Stochastic Environmental Research and Risk Assessment 17 (2003) 104–115 Ó Springer-Verlag 2003

DOI 10.1007/s00477-002-0118-0

The BDS statistic and residual test

H. S. Kim, D. S. Kang, J. H. Kim

104
Abstract. The conventional nonparametric tests have been widely used in
many fields for the residual analysis of a fitted model on observations. Also, in
recent, a new technique called the BDS (Brock–Dechert–Scheinkman) statistic
has been shown that it can be used as a powerful tool for the residual analysis,
especially, of a nonlinear system. The purpose of this study is to compare the
powers of the nonparametric tests and BDS statistic by residual analysis of the
fitted models. This study evaluates stochastic models for four monthly rainfalls
in Korea through the residual analysis by using the conventional nonpara-
metric and BDS statistics. We use SARIMA and AR Error models for fitting
each rainfall and perform the residual analysis by using the test techniques. As
a result, we find that the BDS statistic is more reasonable than the conventional
nonparametric tests for the residual analysis and AR Error model may be more
appropriate than SARIMA model for modeling of monthly rainfalls.

Keywords: Nonparametric tests, Correlation integral, BDS statistic, SARIMA

model, AR Error model

1
Introduction
After Yule (1927) or Box and Jenkins (1970), the stochastic models have been
used in scientific, economic and engineering applications for the analysis of time
series. Hydrologists have also widely used stochastic analog for the analyzing and
modeling of hydrologic time series. However, when the stochastic model is fitted
to the hydrologic data sets, the conventional nonparametric techniques may be
lacking for a clear residual analysis. This was proved by Brock et al. (1991), who

H. S. Kim
Department of Civil Engineering,
Inha University, Incheon, Korea

D. S. Kang
Department of Water Resources,
Kun-il Engineering Co., Ltd., Seoul, Korea

J. H. Kim (&)
Department of Civil and Environmental Engineering,
Korea University, Seoul, Korea,
E-mail: jaykim@korea.ac.kr
This work was supported by grant No. R01-2001-000-00474-0
from the Basic Research Program of the Korea Science
& Engineering Foundation.
used a new test technique, called the Brock–Dechert–Scheinkman (BDS) statistic,
for residual analyses.
The BDS statistic can be applied to the estimated residuals of any time series
model and used as a model selection tool. The BDS statistic has its origins in
the recent work on deterministic nonlinear dynamics and chaos theory. It is not
only useful in detecting deterministic chaos, but also serves as a residual di-
agnostic test. If the model does capture all the properties of hydrologic data, the
residuals should be independently and identically distributed errors (IIDs),
which have no patterns. Under the null hypothesis of independent and identical
distribution (IID), the BDS statistic has shown its ability in distinguishing
random time series from the time series generated by low dimensional chaotic 105
or nonlinear stochastic processes. Hsieh (1989) tested the nonlinearities in daily
foreign exchange rates using the BDS statistic and detected a strong nonlinear
dependence. Takens (1993) surveyed whether a given stationary time series is
adequately described by a linear stochastic model or contains nonlinearities
using the BDS statistic. Also, the BDS statistic serves as a residual diagnostic
that can be used for testing the ‘‘goodness of fit’’ of an estimated model. Brock
et al. (1996) showed that the BDS test is not just a test of nonlinearity, but
might also be a good test of model specification. The specific objective of this
study is to compare nonparametric statistics with the BDS statistic and to detect
an appropriate model for monthly rainfalls using the BDS statistic. Monthly
rainfall is still a useful time scale to summarize water availability for many
applications in hydrology, agriculture and ecology. Seasonal autoregressive in-
tegrated moving average (SARIMA) (Box et al., 1970) and autocorrelated error
(AR Error) (White, 1984) models are used for detecting an appropriate model
for monthly rainfalls in Korea.

2
Test statistics

2.1
Nonparametric statistics
When a sequence of observations is uncorrelated, the autocorrelation function for
all lags should be theoretically equal to zero. However, the estimated autocorre-
lation function of the sampled uncorrelated series is not exactly equal to zero, but
has a sampling distribution which depends on the sample size. This sampling
distribution may be used to test the hypothesis that the sampled time series has
independently and identically distributed (IID) errors (Salas et al., 1993). In this
section we present four nonparametric statistics which are widely used for time
series analysis.

