Globally Optimal And Adaptive Short-Term Forecast of Locally Stationary Time Series And A Test for Its Stability
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Forecasting the evolution of complex systems is one of the grand challenges of modern data science. The fundamental difficulty lies in understanding the structure of the observed stochastic process. In this paper, we show that every uniformly-positive-definite-in-covariance and sufficiently short-range dependent non-stationary and nonlinear time series can be well approximated globally by an auto-regressive process of slowly diverging order. When linear prediction with L^2 loss is concerned, the latter result facilitates a unified globally-optimal short-term forecasting theory for a wide class of locally stationary time series asymptotically. A nonparametric sieve method is proposed to globally and adaptively estimate the optimal forecasting coefficient functions and the associated mean squared error of forecast. An adaptive stability test is proposed to check whether the optimal forecasting coefficients are time-varying, a frequently-encountered question for practitioners and researchers of time series. Furthermore, partial auto-correlation functions (PACF) of general non-stationary time series are studied and used as a visual tool to explore the linear dependence structure of such series. We use extensive numerical simulations and two real data examples to illustrate the usefulness of our results.
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