iance a 2.

An inspection of a plot of the raw data reveals that the variance of this series is increasing
over time(l). Thus, we take natural logarithms of the original series in order to stabilize this
variance. The sample autocorrelation function (SACF) of this transformed series provides
clear indication for its non-stationarity. After some experimentation, we select D (B) =

4
 Figure 1
SACFfor (1 - - B ) (1 - - B TM) In DEUTOR

0.3

+2#
0.2

0 t

0 0

-0 I

-0,2

-0.3

-0 4
0 I 12 24 36

( l - - B ) ( 1 - - B 12) in order to cope with this problem. Figure 1 gives the SACFfor this trans-
formed and differenced series of Austrian retail sales. As so often with economic time
series, this SACF looks rather confusing. We observe that only for the lags 1 and 12 the
estimated autocorrelation coefficients exceed two times their standard errors, suggesting
a model of the form

(3) (1 - - B) (1 - - B 12) In DEUTOR, = (1 - - O1 B) (1 - - O12 B 12) at.

But, the large number of moderately sized autocorrelation coefficients for various other
lags makes us doubt whether this model is an adequate representation of the series under
study. Estimating model (3)yields

= 0.798 #,2 = 072

(0.049) (0.057)

SE = 0.038.

The values in brackets below the parameter estimates are standard errors. Figure 2 shows
the S.4CF of the residuals from model (3). We see immediately that the above mentioned
moderately sized autocorrelation coefficients at various lags are still present; they have

5
 Figure 2
SA CF f o r residuals from (3)

0.20

0.10

0.0O

- 0 . 10

- 0 . 20 .................................................................................................28

, J i J Lag
0 12 24 36

even become more significant. Ljung -- Box (1978) show that under the hypothesis that
the model is correct, for large n the statistic

L
Q* = n(n + 2) Z r~(d)/(n--k)
k=l

has approximately a 2"2 (L--s)-distribution where rk (~) is the lag k sample autocorrelation
coefficient of 6t, and s equals the number of parameters in the noise model. The noise
model is judged inadequate if Q* exceeds 1,2 ( L - - s ) for some suitable 6, which we
choose as 0.01 in the present study.

Calculating this Q*-statistic for the residuals of model (3) we obtain a value of 46.6. The
tabulated Z2-value at the 99 percent significance level is 40.3. Consequently, our estimated
noise model must be considered as inadequate. Adding additional moving average terms to
model (3) does not improve the adequacy of this model. The parameter estimates are
significant, and the standard error of the residuals is slightly reduced, but the value of the
Q*-statistic remains unduly high.

Thus, we finally conclude that it is inappropriate to drop f(Xt;~) from (1). Apparently, Aus-
trian retail sales are strongly affected by certain independent variables. We could imagine
that factors originating from three sources, namely
- - policy interventions,
-- trading day variations, and
-- calendar effects
influence the behaviour of retail sales significantly.
3. Modelling policy interventions
It is easily conceivable that impending changes in the purchase tax rate, which are known
in advance, will strongly affect series like retail sales. We would expect that retail sales in-
crease immediately before a tax increase and drop sharply afterwards. In Austria, we ob-
served two such purchase tax rate increases in the recent past, namely in 1978 and 1984.

As suggested in Box -- Tiao (1975), the functionf(Xt; ~) in (1) can be used to capture the
deterministic effects of such policy interventions. However, in order to be able to do this,
we have to develop some idea about the functional form off(Xt; ~). We assume that

(4) f ( x t ~) = ~1x1, + 1 - ~'2

d~ x2, + s~3x3, + se4x,,,

where

X1 t = 1 for November and December 1977,

= 0 elsewhere,
X2, = 1 for January 1978,
= 0 elsewhere,
X3r = 1 for December 1983,
= 0 elsewhere,
X4, = 1 for January 1984,
= 0 elsewhere.

