3.6.

3 Moving Average (MA) Models

Moving average model is conceptually a linear regression of the current value of the series
against the white noise or random shocks of one or more prior values of the series. The
random shocks at each point are assumed to come from the same distribution, typically a
normal distribution, with location at zero and constant scale. The distinction in this model is
that these random shocks are propagated to future values of the time series. Fitting the MA
estimates is more complicated than with AR models because the error terms are not
observable. This means that iterative non-linear fitting procedures need to be used in place of
linear least squares. MA models also have a less obvious interpretation than AR models.
Moving Average (MA) is another common approach for modeling univariate time series
models is the moving average (MA) model:
Xt= +At− tAt-1− 2At-2−. . . . . . . . . − qAt-q……..…………..…………….
Where, Xt is the time series, is the mean of the series, At-i are white noise, and 1, ... , q are
the parameters of the model. The value of q is called the order of the MA model.
A moving average model of order q, with mean zero, denoted by MA (q) is generally given
by:
Xt = 1 (t-1)+ 2 (t-2)+ 3 (t-3)+. . . . . . . . + qX(t-q)+ t…….……………………
Or
=( 1L+ 2L2+ 3L3+. . . .. . . . .+ qLq)Xt+ t…..……………..…………
28

Where Xt = (L) t
(L)=( 1L+ 2L2+ 3L3+. . . . . . . . .+ qLq)………...…….……...
Where L, is the lag operator and t is the random shock or white noise process and 1, 2, 3. .
.. q are the moving average model parameters. An MA (q) is said to be invertible if (L) can
be inverted, in other words if it can be expressed as an AR. An MA (q) is invertible if the
roots of (L)= all lie outside the unit circle. A finite AR is always invertible. The random
shocks at each point are assumed to come from the same distribution, typically a normal
distribution, with location at zero and constant scale. The distinction in this model is that
these random shocks are propagated to future values of the time series. Sometimes the ACF
and PACF will suggest that a MA model would be a better model choice and sometimes both
AR and MA terms should be used in the same model. It is also important to note, however,
that the error terms after the model is fit should be independent and follow the standard
assumptions for a univariate process. Box and Jenkins popularised an approach that combines
the moving average and the autoregressive approaches (Box, Jenkins, and Reinsel, 1994).
This resulted in autoregressive moving average model (ARMA). The Box-Jenkins model
assumes that the time series is stationary. Box and Jenkins recommend differencing non
stationary series one or more times to achieve stationarity. Doing so produces an ARIMA
model, with the “I” standing for “Integrated.” This is described in detail below since it is the
main method used in the analysis of data in this research.