TIME SERIES ANALYSIS

Outline

Contents
Components of a Time Series
Multiplicative and Additive Models
Moving Averages as a Method for Smoothing of a Series
Decomposition of a Time Series
a. Trend
b. Seasonal
c. Cyclical
d. Random

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 Time Series

Time series is a set of observations recorded over a period of time.

The observations relate to a variable, say business turnover or
sales, number of railway or airline passengers, hotel occupancy,
consumption of electricity, bank deposits, stock market prices, etc.
The observations are recorded at equal intervals, say, daily,
weekly, monthly, quarterly or yearly.

The analysis of such data is especially useful if the interest lies in

forecasting monthly or quarterly or even weekly values of the
variable by taking into account the seasonality in the movement of
the variable.
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Time Series Analysis

The basic assumption in time series analysis is that

any particular value of the variable e.g. business
turnover comprises of four components viz.
Trend Component
Seasonal Component

Cyclical Component

Random( Chance) Component

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 Time Series Components
There are four basic elements of Time series.

Trend: It is the long term tendency in the data to increase, decrease, or

stagnant over a period of time.

Seasonality: These are regular fluctuations in the data having a periodicity of

a year. These are present because of natural seasonal changes and sometimes
due to man made custom which varies with seasons.

Cyclic Fluctuations: These may present because of business cycle, economic

movements or product life cycle etc. A business cycle usually is of a period of
3 to 5 years.

Irregular fluctuations: these are due to uncontrolled factors like market forces,
factors beyond recognition, major economical movements etc.

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Time Series Data

1000000

900000

800000

700000

600000

500000

400000

300000

200000

100000

0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

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Trend Component
900000

800000

700000

600000

500000

400000

300000

200000

100000

0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

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Seasonal Component

110

105

100

95

90

85
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

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Cyclic Variation
variable of interest

time

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Random Variations
variable of interest

time

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Analysis of a Time Series

The analysis of a time series involves segregating and

determining various components of the series.
These components are then combined together to obtain the
forecast, which is usually the objective of time series analysis.

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Decomposing Time Series
Types of Variation
Trend (T)
Seasonal (S)
Cyclical (C)
Random or Irregular (I)
Additive Model
Zt = Tt + St + Ct + It
Multiplicative Model
Zt = (Tt )(St )(Ct )(It)

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Moving Average

A moving average of a time series is an average of a

fixed number of observations that moves as we
progress down the series.

Time: 1 2 3 4 5 6 7 8 9 10 11 12 13 14
Data: 15 12 11 18 21 16 14 17 20 18 21 16 14 19
Five-period moving average: - - 15.4 15.6 16.0 17.2 17.6
17.0 18.0 18.4 17.8 17.6 - -

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Comparing Original to MA
O r ig in a l S e r ie s a n d F iv e - P e r io d M o v in g A v e r a g e s

20
Z

15

10
0 5 10 15
t

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Centered moving average
Centering is required if the period of moving
average is Even.

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Ratio-to-Moving Average for Quarterly Data

Compute a four-quarter moving-average series.

Center the moving averages by averaging every
consecutive pair and placing the average between quarters.
Divide the original series by the corresponding moving
average. Then multiply by 100.
Derive quarterly indexes by averaging all data points
corresponding to each quarter. Multiply each by 400 and
divide by sum.

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Moving Average Calculation
Simple Centered Ratio
Moving Moving to Moving
Quarter Sales Average Average Average
1998W 170 * * *
1998S 148 * * *
1998S 141 * 151.125 93.3
1998F 150 152.25 148.625 100.9
1999W 161 150.00 146.125 110.2
1999S 137 147.25 146.000 93.8
1999S 132 145.00 146.500 90.1
1999F 158 147.00 147.000 107.5
2000W 157 146.00 147.500 106.4
2000S 145 148.00 144.000 100.7
2000S 128 147.00 141.375 90.5
2000F 134 141.00 141.000 95.0
2002W 160 141.75 140.500 113.9
2002S 139 140.25 142.000 97.9
2002S 130 140.75 * *
2002F 144 143.25 * Rahul Chandra
*
Seasonal Index
Quarter
Year Winter Spring Summer Fall

1998 93.3 100.9

1999 110.2 93.8 90.1 107.5
2000 106.4 100.7 90.5 95.0
2002 113.9 97.9

Sum 330.5 292.4 273.9 303.4

Average 110.17 97.47 91.3 101.13

Sum of Averages = 400.07

Seasonal Index = (Average)(400)/400.07

Seasonal
Index 110.15 97.45 Rahul Chandra
91.28 101.11
De-seasonalised sales
Seasonal Deseasonalized
Quarter Sales Index (S) Series(Z/S)*100
1998W 170 110.15 154.34
1998S 148 97.45 151.87
1998S 141 91.28 154.47
1998F 150 101.11 148.35
1999W 161 110.15 146.16
1999S 137 97.45 140.58
1999S 132 91.28 144.51
1999F 158 101.11 156.27
2000W 157 110.15 142.53
2000S 145 97.45 148.79
2000S 128 91.28 140.23
2000F 134 101.11 132.53
2002W 160 110.15 145.26
2002S 139 97.45 142.64
2002S 130 91.28 142.42
2002F 144 101.11 142.42 Rahul Chandra
 Fitting Trend Line

Trend line is fitted using de-seasonalised sales using

regression method
T re n d L in e a n d M o v in g A v e ra g e s

180

170

160
S a le s

150

140

130

120
1992W 1992S 1992S 1992F
t
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Question 1

Year Actual sales

2000 Q1 7.6
Q2 7.8
Q3 8
Q4 8.2
2001 Q1 8.5
Q2 8.4
Q3 9.1
Q4 8.7

Forecast for the next year using ratio to MA

and ratio to trend.
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Question 2

Year Actual sales

2000 Q1 105
Q2 100
Q3 90
Q4 115
2001 Q1 110
Q2 105
Q3 95
Q4 115
2002 Q1 100
Q2 95
Q3 95
Q4 105
2003 Q1 115
Q2 110
Q3 100
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Q4 125
Question 3

Year Quarters Actual sales

2000 Q1 1861
Q2 2203
Q3 2415
Q4 1908
2001 Q1 1921
Q2 2343
Q3 2514
Q4 1986
2002 Q1 1834
Q2 2154
Q3 2098
Q4 1799
2003 Q1 1837
Q2 2025
Q3 2303
Q4 1965
2004 Q1 2073
Q2 2414
Q3 2339
Q4 Rahul Chandra
1967