A justification for this particular form off(Xt; ~) can be found in Thury (1982). The rationale
behind it is quite simple. Let us exemplify it for the 1978 purchase tax increase. Since the
impending increase of the VAT rates was known in advance, the first reaction of the con-
sumers was a rush in buying during the last months of 1977. Therefore, the coefficient of
X1 t is expected to be positive. Once the tax rate change was in effect, a drastic decline in
retail sales occurred. Consequently, the coefficient of X2t is expected to be negative.
Thereby, it is assumed that, at first, a large initial negative effect is observed which gradu-
ally turns into a final negative effect. This gradual transition will be captured by the parame-
ter d. The effect of the 1984 purchase tax increase is of similar, but somewhat simpler
structure.

By combining this particular form off(Xt; .~) with an ARIMA model for the noise series Nt,
we obtain the following model for retail sales

0 (B)
(5) In DEUTORt = f (Xt ~) + ~ (B) D (B) a,,

wheref(Xt; ~) is given by (4) and the ARIMA model for Aft by (3). Estimation yields the fol-
lowing parameter values:
 = 0084 -~2 =-0108 ~ = 0841
(0.023) (0.030) {0.075)

~3 = 0.118 ~4 =--0.059 8,---- 0.817

(0.030) (0. 032) (0. 051)

812 = 0.615
(0.066)

SE = 0.032.

All coefficients are highly significant and of the expected sign. The residual standard error
is somewhat smaller than in the pure ARIMA model above. The autocorrelation of the resid-
uals, however, increased still further after incorporating independent variables into the
model. This result is not surprising because the removal of outliers usually tends to in-
crease the autocorrelation of the corrected series. The Ljung-Box Q*-statJstic has now a
value of 59.5 which must be compared to a tabulated value of 34.8. Removing the effects of
changes in the VAT reveals the inadequacy of our estimated noise model even more
clearly. The estimation of the intervention model was not mere waste of time. We can use it

Figure 3
SA CF for residuals from (5)

0.3

0.2

I ;
0. I

0,0
............ i ........ .... ....... ...... i ...... ....
-0. I
I I _2~
-0, 2

-0.3

I ~ r Lag
0 12 24 36
to correct the retail sales series for the effects of purchase tax changes. In the rest of this
paper, we shall work with this corrected series, which we denote by DEUTORC.

4. Modelling trading day variation

Another systematic influence encountered in many time series is due to trading day varia-
tion. Trading day variation arises because the intensity of certain activities varies with the
day of the week, and the number of times each day of the week occurs in a month is chang-
ing. As we shall see below, retail sales for example are higher on Thursdays and Fridays
than on the other days. Therefore, the monthly series of this variable will be higher in
months containing five Thursdays and/or Fridays than in those with four.

Trading day effects were first investigated in their relation to seasonal adjustment. Young
(1965) describes the procedures which are used in CENSUS X-11 to remove trading day
variations. Cleveland - - Devlin (1980, 1982) present a new methodology for dealing with
this effect. In all approaches, it is assumed that trading day effects can be approximated by
a deterministic model. If ffi, i -- 1. . . . . 7, represent the average rate of activity on Monday,
Tuesday, Wednesday, Thursday, Friday, Saturday, and Sunday for the series being ana-
lysed, then the overall effect of the number of times each day of the week occurs in month t
is given by

7
(6) f (X~; ~) = TD, = ~ ~ Xi,,
i=1

where Xit, i = 1 , . . . , 7, are, respectively, the number of Mondays, Tuesdays, and so on in

month t. Thus, for a situation where trading day variation is present, model (1) can be writ-
ten as

(7) Yt = TDt + Nt,

where TDt is defined in (6), and Nt follows an ARIMA model as in (2). After some experi-
mentation with alternative differencing operators, we end up with the following mixed re-
gression/ARIMA model for retail sales
7
(1--O1 B) (1--O12 B 12)
(8) In DEUTORC, = ~. } , X , , + ( l - - B ) ( 1 - - B '2) a,,
i=1

where D E U T O R C denotes retail sales corrected for VAT effects. Simultaneous estimation
of the parameters in (8) by maximum likelihood yields

= 1.270 = 0.950 = 0.950

(0.115) (0.114) (0.113)

 ~4 = 1.421 ~5 = 1.236 ~6 = 0.740
(0. 115) (0. 112) (0. 113)

= 0.433 8, = 0.686 812 = 0.542

(0,113) (0,058) (0,067)

SE = 0.026.

