# Detecting regime change in irregular time series

July 11, 2013
By

(This article was first published on Cartesian Faith » R, and kindly contributed to R-bloggers)

In my current research, I am modeling consumer spending behavior to predict future income and spending. To do this I transform a set of transactions into a transaction stream, which is basically all the transactions for a given merchant or category (like ‘Gas Stations’). A conventional time series analysis is not appropriate since the series is not continuous and is irregularly spaced. These streams bear more similarity to Poisson processes and Weibull processes (under specific circumstances). The basis for the model is intermittent demand forecasting. Specifically there are methods that use bootstrapping to forecast the magnitude of future demand for a given window.

The biggest assumption with the bootstrap estimate is that events are IID, which in this case cannot be assumed. The reason is that this forecast is for a single individual, and people’s spending habits change over time. There are innumerable reasons for this: someone moves to a different city, they get a raise, they lose their job, they start dating someone, they go on a diet, etc. Hence a single transaction stream can have multiple regimes. If we are basing our forecast on a bootstrap, then the probability of an event occurring will be biased if the regime is ignored. In Figure 1 the probability of an event is 0.0144. However, most of the events occurred back in 2010, and there haven’t been any transactions at Baja Fresh since Q3 2010. Consequently the forecast will have a significant positive bias based on history that is no longer relevant. If we look at the two regimes (red, blue) the blue regime is active and an event occurring in this regime has a probability of 0.0026, which is a full order of magnitude less frequent.

Figure 1: Baja Fresh spending regimes

Another example of identifying distinct regimes is in Figure 2. In this case there are three regimes identified, where the red regime has returned after a hiatus. Clearly there is more spending activity in the red regime than in the green or blue regimes so including the green and blue regimes would produce a negative bias on the forecast transactions.

Figure 2: iTunes spending regimes

These spending regimes are identified by analyzing the interarrival times of the transactions. This is transformed into a two dimensional measure, which is on the right-hand plot. I then feed this into a standard agglomerative clustering approach with hclust. The key in this output is that the clusters are contiguous regions in the actual spending data. A naive clustering approach would not recognize the time dependence and would divide the transaction stream into disconnected slices that provide no useful information as shown in Figure 3.

Figure 3: Naive clustering of iTunes spending

Hence the key insight is that spending data has a time dependence associated with it and the analysis method needs to preserve that dependence. The simplest way of accomplishing that is by transforming the data into a form that preserves the dependence. This is no different from taking the log of a sequence of numbers to transform it into a linear problem.

To leave a comment for the author, please follow the link and comment on their blog: Cartesian Faith » R.

R-bloggers.com offers daily e-mail updates about R news and tutorials on topics such as: Data science, Big Data, R jobs, visualization (ggplot2, Boxplots, maps, animation), programming (RStudio, Sweave, LaTeX, SQL, Eclipse, git, hadoop, Web Scraping) statistics (regression, PCA, time series, trading) and more...

If you got this far, why not subscribe for updates from the site? Choose your flavor: e-mail, twitter, RSS, or facebook...

## Recent popular posts

Contact us if you wish to help support R-bloggers, and place your banner here.

# Never miss an update! Subscribe to R-bloggers to receive e-mails with the latest R posts.(You will not see this message again.)

Click here to close (This popup will not appear again)