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CodeRAG-Bench 20

ERROR: type should be string, got "https://sarit-maitra.medium.com/membership\nVECTOR auto-regressive (VAR) integrated model comprises multiple time series and is quite a useful tool for forecasting. It can be considered an extension of the auto-regressive (AR part of ARIMA) model. VAR model involves multiple independent variables and therefore has more than one equations. Each equation uses as its explanatory variables lags of all the variables and likely a deterministic trend. Time series models for VAR are usually based on applying VAR to stationary series with first differences to original series and because of that, there is always a possibility of loss of information about the relationship among integrated series.\nTherefore, differencing the series to make them stationary is one solution, but at the cost of ignoring possibly important (“long run”) relationships between the levels. A better solution is to test whether the levels regressions are trustworthy (“cointegration”.) The usual approach is to use Johansen’s method for testing whether or not cointegration exists. If the answer is “yes” then a vector error correction model (VECM), which combines levels and differences, can be estimated instead of a VAR in levels. So, we shall check if VECM is been able to outperform VAR for the series we have.\nThis an extension of my previously published article.\nAfter necessary cleaning & pre-processing (filling the missing values with previous ones), we finally have the three time series for necessary analysis.\nA quick test is to check if the data is random. Random data will not exhibit a structure in the lag plot.\nThe time series plot clearly indicates some kind of relationships among the series. The linear shape of the lag plot suggests that an AR model is a better choice. We also don’t see any outlier in the data. Data here showing linear pattern, indicating the presence of positive auto-correlation.\n“Time series for economic data is generally stochastic or has a trend that is not stationary, meaning that the data has a root unit”\n# plots the autocorrelation plots at 75 lagsfor i in dataset: plot_acf(dataset[i], lags = 50) plt.title(‘ACF for %s’ % i) plt.show()\ndef augmented_dickey_fuller_statistics(time_series): result = adfuller(time_series.values) print('ADF Statistic: %f' % result[0]) print('p-value: %f' % result[1]) print('Critical Values:')for key, value in result[4].items(): print('\\t%s: %.3f' % (key, value))\nThrough the above function, we can run Augmented Dickey Fuller (ADF) test on all columns, which clearly shows the original series are non-stationary and contain unit root.\nprint('Augmented Dickey-Fuller Test: Gold Price Time Series')augmented_dickey_fuller_statistics(X_train['Gold'])print('Augmented Dickey-Fuller Test: Silver Price Time Series')augmented_dickey_fuller_statistics(X_train['Silver'])print('Augmented Dickey-Fuller Test: Oil Price Time Series')augmented_dickey_fuller_statistics(X_train['Oil'])\nVAR models can also be used for analyzing the relation between the variables involved using Granger Causality tests. Granger causality specifies that a variable y1t is causal for a variable y2t if the information in y1t is helpful for improving the forecasts of y2t.\nGranger Causality tests try to determine if one variable(x1) can be used as a predictor of another variable(x2) where the past values of that another variable may or may not help. This means that x1 explains beyond the past values of x2. Two important assumptions here are -\nboth x1 and x2 are stationary\nthere exists a linear relation between their current and past values.\nThis means that if x1 and x2 are non-stationary, we have to make them stationary before testing for Granger Causality.\nWe will fit the VAR model on X_train to forecast the next 10 observations. These forecasts will be compared against the actuals present in test data (X_test). We shall use multiple forecast accuracy metrics.\nA difference transform is a simple way for removing a systematic structure from the time series. We will remove trend by subtracting the previous value from each value in the series which is the first order differencing. To keep it simple, we will do first order differencing or seasonal differencing.\nIf we have an integrated order to n time series and if we take first order to difference and time, we will be left with series integrated order of zero.