Of the trading day coefficients, only the coefficients for Tuesday to Sunday ~2, ~3 . . . . .
were estimated directly, while the coefficient for Monday, ~1, was obtained from the restric-
7
tion ~ ~i = 7. The correlation matrix for the directly estimated trading day coefficients is
i=1

Table 1
Correlation matrix of

~2 1.000
~3 --0.566 1.000
~4 0.046 --0.549 1.000
~ --0.042 0.076 --0.583 1.000
~6 0.097 --0.007 0.021 --0.533 1.000
~7 0.008 0.029 0.046 0.013 --0.550 1.000

Figure 4
S A C F for residuals from (8)

0.20
............................................................................................... +2d
0.10

O. O0
" II I' I I
- 0 . 10

....................................................................................... '. . . . . . . . . --2 #

- 0 . 20

0 ~
12 24f 36 Lag

10
reported in Table 1. These parameter estimates are correlated and, therefore, individual in-
ferences about these parameters must be made with caution. A correlation pattern of the
observed type is encountered quite frequently in the literature,

We now examine whether the daily effects (~i) are different for the different days of the
7
week. For ease of computation, we normalize the ss so that ~, ~i = O, and then test
i=1

(9) H0" ~2 . . . . . ~ versus

//1 ' not all ~i are equal.

If we denote by A the estimated correlation matrix of ~ = (s~2. . . . . ~7) ', then under H0 of
(9), the asymptotic distribution of ~ ' A -~ ~" is Z 2 with 6 degrees of freedom. Since ~ ' A -1
89.1 is larger than 16.8, which is the 0.01 critical value of a z2-distribution, we reject H0
in (9). The different days of the week have significantly different effects on Austrian retail
sales.

The inclusion of trading day effects has substantial consequences for the fit of our esti-
mated ARIMA model for the noise series. Comparing model (8) with (3), we note that the
residual standard error decreased by almost one third. However, not only the fit of the
model improved considerably, but the autocorrelation of the residuals was also reduced
significantly by allowing for trading day effects. Figure 4 gives the autocorrelation function
of the residuals from model (8). Already a cursory visual inspection reveals that most auto-
correlation coefficients are much smaller than those in Figures 2 and 3 above. This visual
impression is fully corroborated by the Ljung-Box Q*-statistic. A value of 25.5 for this sta-
tistic signals the adequacy of the estimated noise model. A closer inspection of Figure 4,
however, reveals that relatively significant autocorrelations for only moderately large lags,
such as 4, 6, and 10, are still present. We interpret this fact as evidence for the existence of
Easter effects in our retail sales series.

5. Modelling Easter effects

Retail sales are likely to be affected by changing Easter dates. The earliest and latest dates
on which Easter can fall are March 22 and April 25. Thus, the March and April values of a
series, for which increased buying takes place before Easter, will depend on the date of
Easter.

Specifying a functional form for the Easter effect is somewhat more complicated than doing
so for trading day effects. We follow again techniques which were suggested by Bell -- Hill-
mer(1983). Denote by ~i the effect on retail sales on the i-th day before Easter. Let h (i, t)
be 1 when the i-th day before Easter falls in the month corresponding to time point t, and 0
otherwise. Then the effect of Easter on retail sales at time t, Et, is given by

11
 Figure 5

Date of Easter for 1970 to 1984

82 84
78 70 75 72 83 80 77 71 74 79 76 81 73

l'llllll llilill'llll'''lll ''1

2603 3103 0504 1004 1504 2004 25O4

March April

K
(1o) E, = Z 07,hfi, t),
i=1

where K denotes some suitable upper bound on the length of the effect in days.