2.1.1
Anderson’s correlogram test
The sample autocorrelation coefficient qk for the observations fxi g; i ¼ 1; . . . ; N;
in which N is the sample size, may show the normal distribution with mean zero
and variance 1=N when the sample size N is large. The two-sided interval for the
test of the null hypothesis qk ¼ 0 versus the alternative hypothesis qk 6¼ 0 is given
as follows
 
u1a=2 u1a=2
pffiffiffiffi ; pffiffiffiffi ð1Þ
N N
 where u1a=2 is the 1  a=2 quantile of the standard normal distribution.
Therefore, if qk is located within the interval, the null hypothesis may not be
rejected at an a significance level.

2.1.2
Run test
A run is defined as a succession of ones and zeros for the sequence of observa-
tions. A sequence of ones and zeros for the observations fxi g; i ¼ 1; . . . ; N can be
formed as follows
 
106 ui ¼ 1 for xi > x
ð2Þ
ui ¼ 0 for xi x

where x is the mean for the sample size of N.

If ‘m’ is the number of runs of ones and ‘n’ is the number of runs of zeros,
the total number of runs is ‘R ¼ m þ n’. The run test is based on the as-
sumption that if a series is IID, the total number of runs ‘R’ is approximately
normal. Then, the statistic Rc is defined as follows

R  1  2mn=ðm þ nÞ
Rc ¼ qffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi ð3Þ
ð2mnð2mn  ðm þ nÞÞÞ=ððm þ nÞ2 Þðm þ n  1ÞÞ

where R1a=2 is the 1  a=2 quantile of the standard normal distribution.

2.1.3
Spearman’s rank correlation coefficient test
The observations fxi g; i ¼ 1; . . . ; N, in which N is the sample size, are ordered in
increasing manner, with ui the rank of the ordered sequence. The rank correlation
R between the pairs (i; ui ) is used for the Spearman’s test. This coefficient is
obtained by
P
6 Ni¼1 ði  ui Þ2
R¼1 ð4Þ
NðN 2  1Þ

The Spearman’s rank correlation coefficient R follows a standard normal distri-

bution if the observations are random and 1  R2 has a Chi-square distribution
with N  2 degrees of freedom. Then, the student’s t-distribution is applied to the
ratio
pffiffiffiffiffiffiffiffiffiffiffiffi
R N 2
Tc ¼ pffiffiffiffiffiffiffiffiffiffiffiffiffi ð5Þ
1  R2
The null hypothesis of randomness may be rejected at the significance level a if
jTc j  T1a=2 ðN  2Þ; where T1a=2 ðN  2Þ is the 1  a=2 quantile of the student’s
t-distribution with N  2 degrees of freedom.

2.1.4
Turning point test
For a given series of observations fxi g; i ¼ 1; . . . ; N, in which N is the sample
size, a peak is defined as the occurrence of a value fxi g such that
xi1 < xi > xiþ1

and a trough by

xi1 > xi < xiþ1

If the sample series is random, the total number of peaks and troughs M is
approximately normally distributed. The test statistic uc can be computed by

M  EðMÞ
uc ¼ pffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi ð6Þ
VarðMÞ 107

Then, the hypothesis of randomness cannot be rejected at the a significance level

if juc j u1a=2 where u1a=2 is the 1  a=2 quantile of the standard normal dis-
tribution.

