THE ANALYSIS OF FINANCIAL DATA USING MULTIVARIATE AND TIME SERIES TECHNIQUE

M.Sc. Thesis proposal

By

ABO, TERSEAH DAVID

MTH/M.Sc/2010/0011

Submitted to
Department of Mathematics/ Statistics/Computer Science
UNIVERSITY of CALABAR
In Partial Fulfillment for the Award of Master of Science (M.Sc.) Degree in Statistics

October, 2015

INTRODUCTION
Statistical Analysis plays an imperative role in decision-making. Time Series Analysis is
an important tool used by the policy makers/ practitioner for analysis of data as well as
generating forecasts for future periods. Forecasting is the estimation of the value of some
variable or a set of variables at some point in the future. Most forecasting techniques involve the
creation of mathematical model which can be used to make quantitative predictions. Parameters
in the mathematical model are estimated using a set of historical data. Simulation is then used to
make predictions out of the sampling period.
In this thesis, we will use the Time Series Analysis for generating forecasts and compare
the performance for both in short term and long-term lead periods. When a forecasting exercise
is undertaken, it is assumed that the behavior of the time series will continue to be the same as in
the past. To generate a forecast, we first build the model with the past data and then project the
future value of the series based on the selected model. So, the projected values are the indicative
of its future behavior of the series when it is not manipulated or controlled. In this thesis, we will
use interdependences of the economic time series by developing bivariate as well as multivariate
methods to analyze their forecasting performance. Time series analysis accounts for the fact that
data points taken over time may have an internal structure (such as autocorrelation, trend, or
seasonal variation) that should be accounted for. Time Series Analysis is used for many
applications such as, Economic Forecasting, Sales Forecasting, Budgetary Analysis, Stock
Market Analysis, Yield Projections, Process and Quality Control, Inventory Studies, Workload
Projections, Utility Studies, Census Analysis.
The univariate time series forecasting methods available to a policy makers/practitioner
are many and varied. It begins with classical trend plus seasonal plus cyclic plus error model.
With the development of modern the technique, the relative performance of the several univatiate
forecast models were empirically tested by Reid (1969), Newbold and Granger (1974),
Makridakis and Hibbon (1979), Ray (1988) etc. Makridakis and Hibbon (1979) offered an
explanation to the seemingly conclusions of past empirical research on the accuracy of
forecasting and evaluated the forecast errors of different lead periods to assess the relative
efficiency of the forecast models.
We have evaluated the performance of univariate time series methods by comparing the
actual values with the forecasting obtained from the methods given by various authors for short

term as well as long-term lead periods. For short terms, we compare the actual with forecasts for
6 lead periods whereas for long terms, we compare the actual with forecasts for 12 lead periods.
These univariate methods are 1) Bilinear Method [Granger & Anderson (1878); Rao (1977,
1981) & Rao and Gabr, (1984)] 2) Box-Jenkins Method [Box & Jenkins (1977)], 3) Holt-Winters
Method [Holt (1957) and Winters (1960)], 4) Brown Exponential Methods [Brown (1962)],5)
State Dependent Method [Priestly (1980)].
All the above methods are univariate methods and forecasts generated by these methods
taking the past data of the series. Generally economic time series cover data on policy variables.
As policy variables are exogenous to the time series modeling, there may be many interrelated
indicators which have to be considered to project such economic time series. In that case one has
to consider the multivariate time series analysis. In multivariate process, a framework is needed
for describing not only the properties of the individual series but also the possible crossrelationships among the series. Transfer Function Model has been developed based on Box &
Jenkins (1977), Multivariate ARIMA Model based on Jenkins & Alvi (1981). The results of
Transfer Function Model presented in the Thesis based on the result Datta (1987). The HoltWinters Exponential Smoothing univariate methods have been extended to Bivariate &
Multivariate Exponential Smoothing (Basu & Datta 2000) and the results has been compared
with the univariate one.
Multivariate time series analysis is used when one wants to model and explain the
interactions and co-movements among a group of time series variables (Economic indicators).
Multivariate methods are very important in economics and much less so in other applications of
forecasting. The multivariate view is central in economics, where single variables are
traditionally viewed in the context of relationship to other variables. In forecasting and even in
economics, multivariate models are convenient in modeling interesting interdependencies and
achieve a better fit within a given data or economic indicator. Multivariate forecasting methods
rely on models in the statistical sense of the word, though there have been some attempts at
generalizing extrapolation methods to the multivariate case. This does not necessarily imply that
these methods rely on models about whether they are a theoretical, such as time series models, or
structural or theory-based. Much research has gone into the development of ways of analysis
multivariate time series (MTS) data in both the statistical and artificial intelligence communities.

In this thesis, we will use cross section data by using multivariate analysis technique for
identifying homogeneous group of related sectors. Multivariate Analysis can be simply defined
as the application of methods that deal with reasonably large numbers of variables made on each
object in one or more samples simultaneously. Multivariate Analysis deals with the simultaneous
relationship among variables. In other words, multivariate techniques differ from univariate and
bivariate analysis in that they direct attention away from the analysis of mean and variance of a
single variable, or from the pairwise relationship between two variables, to the analysis of the
covariances or correlations which reflect the extent of relationship among three or more
variables. In our study we have used both interdependence and dependence method to analyze
the multivative data. In interdependence methods, we have used Factor Analysis and in
dependence method, we have used Discriminant Analysis.
Statement of the problem
Financial time series analysis is concerned with the theory and practice of asset valuation
over time. However, it is a highly empirical discipline, but like other fields theory forms the
foundation of making inference. Both financial and its empirical time series contain an element
of uncertainty. Thus, the problem of interest is to generate, forecast, and compare the
performance of multivariate methods on financial data in short-term and long-term periods.
Significance of the study
Economic indicators express the strength and weakness of financial investments and
returns. However, the effective forecast, comparison, and analysis of financial data using transfer
function model and multivariate time series improves the financial policy.
If an economic policy is formulated and implemented to boost the industrial production of the
country, then the worthiness of the policy can be judged by comparing the forecast values with
the actual of the series which measures the total industrial production of the country over time.
Many interrelated indicators are to be considered jointly to predict the future values of the series.
Objectives of the Study
This study is aimed at analyzing, and comparing financial data using multivariate and time series
techniques with the following objectives:
i. To analyzed the forecasting performance of financial data using interdependences of the
economic time series.

ii. Compare the performance values of the financial data using several univariate time series
method.
iii. To understand the dynamic relationships over time among the series and to improve
accuracy of forecasts for individual series by using the additional information available
from the related series in the forecasts for each series