Knowing already from the preceding section that trading day variation is also present in our
retail sales series, we consider the model

(11) Yt = TD, + Et + Nt,

where TD t is given by (6), Nt by (2), and s by (10). Unfortunately, however, it is impossible

to estimate (11) without further simplifying the model for the Easter effect, Et. Originally,
this model was derived by seizing the daily impact of Easter on the level of retail sales. With
monthly observations, however, we cannot estimate effects as general as (10). To illustrate
this, consider the date of Easter for the years 1970 to 1984. Figure 5 shows these dates.
From this diagram it is evident that not all of the 07~ in (10) can be estimated. For example,
in these years whenever the fourth day before Easter fell in March so did the fifth day be-
fore Easter; otherwise, they both fell in April. Thus, using the data from 1970 to 1984, the ef-
fect of 074 h (4, t) cannot be distinguished from that of 075 h (5, t). In order to overcome this
problem, we must assume special simple patterns in the 07;'s. To start with, we assume the
simple pattern

071 = . . . = 07r = 07,

12
for some value 4. Relation (10) then becomes

(12) Et = ~x H (4, t),

where

0~=44

and

H (4, t) = -~i~1~_h (i, t).

Given 4, H (4, t) is the proportion of the span of 4 days before Easter that falls in the
month corresponding to time point t. Figure 6 shows H (4, t) for t corresponding to March
1980 and April 1980, with Easter falling on April 6 that year.

Now, with this simplifying assumption, we are able to estimate (11). Unfortunately, our com-
puter software does not allow us to deal simultaneously with trading day variation and East-
er effects. Therefore, we have to proceed in a stepwise fashion. We first remove trading day
variation from the retail sales series, and then regress (1--B) (1--B ~2) In D E U T O R C ~ on
( l - - B ) (1--B 12) H(4, t), where D E U T O R C ~ denotes the retail sales series corrected for
VAT effects and trading day variation. The best fitting regression is obtained for 4 = 10; the
estimate of ~ being 0.029 with a standard error of 0.004.

Before discussing the final version of the mixed regression/ARIMA model for retail sales,
we check whether our relatively simple pattern for the Easter effect is really adequate. As
already mentioned, we cannot estimate all the 4i in (10), but by collecting terms we obtain
a model for the Easter effect, which can be estimated with monthly data. Following Bell --
Hillmer (1983), we use the grouping

(13) El = ~ [h (1, t) + h (2, t)] + s [h (3, t) + . . . + h (6, t)] +

+ 43[h(7, t) + . . . + h(lO, t)] +

+ 44 [h (11, t) + . . . + h (14, t)] +

+ & [h (15, t) + . . . + h (18, t)] +

+ o7.8[h (19, t) + . . . + h (22, t)].

We have 30 March and April observations for estimating the Easter effect. So as not to
spread these observations too thin, six groups are chosen. Five of them are of equal

13
 Figure 6
The typical shape of H (~z-,t)

0.8

0.7

0.6
March 1980
0.5

0.4

0.3

0.2

O. I

: l i t

I.o

0.9

0.8

0.7

0.6

0.5

0.4

0.3

5 10 15 20 25 'T"

14
length. The first group of length 2 is included to allow for a.possibly important effect imme-
diately before Easter.

With this grouping, we can now investigate how complex a pattern is needed by sequen-
tially testing

Ho: &j = o7j+1 . . . . . &8 = 0 versus

/-/1: o~j ~= O; o;~+~ . . . . . &=O

for j = 1 , . . , 6. When H0 is rejected we can investigate whether a simple pattern of the

form ~ = . . . = ~ , = ~ and ~,+~ = . . . = ~k = 0 is adequate by testing

H~: & ..... aj; ~j+~ . . . . . & = 0

against//1 f o r j > 1. Table 2 presents likelihood ratio test statistics which are computed as

