Getting Started with Time Series


Time series analysis is a subfield of statistics and econometrics. Time series data \(y_{t}\) is indexed by time \(t\) and ordered sequentially. This presents unique challenges including autocorrelation within the data, non-exchangeability of data points, and non-stationarity of data and parameters. Because of the sequential nature of the data, time series analysis has particular goals. We can summarize these goals into one of description of a time series in terms of latent components or features of interest, and prediction, which aims to produce reasonable forecasts of the future (Harvey, 1990).

From start to finish, we can place time series modelling in a framework in the spirit of Box’s Loop (Blei, D.M. 2014). In particular, we:

  1. Build a model for the time series data
  2. Perform inference on the model
  3. Check the model fit, performing evaluation & criticism
  4. Revise the model, repeat until happy
  5. Perform retrospection and prediction with the model

Below we outline an example model building process for JPMorgan Chase stock data, where the index is daily. Consider this time series data:

import pandas as pd
import numpy as np
from import DataReader
from datetime import datetime

a = DataReader('JPM',  'yahoo', datetime(2006,6,1), datetime(2016,6,1))
a_returns = pd.DataFrame(np.diff(np.log(a['Adj Close'].values)))
a_returns.index = a.index.values[1:a.index.values.shape[0]]
a_returns.columns = ["JPM Returns"]

JPM Returns
2006-06-02 0.005264
2006-06-05 -0.019360
2006-06-06 -0.013826
2006-06-07 -0.003072
2006-06-08 0.002364

The index of the data is meaningful for this data; we cannot simply ‘shuffle the deck’ otherwise we could lose meaningful dependencies such as seasonality, trends, cycles and other components.

Step One: Visualize the Data

Because time series is sequential, plotting the data allows us to obtain an idea of its properties. We can also plot autocorrelation plots of the data (and transformations of the data) to understand if autocorrelation exists in the series. Lastly, in this stage, we can reason about potential features that might explain variation in the series.

For our stock market data, we can first plot the data:

plt.figure(figsize=(15, 5))

It appears that the volatility of the series changes over time, and is clustering in periods of market turbulence, such as in the financial crisis of 2008. We can obtain more insight by plotting autocorrelation functions of the returns and squared returns:

import pyflux as pf
import matplotlib.pyplot as plt

The squared returns demonstrate strong evidence of autocorrelation. The fact that autocorrelation persists and decays over multiply lags is evidence of an autoregressive effect within volatility. For returns, there is less strong evidence of autocorrelation, although the first lag is significant.

Step Two: Propose a Model

We reason about a model that can explain the variation in the data and we specify any prior beliefs we have about the model parameters. We saw evidence of volatility clustering. One way to model this effect is through a GARCH model for volatility (Bollerslev, T. 1986).

\[y_{t} \sim N\left(\mu,\sigma_{t}\right)\]
\[\sigma_{t}^{2} = \omega + \alpha\epsilon_{t}^{2} + \beta{\sigma_{t-1}^{2}}\]

We will perform Bayesian inference on this model, and so we will specify some priors. We will ensure \(\omega > 0\) through a log transform, and we will use a Truncated Normal prior on \(\alpha, \beta\):

my_model = pf.GARCH(p=1, q=1, data=a_returns)

  Index    Latent Variable     Prior           Prior Hyperparameters   V.I. Dist  Transform
  ======== =================== =============== ======================= ========== ==========
  0        Vol Constant        Normal          mu0: 0, sigma0: 3       Normal     exp
  1        q(1)                Normal          mu0: 0, sigma0: 0.5     Normal     logit
  2        p(1)                Normal          mu0: 0, sigma0: 0.5     Normal     logit
  3        Returns Constant    Normal          mu0: 0, sigma0: 3       Normal     None

my_model.adjust_prior(1, pf.TruncatedNormal(0.01, 0.5, lower=0.0, upper=1.0))
my_model.adjust_prior(2, pf.TruncatedNormal(0.97, 0.5, lower=0.0, upper=1.0))

Step Three: Perform Inference

As a third step we need to decide how to perform inference for the model. Below we use Metropolis-Hastings for approximate inference on our GARCH model. We also plot the latent variables \(\alpha\) and \(\beta\):

result ='M-H', nsims=20000)

Tuning complete! Now sampling.
Acceptance rate of Metropolis-Hastings is 0.33865


Step Four: Evaluate Model Fit

We next evaluate the fit of the model and establish whether we can improve the model further. For time series, the simplest way to visualize fit is to plot the series against its predicted values; we can also check out-of-sample performance. If we seek further model improvements, we go back to step two and proceed. Once we are happy we go to step five.

Below we plot the fit of the GARCH model and observe that it picking up volatility clustering in the series:


We can also plot samples from the posterior predictive density:

my_model.plot_sample(nsims=10, figsize=(15,7))

We can see that the samples (colored) appear to be picking up variation in the data (the square datapoints).

We can also perform a posterior predictive check (PPC) on features of the generated series, for example the kurtosis:

from scipy.stats import kurtosis

It appears our generated data underestimates kurtosis in the series. This is not surprising as we are assuming normally distributed returns, so we may want to consider alternative volatility models.

Step Five: Analyse and Predict

Once we are happy with our model, we can use it to analyze the historical time series and make predictions. For our GARCH model, we can see from the previous fit plot that the main periods of volatility picked up are during the financial crisis of 2007-2008, and during the Eurozone crisis in late 2011. We can also obtain forward predictions with the model:

my_model.plot_predict(h=30, figsize=(15,5))


Blei, D. M. (2014). Build, compute, critique, repeat: Data analysis with latent variable models. Annual Review of Statistics and Its Application, 1, 203–232.

Bollerslev, T. (1986). Generalized Autoregressive Conditional Heteroskedasticity. Journal of Econometrics. April, 31:3, pp. 307–27.

Harvey A. C. (1990). Forecasting, Structural Time Series Models and the Kalman Filter. Cambridge University Press.