Nonparametric time series forecasting with dynamic updating

Han Lin Shang, Rob J Hyndman
(2011) Mathematics and Computers in Simulation 81, 1310-1324


Abstract We present a nonparametric method to forecast a seasonal univariate time series, and propose four dynamic updating methods to improve point forecast accuracy. Our methods consider a seasonal univariate time series as a functional time series. We propose first to reduce the dimensionality by applying functional principal component analysis to the historical observations, and then to use univariate time series forecasting and functional principal component regression techniques. When data in the most recent year are partially observed, we improve point forecast accuracy using dynamic updating methods. We also introduce a nonparametric approach to construct prediction intervals of updated forecasts, and compare the empirical coverage probability with an existing parametric method. Our approaches are data-driven and computationally fast, and hence they are feasible to be applied in real time high frequency dynamic updating. The methods are demonstrated using monthly sea surface temperatures from 1950 to 2008.

Keywords: Functional time series, Functional principal component analysis, Ordinary least squares, Penalized least squares, Ridge regression, Sea surface temperatures, Seasonal time series.