[RSS (Ho) -- RSS (H,) ] / v,

R S S (H,) / v2

and similarly for H~, whereby RSS denotes the residual sum of squares. The numerator de-
grees of freedom, ~1, is 1 for testing Ho and j - - 1 for testing H~. The denominator degrees
of freedom, ~2, is 180 (number of observations) - - 13 (for differencing) - - j . These signifi-
cance tests corroborate fully the outcome of our above search procedure for ~. There is
not much evidence that ~j=l=0 for j > 3 . Furthermore, we find that ~ and ~2 are approxi-
mately of equal size. There is some evidence, however, that ~3 is slightly smaller than ~1
and o72. Nevertheless, we would claim that the test statistics of Table 2 provide no really
significant evidence of a serious inadequacy of our simplified model for the Easter effect as
given by (12).

Table 2
Significance tests for the pattern of the Easter effect
j F-statistic /'o.o5 (j--l, 167--j) Fo.m 0--1,167--j)
for H0 for Ho'
1 46.325 - - - -

2 10.693 0.904 3.840 6.630

3 3.643 3.119 3.000 4.610
4 2.761 - _

5 4.659 - - _

6 0.900 _ _

F0.05 (1,167) = 3.84 PO.Ol (1,167) = 6.63

15
Finally, after incorporating our model for the Easter effect into (8), we end up with the fol-
lowing mixed regression/ARIMA model for retail sales
7
(14) In D E U T O R C t = ~, ~iXi + ~ H (IO, t) + (1--01 B)(1--012 B ~2)
i=1 (l--B) (1--B 12) at.

As a last step, we have to estimate the parameters of the noise model. Summarizing all par-
ameter estimates for model (14), we have

~ = 1.270 ~ = 0.950 ~, = o.95o

(0.115) (0.114) (0.113)

~4 = 1.421 ~5 = 1.236 ~6 = 0.740

(0.115) (0.112) (0.113)

-- 0.433 ~ = 0.029 r = 10
(0. 113) (0.004)

61 = 0.591 612 = 0.426

(0. 113) (0. 070)

SE = 0.021 Ljung-Box Q * = 16.6.

Figure 7 gives the SACF of the residuals from model (14). Comparing with model (3) we
see that the mixed regression/ARIMA model is superior to the pure ARIMA model in all re-

Figure 7
S.4CF for residuals from (14)

0.20
...................................................................................... +2~
0.)0

o.oo~,., ) ) ' " ]i 'I I' ~E ~

- 0 . 10

.................................................................................................. 2
- 0 . 20

I ) ) Lag
0 12 24 36

16
spects. The standard error of estimate drops from 0.038 to 0.021, a reduction of 45 percent.
The Ljung-Box Q*-statistic also decreases substantially from 46.6 to 16.6 and, now, indi-
cates no inadequacy of the noise model anymore. Interesting to note is the reduction in the
size of the noise model parameters, and here especially in the seasonal moving average
parameter ~12. A possible explanation might be that, apparently, systematic factors like
trading day variation and calendar effects are attributed erroneously to the seasonal part of
the model.

6. C o n s e q u e n c e s for s e a s o n a l a d j u s t m e n t - - an e x a m p l e

It is shown in Thury (1985) that an ARIMA model-based approach to seasonal adjustment

might produce better results than empirical methods such as CENSUS X-11 for example. A
necessary condition for this to be the case is, however, that the ARIMA model for the
series to be adjusted is adequate. In the following, we attempt to give more empirical con-
tent to this somewhat loose statement. For this purpose, we compare for a concrete exam-
ple, namely the series of retail sales, the outcomes of two model-based seasonal adjust-
ment runs applying ARIMA models of substantially different quality. In the first run, we use
the inadequate model (3) and, in the second run, the well-elaborated model (14) as starting
points for ARIMA model-based seasonal adjustment. The aim of seasonal adjustment is to
decompose an observed series ~ into trend (~), seasonal (St), and irregular component
(1,), i.e.,

(15) Y,= T, + S, + ~,.