2.2
The BDS statistic
The BDS statistic is derived from the correlation integral and has its origins in the
recent work on deterministic nonlinear dynamics and chaos theory. According to
Packard et al. (1980) and Takens (1981), the method of delays can be used to
embed a scalar time series fxi g; i ¼ 1; 2; . . . ; N into an m-dimensional space as
follows

xi ¼ ðxi ; xiþt ; . . . ; xiþðm1Þt Þ;

~ xi 2 Rm
~ ð7Þ

where t is the index lag. Grassberger and Procacccia (1983) introduced the
correlation integral as a method of measuring the fractal dimension of deter-
ministic data. It is a measure of the frequency with which temporal patterns are
repeated in the data. The correlation integral at the embedding dimension m is
given by
2 X 


Cðm; N; rÞ ¼ H r 
~ xj
;
xi  ~ r>0 ð8Þ
MðM  1Þ 1 i<j M

HðaÞ ¼ 0; if a 0
HðaÞ ¼ 1; if a  0

where N is the size of the data sets, M ¼ N  ðm  1Þt is the number of embedded
points in m-dimensional space, and kk denotes the sup-norm. Cðm; N; rÞ mea-
sures the fraction of the pairs of points ~ xi , i ¼ 1; 2; . . . ; M, whose sup-norm
separation is not greater than r. If the limit of Cðm; N; rÞ as N ! 1 exists for each
r, we write the fraction of all state vector points that are within r of each other as
Cðm; rÞ ¼ lim Cðm; N; rÞ.
N!1
If the data is generated by a strictly stationary stochastic process that is
absolutely regular, then this limit exists. In this case the limit is as follows
Z Z
Cðm; rÞ ¼ Hðr  k~
x ~ xÞdFð~
ykÞdFð~ yÞ; r>0 : ð9Þ
X
 Q
m
When the process is IID, and since Hðr  k~
x ~
ykÞ ¼ Hðr  jxk  yk jÞ, Eq. (9)
k¼1
m m
implies that Cðm; rÞ ¼ C ð1; rÞ. Also Cðm; rÞ  C ð1; rÞ has asymptotic normal
distribution, with zero mean and variance as follows

r2 ðm; M; rÞ=4 ¼ mðm  1ÞC 2ðm1Þ ðK  C2 Þ þ K m  C2m

Xh
m1 i
þ2 C2i ðK mi  C2ðmiÞ Þ  mC2ðmiÞ ðK  C2 Þ ð10Þ
i¼1

108 We can consistently estimate the constants C by Cð1; rÞ and K by

6 X 




Kðm; M; rÞ ¼ Hðr 
~ xj
ÞHðr 
~
xi  ~ xj
Þ
xi  ~
MðM  1ÞðM  2Þ 1 i<j M
ð11Þ
Under the IID hypothesis, the BDS statistic for m > 1 is defined as
pffiffiffiffiffi
M
BDSðm; M; rÞ ¼ ½Cðm; rÞ  Cm ð1; rÞ ð12Þ
r
It has a limiting standard normal distribution under the null hypothesis of
IID as M ! 1 and obtains its critical values using the standard normal
distribution.
Even though the BDS statistic cannot be used to distinguish between a non-
linear deterministic system and a nonlinear stochastic system, it is a powerful tool
for distinguishing random time series from the time series generated by low
dimensional chaotic or nonlinear stochastic processes. Not only is the resulting
test useful in detecting deterministic chaos, but it also serves as a residual di-
agnostic. If the model is correct, then the estimated residuals will pass the test for
IID. A failure to pass the test is an indication that the selected model is mis-
specified.
Before applying the BDS statistic, the first issue is what region of ‘r’ yields the
BDS statistic that is well approximated by an asymptotic distribution. As the
sample size is increased, the distribution of the BDS statistic becomes more
normal, so the minimal number of data should be provided. Next, the region of
the embedding dimension ‘m’ should be suggested. If the sample size is fixed,
we expect the finite sample property to worsen as ‘m’ increases. This study
follows the recommendation of Brock et al. (1991) for selecting the ranges of m,
r, N. Therefore, 500 or more observations are prepared and the embedding
dimension m is used in the range of 2 m 5. Then, the value of ‘r’ is selected
as half the standard deviations of the data sets.
3
Effectiveness of statistics
The effectiveness of nonparametric and BDS statistics are simply tested by using
the series of Gaussian noise and Logistic map which is a chaotic process. Typical
time series plots of Gaussian and chaotic processes are shown in Fig. 1. Gaussian
process fxt g has zero mean and variance r2 and is written as

