Dynamic linear regression models for forecasting time series with semi long memory errors

Abstract: Dynamic linear regression models forecast the values of a time series based on a linear combination of a set of exogenous time series while incorporating a time series process for the error term. This error process is often assumed to follow a stationary autoregressive integrated moving average (ARIMA) model, or its seasonal variants, which is unable to capture a long-range dependence structure (long memory) of the error process. We propose a novel dynamic linear regression model that incorporates the long-range dependence feature of the errors and show that the proposed error process may: (i) have a significant impact on the posterior uncertainty of the estimated regression parameters and (ii) improve the model's forecasting ability. We develop a Markov chain Monte Carlo method to fit general dynamic linear regression models based on a frequency domain approach that enables fast, asymptotically exact Bayesian inference for large datasets. We demonstrate that our approximate algorithm is faster than the traditional time domain approaches, such as the Kalman filter and the multivariate Gaussian likelihood, while producing a highly accurate approximation to the posterior. The method is illustrated in simulated examples and two energy forecasting applications.