Therefore, the obvious thing to do is to compare the estimates of the trend, seasonal, and
irregular components which we obtain from our two adjustment runs. Figure 8 shows the
two trend estimates resulting from the different ARIMA models for retail sales. There is not
much difference between these two estimates for the trend. Surprisingly perhaps, the
trend resulting from the inadequate ARIMA model even looks somewhat smoother. But, as
it is shown in Thury (1985), smoothness of the extracted trend is not a too reliable criterion
for judging the performance of a seasonal adjustment procedure. The possibility of overad-
justment of the trend component cannot be ruled out.

Figure 9 exhibits the estimated seasonal factors for the retail sales series. Here, we note
immediately substantial differences in the results for the two ARIMA models. Model (3)
gives rise to a very rigid seasonal pattern. This fact is simply the consequence of the large
value for the seasonal moving average parameter in that model (~12 =0.726). This differ-
ence in the rigidity of the estimated seasonal components can be seen even more clearly
from Figure 10. Here, we show the development of the seasonal factors for each month
separately during the sample period 1970 to 1984. The seasonal pattern produced by model
(14) is fluctuating much more over time than that given by model (3), which apparently is
too rigid.

17
 Figure 8
Trend estimates for retail sales

Index points

240

230

220

210 obtained from model (14)

200

190

lBO

I70

I60
70 71 72 73 74 -/5 76 77 78 79 80 81 82 83 84

Year

18
 F-~gure9
Seasonal factors for retail sales

Percent Seasonal factors

obtained from model (3)

140

I30

120

110

100

90

80

oDtalneo from moael (1#2

40

30

20

10

O0

90

80
70 71 72 73 74 75 76 77 78 79 80 8t 82 83 84
Year

The estimates of the irregular components resulting from our two ARIMA models are given
as Figure 11. The irregular component for model (3) is relatively large and, definitely, not a
white noise or a low order moving average process as required by statistical theory. A
Ljung-Box Q~-statistic of 74.3 clearly indicates that this component must contain predic-
table systematic factors which should be absorbed in the trend and the seasonal compo-
nent.

19
 Figure 10
Development of monthly seasonal factors over 1970 to 1984

Percent

140 Monthly seasonal factors

\
obtained from model (3)

130

120

li0

100
J j J r -~_
90

80

140

130
Monthly seasonal factors
obtained from model (14) L
120

110

100

90

80
1970-1984
i--I
l II ~ r - - l l II II ~r - - 1 r - - 1 r - - n i - -

Jan Feb Mar Apr May Jun aul Aug Sep Oct Nov Dec

20
Figure 13 finally displays the seasonally adjusted series of retail sales. We see immediately
that model (14) gives rise to significantly better seasonally adjusted values. These figures
show much less erratic variation than those derived from model (3) and, in addition, cap-

Figure 11
Estimated irregular components for retail sales

Percent

O8
Irregular component
06 obtained from model (3)

O2
J

100 '
98
96
94
i
92 L

110

Irregular component
obtained from model (14.)
105

100

95

90 , , , , fl,,,,,,,,,,i,,,,,,,h,,,,,,,h,,,,, h,,,,,,fl,,,,,,,,, h,,,,,,,,, ,,h I

70 71 72 73 74 75 76 77
Year

21
ture the effects of the two major policy interventions in 1977/78 and 1983/84 with greater
precision.

Figure 12
SA CF for estimated irregular components for retail sales

Irregular component
obtained from model (3)
0.3

0.2 +28

0.1

0.0

-0.1

-0. 2
--2 8

-0.3

Irregular component
obtained from model (14)
0.20
+2#
0~10

0.00

- 0 , tO

--2#
- 0 . 20

L ~ , ~ Lag
0 12 24 36

22
7. Conclusions

In applied work there has been an apparent tendency either to work with pure regression
models or to use pure ARIMA time series models. However, we could imagine situations in
which a combination of these two approaches might give rise to more satisfactory results.