fxt g  Nð0; r2 Þ ð13Þ

 109

Fig. 1. Time series plots of Gaussian and chaotic processes

where xt is IID standard normal. Time series with N ¼ 1000 Gaussian sequence is
simulated. The test results by nonparametric and BDS statistics are in Table 1. All
the computed statistic values indicate that the Gaussian sequences are IID and
present correct results.
May (1976) emphasized that a simple nonlinear map may have very compli-
cated dynamics. He showed this with a logistic map, which is a discrete time
analog for population growth. A logistic map is defined as

xt ¼ rxt1 ð1  xt1 Þ ; ð14Þ

where r is between 0 and 4. For small values of r, the system is stable, but as the value
of r approaches 4, the system becomes chaotic. A time series of N ¼ 1000 is sim-

Table 1. Statistics for the Gaussian and logistic series

Statistic Value of statistic 95% CI

Gaussian Logistic

Run 0.182 1.361 [)1.96, 1.96]

Anderson’s 0.025 0.015 [)0.093, 0.088]
Spearman’s 0.256 1.713 [)1.96, 1.96]
Turning point 0.250 0.926 [)1.96, 1.96]
BDS(2) )0.679 205.12 [)1.96, 1.96]
BDS(3) )1.005 187.09 [)1.96, 1.96]
BDS(4) )0.714 177.33 [)1.96, 1.96]
BDS(5) )1.771 170.85 [)1.96, 1.96]
 ulated from the logistic map with r ¼ 4. The results of nonparametric and the BDS
statistic are represented in Table 1. The time series from the logistic map pass all of
the nonparametric IID tests, which may be due to its nonlinearity. However, most
BDS statistics reject the IID hypothesis and this result indicates that the BDS statistic
is very effective in distinguishing chaos from random noise.
4
Fitting the models for monthly rainfalls

4.1
110 Data descriptions
Four monthly rainfall time series at the sites of Seoul, Busan, Mokpo and Cheju in
Korea are used for fitting to stochastic models. The sizes of records are shown in
Table 2 and the time series plots are shown in Fig. 2. The rainfall series exhibits
its seasonal variability or nonstationarity, which is common in hydrologic time
series of time scales less than a year. The autocorrelation functions of the data
series demonstrate their periodic patterns with 12 lags, namely 1 year, as shown
in Fig. 3. This presents the monthly correlation of the series. This type of series
can be modeled by SARIMA. The fitted SARIMA model is compared with the AR
Error model by residual analysis to check the model’s validity, and the non-
parametric and BDS statistics are used for the residual analysis.
5
SARIMA model
Box et al. (1970) have generalized the ARIMA model to deal with seasonality, and
define a general multiplicative seasonal ARIMA model. The SARIMA model of
order ðp; d; qÞ  ðP; D; QÞs is written by

/p ðBÞUP ðBs ÞZt ¼ hq ðBÞHQ ðBs Þet

ð15aÞ
Zt ¼ rd rDs Xt

UP ðBs Þ ¼ 1 þ U1 Bs þ U2 B2s þ    þ UP BPs

HQ ðBs Þ ¼ 1 þ H1 Bs þ H2 B2s þ    þ HQ BQs ð15bÞ
rDs ¼ ð1  Bs ÞD

where B denotes the backward shift operator, /p ; UP ; hq ; HQ are polynomials of

order p; P; q; Q respectively, et denotes IID errors and s ¼ 12 for monthly rainfalls.
When we have a series exhibiting seasonal behavior with known periodicity s, it is
of value to set down the data in the form containing s. For seasonal data, special
care is needed in selecting an appropriate transformation, and data analysis
supports the use of the logarithm for the study.