\nX_train_log = np.log(X_train)X_train_log_diff =(X_train_log).diff().dropna()X_train_log_diff.describe()\nlooking at the plot, we could figure out that data set looks like normalized\nBelow function plots the auto-correlation plots for the difference in each stock’s price from the price the previous trading day at 75 lags.\nfig, ax = plt.subplots(1,2, figsize=(10,5)) ax[0] = plot_acf(X_train_log_diff['Gold'], ax=ax[0])ax[1] = plot_pacf(X_train_log_diff['Gold'], ax=ax[1])\nWe have shown ACF & PACF of transformed Gold series; likewise, other series can be plotted.\nprint('Augmented Dickey-Fuller Test: Gold Price Time Series')augmented_dickey_fuller_statistics(X_train_log_diff['Gold'])print('Augmented Dickey-Fuller Test: Silver Price Time Series')augmented_dickey_fuller_statistics(X_train_log_diff['Silver'])print('Augmented Dickey-Fuller Test: Oil Price Time Series')augmented_dickey_fuller_statistics(X_train_log_diff['Oil'])Augmented Dickey-Fuller Test on \"Oil\" \nThe Granger causality test is conducted to determine whether one time series is useful in forecasting another. A time series X is said to Granger-cause Y if it can be shown, usually through a series of t-tests and F-tests on lagged values of X (and with lagged values of Y also included), that those X values provide statistically significant information about future values of Y.\nHere, for multivariate Granger causality analysis performed by fitting a VAR to the time series. Considering below is a d-dimensional multivariate time series —\nGranger causality is performed by fitting a VAR model with L time lags as follows:\nwhere ε ( t ) is a white Gaussian random vector, and A τ is a matrix for every τ. A time series X i is called a Granger cause of another time series X j, if at least one of the elements A τ ( j , i ) for τ = 1 , ... , L is significantly larger than zero.\nprint(grangercausalitytests(X_train_log_diff[['Gold','Silver']], maxlag=15, addconst=True, verbose=True))print(grangercausalitytests(X_train_log_diff[['Gold','Oil']], maxlag=15, addconst=True, verbose=True))print(grangercausalitytests(X_train_log_diff[['Oil','Silver']], maxlag=15, addconst=True, verbose=True))\nBelow output shown for Gold & Oil which differs the test hypothesis till lag 4.\nA VAR(p) process in its basic form is:\nHere yt​​ represents a set of variables collected in a vector, c denotes a vector of constants, a is a matrix of autoregressive coefficients and e​t​​ is white noise. Since the parameters of a​​ are unknown, we have to estimate these parameters. Each variable in the model has one equation. The current (time t) observation of each variable depends on its own lagged values as well as on the lagged values of each other variable in the VAR.\nI have implemented Akaike’s Information Criteria (AIC) through the VAR (p) to determine the lag order value. In the fit function, I have passed a maximum number of lags and the order criterion to use for order selection.\n#Initiate VAR modelmodel = VAR(endog=X_train_log_diff)res = model.select_order(15)res.summary()\n#Fit to a VAR modelmodel_fit = model.fit(maxlags=3)#Print a summary of the model resultsmodel_fit.summary()\nThe forecasts are generated on the training data used by the model.\n# Get the lag orderlag_order = model_fit.k_arprint(lag_order)# Input data for forecastinginput_data = X_train_log_diff.values[-lag_order:]print(input_data)# forecastingpred = model_fit.forecast(y=input_data, steps=nobs)pred = (pd.DataFrame(pred, index=X_test.index, columns=X_test.columns + '_pred'))print(pred)\nSo, to bring it back up to its original scale, we need to de-difference to the original input data. Our data is 1st logarithm transformed and then differenced. So, to inverse, we have to first use cumulative sum to de-differentiate and then use exponential. Natural logarithm is the inverse of the exp().\n# inverting transformationdef invert_transformation(X_train, pred_df): forecast = pred.copy() columns = X_train.columnsfor col in columns: forecast[str(col)+'_pred'] = X_train[col].iloc[-1] + forecast[str(col) +'_pred'].cumsum() return forecastoutput = invert_transformation(X_train, pred)print(output)output_original = np.exp(output)print(output_original)\n#Calculate forecast biasforecast_errors = [X_test['Oil'][i]- output_original['Oil_pred'][i] for i in range(len(X_test['Oil']))]bias = sum(forecast_errors) * 1.0/len(X_test['Oil'])print('Bias: %f' % bias)#Calculate mean absolute errormae = mean_absolute_error(X_test['Oil'],output_original['Oil_pred'])print('MAE: %f' % mae)#Calculate mean squared error and root mean