It is a series which needs to be differentiated in order to be

made stationary is an “integrated” (I) series.

Lags of the stationarized series are called “autoregressive” that

refers to (AR) terms & Lags of the forecast errors are called
“moving average” which refers to (MA) terms.

It is basically used for forecasting

Arima is a Generalized random walk models which is fine-

tuned to eliminate all residual autocorrelation.

It is a Generalized exponential smoothing model that can

incorporate long-term trends and seasonality.

The Stationarized regression model uses lags of the

dependent variables and/or lags of the forecast errors as
regressors.

Here the forecasting model of time series can be stationarized

by using transformations like differencing, logging and
deflating.

By this we can say that a time series is “Stationary” if all the

Statistical properties like mean, variance, autocorrelation etc.
are constant in time.
ARIMA Model CONSTRUCTION

Terms:

ACF= Autocorrelation Function

PACF= Partial Autocorrelation Function

ACF

The autocorrelation function (ACF). Intuitively, a

stationary time series is defined by its mean, variance
and ACF. A useful result is that any function of a
stationary time series is also a stationary time series.
PACF

In time series analysis, the partial autocorrelation function

(PACF) gives the partial correlation of a time series with its
own lagged values, controlling for the values of the time
series at all shorter lags. It contrasts with the autocorrelation
function, which does not control for other lags.

Terminologies in ARIMA

ARIMA model can be (almost) completely summarized by three

numbers:

p = the number of autoregressive terms

p is the number of autoregressive terms (AR part). It allows to

incorporate the effect of past values into our model. Intuitively,
this would be similar to stating that it is likely to be warm
tomorrow if it has been warm the past 3 days.

d = the number of nonseasonal differences

d is the number of nonseasonal differences needed for

stationarity. Intuitively, this would be similar to stating that it
is likely to be same temperature tomorrow if the difference in
temperature in the last three days has been very small.

q = the number of moving-average terms

q is the number of lagged forecast errors in the prediction

equation (MA part). This allows us to set the error of our
model as a linear combination of the error values observed at
previous time points in the past.
These are the three integers (p, d, q) that are used to
parametrize ARIMA models. Hence, this is called an “ARIMA
(p, d, q)” model.
ARIMA “filtering box”

Working of ARIMA (p, d, q)

First apply differencing
Then fit ARMA (p, q):

used for removing trends. Order d= {0,1,2}

Order d = how many times to perform lag-1 differencing?

d=0: no differencing (no trends)

d=1: perform differencing once (linear trend)

d=2: double differencing

used for removing seasonality. Order D= {0=none, 1=once}

Let us now try and understand ARIMA forecasting equation for

better understanding.
Advantages:

It is a strong underlined mathematical theory which makes it

easy to predict “PREICTIVE INTERVALS” which is it is flexible
in capturing a lot of different parameters.

Drawbacks:

No explicit seasonal indices, hard to interpret coefficients or

explain “how the model works”, there is danger of overfitting or
mis-identification if not used with care.