Figure 13
Seasonally adjusted series of retail sales

Index ~oints
1
60
50 Values derived A^ ~J~,A ,
40
30
20
10
00
90
80
70
60
50

270
2_60
250 Values derived .A~
240
230
2_20
210
200
I90
180
170
160 ~,~1~1~11III II Illl III li ILIIl~lilillll~llillhllll III lUllliilllll llhllli IIItlllllll HI ililhlttHtllHht hi tilt*ill Ill llllll I~IIILIIIII II hi imumlt lllll I IIIP
70 71 72 73 74 75 76 77 78 79 80 81 82 83 84
Year

23
Time series that are influenced by trading day variation and calendar effects are examples,
for which this might be the case. Therefore, we performed a thorough analysis of retail
sales which are strongly influenced by trading day variation and Easter effects. Our results
prove that, for this type of series, a mixed regression/ARIMA model is clearly superior to
pure models of either form. However, in order to avoid misunderstanding, we must point
out that we are not using ARMAX systems; our approach is theoretically less ambitious.
Our, findings are in close accordance with those of B e l l - - H i l l m e r (1983). They have impor-
tant implications for practitioners, working in the field of forecasting and seasonal adjust-
ment. Especially, for seasonal adjustment ARIMA model-based approaches have been
gaining in importance in recent years. We demonstrate in this paper that the success of
these approaches depends crucially on the quality of the underlying ARIMA model. The re-
suiting seasonally adjusted figures wilt be optimal if and only if the series to be adjusted is
modelled adequately.

8. References

Bell, W. R., Hillmer, S. C., "Modeling Time Series with Calendar Variation", Journal of the American Sta-
tistical Association, 1983, 78(383), pp. 526-534.

Box, G. E. P., Jenkins, G. M., Time Series Analysis: Forecasting and Control, Holden Day, San Fran-
cisco, 1970.

Box, G. E. P., Tiao, G. C., "Intervention Analysis with Applications to Economic and Environmental
Problems", Journal of the American Statistical Association, 1975, 70(349), pp. 70-79.

Cleveland,W. S., Devlin, S. J., "Calendar Effects in Monthly Time Series: Detection by Spectrum Analy-
sis and Graphical Methods", Journal of the American Statistical Association, 1980, 75(371),
pp. 487-496.

Cleveland, W. S., Devlin, S. J., "Calendar Effects in Monthly Time Series: Modeling and Adjustment",
Journal of the American Statistical Association, 1982, 77(379), pp. 520-528.

Granger, C. W. J., Newbold, P., Forecasting Economic Time Series, Academic Press, New York, 1977.

Grupe, M. R., Modified Computer Programs to Analyze: (i) Univariate Time Series, (ii) Univariate Time
Series with Interventions, and (iiJ)Single Input Transfer Function Time Series, The UniversJtyof Wiscon-
sin-Madison, Department of Statistics, mimeo, 1977.

Ljung, G. M., Box, G. E. P., "On a Measure of Lack of Fit in Time Series Models", Biometrika, 1978, 65,
pp. 59-76.

Thury, G., "Modelling Private Consumer Expenditure in Austria by Intervention Analysis", in Anderson,
O.D. (Ed.), Time Series Analysis: Theory and Practice 1, North-Holland, Amsterdam, 1982,
pp. 307-322.

24
Thury, G., "Seasonal Adjustment by Signal Extraction% Empirica, 1985, 12(2), pp. 191-208.

Young, A. H., "Estimating Trading-Day Variation in Monthly Economic Time Series", U. S. Department
of Commerce, Bureau of the Census, Technical Paper, 1965, (12).

9. Note
(1) The following computer programs were used:

- - the University of Wisconsin computer program for estimating ARIMA models with interventions
which is documented in Grupe(1977),

- - an ARIMA model-based seasonal adjustment program which was written by S. Hillmer.

An improved and integrated version of these programs is now available for PC's from Scientific Com-
puting Associates.

Correspondence:

Gerhard Thury
Osterreichisches Institut for Wirtschaftsforschung
Arsenal, Objekt 20
Postfach 91
A-1103 Wien

25