Table 2. Four monthly rainfalls at each site in Korea

Site Period Data Size

Seoul 1957=1=  1996=12= 480

Pusan 1957=1=  1996=12= 480
Mokpo 1957=1=  1996=12= 480
Cheju 1957=1=  1996=12= 480
 111

Fig. 2. Time series plots of monthly rainfalls

When fitting a seasonal model to data, the first task is to assess values of d and
D, which reduce the series to stationarity and remove most of the seasonality.
Then the values of p; P; q and Q need to be assessed using the sample ACF and
PACF. The difficulty for parameter estimation of seasonal models, particularly
multiplicative ones, lies in computing first estimates of parameters. To aid in this
effort, Box et al. (1970) give the theoretical autocovariances of the most popular
seasonal models. They may be used to obtain initial parameter estimates using the
method of moments. Four monthly rainfalls at each site are fitted to the SARIMA
model with the order ð0; 0; 0Þ  ð2; 1; 0Þs ¼ 12 and the models are represented in
Table 3.
The residual analysis by using the BDS statistic for four monthly rainfalls is
shown in Table 4. In the case of a rainfall in Seoul, the fitted SARIMA model can
be accepted from the tests both of the nonparametric and BDS statistics. The
fitted model at Pusan is also acceptable from the BDS test, but the Run and
Turning point tests do not pass the hypothesis. The residual analysis both by the
nonparametric and BDS tests shows quite different results for the fitted SARIMA
model on a monthly rainfall in Mokpo. This may be due to the error term which
may be autocorrelated. Therefore, the nonparametric tests may not be distinguish
112

Fig. 3. Autocorrelation functions of monthly rainfalls

this autocorrelation and, as shown in a previous section, not distinguish the

nonlinearity of the underlying system. However, the BDS statistic can distinguish
IID from the autocorrelated residuals and nonlinearity of time series. The fitted
model for Cheju is acceptable except for the result of BDS(2). From the tests, we
may conclude that the fitted SARIMA model for each site is appropriate except for
a monthly rainfall at Mokpo. However, we know that the results of the tests are
not stable, as seen in Table 4.

6
Autoregressive error model
This study considers a model that includes regression terms such as deterministic
sine and cosine functions to represent seasonality of time series and an error term

Table 3. The fitted SARIMA model for four monthly rainfalls

Site Fitted SARIMA model

Seoul ð1 þ 0:6931B12 þ 0:3442B24 Þð1  B12 ÞZt ¼ et

Pusan ð1 þ 0:6573B12 þ 0:2484B24 Þð1  B12 ÞZt ¼ et
Mokpo ð1 þ 0:6769B12 þ 0:2990B24 Þð1  B12 ÞZt ¼ et
Cheju ð1 þ 0:6015B12 þ 0:3473B24 Þð1  B12 ÞZt ¼ et
Table 4. Residual analysis for the fitted SARIMA model

Statistic Value of statistic 95% CI

Seoul Pusan Mokpo Cheju

Run 0.6678 2.3106 0.1867 0.3718 [)1.96, 1.96]

Anderson’s )0.0043 0.1293 0.0369 0.0545 [)0.093, 0.088]
Spearman’s 0.4551 0.1206 0.0305 0.8453 [)1.96, 1.96]
Turning point 1.6843 2.0504 0.2563 0.9520 [)1.96, 1.96]
BDS(2) )0.0502 1.4913 2.4495 2.0766 [)1.96, 1.96]
BDS(3) )0.8879 1.8648 3.2301 1.5429 [)1.96, 1.96]
BDS(4) 1.9058 1.5674 3.4501 0.5314 [)1.96, 1.96] 113
BDS(5) 1.9186 1.0487 2.6648 )0.3462 [)1.96, 1.96]

which may be autocorrelated. We consider the case where the error term mt can be
assumed to be a stationary ARMA type process and differencing of the original
series. We suppose that the series Zt follows the regression model:

Zt ¼ Xt0 b þ mt ð¼ b0 þ b1 Xt1 þ    þ bk Xtk þ mt Þ

mt ¼ et  /1 mt1      /p mtp ð16aÞ
2
et  Nð0; r Þ

where Xt1 ; . . . . . . ; Xtk are values of k explanatory or predictor variables and the
errors mt are assumed to follow the ARðpÞ process

1 tðmod sÞ ¼ i
INDti ¼ ð16bÞ
0 otherwise

where the INDti is the indicator function for treating the seasonality. When fitting
a regression model to a time series, we should always consider the possibility of
autocorrelation in the error term. The AR error model with the indicator function
for each monthly rainfall can be described as follows:

X
12
Zt ¼ di INDti þ mt ð16cÞ
i¼1

For the parameter estimation, the transformation is needed in order to produce

data which can be described as a stationary time series. This study takes natural
logarithms for monthly rainfalls and averages them for each month. Then, the
seasonality is reflected with the indicator function INDti and the parameter for
each month is estimated. After the monthly parameters are estimated, we
assume that the error mt follows the ARðpÞ process and estimate the order of
process and parameters. The estimated parameters for the modeling of monthly
rainfalls are shown in Table 5 and the fitted AR error models can be identified in
Table 6. As shown in Fig. 2, the rainfalls are concentrated in summer, especially
in July and August. So, the parameters dð7Þ and dð8Þ show larger values than the
others.
The residual analysis for AR error models for each monthly rainfall is per-
formed as shown in Table 7. We can see that the AR error model is acceptable for
 Table 5. Estimated parameters for fitting the AR error model of four monthly rainfalls

Variable Seoul Pusan Mokpo Cheju

d(1) 2.5584 2.8649 3.1357 3.8625

d(2) 2.6100 3.3088 3.3548 3.8394
d(3) 3.4994 4.1626 3.6176 4.0340
d(4) 4.1339 5.1304 4.3844 4.4743
d(5) 4.3317 5.0517 4.2252 4.3476
d(6) 4.7205 5.6055 5.0544 5.4462
d(7) 7.0407 6.1653 5.6205 5.7348
d(8) 6.3850 5.5636 5.2584 6.0941
114 d(9) 4.9182 5.2541 4.4736 5.2628
d(10) 3.4681 3.5352 3.3697 3.8357
d(11) 3.5717 3.5916 3.5706 4.0546
d(12) 2.7268 2.6821 3.0301 3.6078

Table 6. The fitted AR error model for four monthly rainfalls

Site Fitted AR error model

Seoul mt ¼ et  0:1022mt13 þ 0:1314mt35

et  Nð0; 1:0979Þ
Pusan mt ¼ et þ 0:1295mt1  0:1042m116  0:1162mt27  0:1120mt36
et  Nð0; 1:3053Þ
Mokpo mt ¼ et  0:1052mt27
et  Nð0; 1:0788Þ
Cheju mt ¼ et  0:1207mt13
et  Nð0; 1:0513Þ

Table 7. Residual analysis for the fitted AR error model

Statistic Value of statistic 95% CI

Seoul Pusan Mokpo Cheju

Run 0.9688 1.0901 0.3690 0.2880 [)1.96, 1.96]

Anderson’s 0.0045 )0.0065 0.0549 0.0245 [)0.093, 0.088]
Spearman’s 0.4538 0.5532 1.9318 0.5963 [)1.96, 1.96]
Turning point 0.7954 0.7954 0.5061 0.1808 [)1.96, 1.96]
BDS(2) 0.7642 )0.1802 0.9932 1.9004 [)1.96, 1.96]
BDS(3) 1.5346 )0.1138 0.1101 1.0896 [)1.96, 1.96]
BDS(4) 1.9022 0.1115 0.5354 0.2941 [)1.96, 1.96]
BDS(5) 1.9373 0.2129 0.3269 )0.6973 [)1.96, 1.96]

modeling monthly rainfall. The residual analysis by the nonparametric and BDS
tests gives quite stable results for modeling each monthly rainfall with the
AR error model. Therefore, we know that the AR error model might be more
reasonable than the SARIMA model from the residual analysis through the
nonparametric and BDS tests.
7
Conclusions
This study has presented four nonparametric statistics and the BDS statistic for
the residual analysis of fitted models for monthly rainfalls. We have shown that
the nonparametric tests may not be appropriate for nonlinear series and auto-
correlated errors and, instead, that the BDS statistic may be more reasonable for
testing the randomness of the time series and residual analysis on the fitted
models’ validity.
Monthly rainfalls have fitted to the SARIMA model and use the nonparametric
and BDS statistics for the residual analysis of the fitted models’ validity. However,
we have shown that the SARIMA model is not stable for modeling monthly 115
rainfalls and that the AR error model may be more appropriate. As a result, the
BDS statistic can be used as an alternative technique in residual analysis and the
AR error model may be more valid for modeling monthly rainfalls.

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