squared errormse = mean_squared_error(X_test['Oil'], output_original['Oil_pred'])print('MSE: %f' % mse)rmse = sqrt(mse)print('RMSE: %f' % rmse)\n“Least squares parameter estimation of dynamic regression models is known to exhibit substantial bias in small samples when the data is fairly persistent”\nVECM imposes additional restriction due to the existence of non-stationary but co-integrated data forms. It utilizes the co-integration restriction information into its specifications. After the cointegration is known then the next test process is done by using error correction method. Through VECM we can interpret long term and short term equations. We need to determine the number of co-integrating relationships. The advantage of VECM over VAR is that the resulting VAR from VECM representation has more efficient coefficient estimates.\nIn order to fit a VECM model, we need to determine the number of co-integrating relationships using a VEC rank test.\nvec_rank1 = vecm.select_coint_rank(X_train, det_order = 1, k_ar_diff = 1, method = 'trace', signif=0.01)print(vec_rank.summary())\nWe find the λtrace statistics in the third column, together with the corresponding critical values. The test statistic of 38.25 is lower than the critical value (41.08) and so the null of at most one co-integrating vector cannot be rejected.\nLet us employ an alternative statistic, the maximum-eigenvalue statistic (λmax).\nvec_rank2 = vecm.select_coint_rank(X_train, det_order = 1, k_ar_diff = 1, method = 'maxeig', signif=0.01)print(vec_rank2.summary())\nThe test output reports the results for the λmax statistics which does not differ much from trace statistic; the critical value (29.28) is still higher than test statistic.\nWe will still go ahead and estimate VECM, since it can still valuable for short-run dynamics in absence of co-integration. Let’s estimates the VECM on the prices with 9 lags, 1 co-integrating relationship, and a constant within the co-integration relationship. I have used ‘cili’ a combination of “ci” — constant within the co-integration relation and “li” — linear trend within the co-integration relation\nvecm = VECM(endog = X_train, k_ar_diff = 9, coint_rank = 3, deterministic = ‘ci’)vecm_fit = vecm.fit()vecm_fit.predict(steps=10)\nforecast, lower, upper = vecm_fit.predict(10, 0.05)print(“lower bounds of confidence intervals:”)print(lower.round(3))print(“\\npoint forecasts:”)print(forecast.round(3))print(“\\nupper bounds of confidence intervals:”)print(upper.round(3))\nThough we had an indication that, VAR would be best for our data set for price prediction; however, we have shown VECM for experimentation and illustration purpose. This is a simple procedure to explain VAR. However, there are other procedures like impulse response analysis and variance decomposition also can be introduced to experiment if we are able to see how a shock to one variable affects other variable in subsequent periods.\nTime series for economic data is generally stochastic or has a trend that is not stationary, meaning that the data has a root unit. To be able to estimate a model using the data-\nSteps for VAR-\nTest stationarity of data and degree of integrationDetermination of lag lengthTest the granger causalityEstimation of VARVariance decomposition\nTest stationarity of data and degree of integration\nDetermination of lag length\nTest the granger causality\nEstimation of VAR\nVariance decomposition\nForecasting Steps for VECM-\nDetermination of lag lengthTest the granger causalityCointegration degree testEstimation of VECMVariance decomposition\nDetermination of lag length\nTest the granger causality\nCointegration degree test\nEstimation of VECM\nVariance decomposition\nI can be reached here.\nNotice: The programs described here are experimental and should be used with caution. All such use at your own risk.\nReferences:\n(1) Rao, B. (2007). Cointegration: for the Applied Economist, Springer.\n(2) Ashley, R. A., & Verbrugge, R. J. (2009). To difference or not to difference: a Monte Carlo investigation of inference in vector autoregression models. International Journal of Data Analysis Techniques and Strategies, 1(3), 242–274.\n(3) Lütkepohl, H. (2011). Vector autoregressive models. In International Encyclopedia of Statistical Science (pp. 1645–1647). Springer Berlin Heidelberg.\n(4) Kuo, C. Y. (2016). Does the vector error correction model perform better than others in forecasting stock price? An application of residual income svaluation theory. Economic Modelling, 52, 772–789."