Chapter 7: Time Series Analysis 343

Chapter 7

Time Series Analysis

LEARNING OBJECTIVES
After studying this chapter, you should be able to:
1. Understand time series analysis.
2. State the role of time series analysis in business and economics.
3. Describe the different components of time series analysis.
4. Explain how time series analysis helps management to take decision.
5. Define business cycle.
6. Explain the criteria of a good forecasting method.
7. Explain why time series considered being an effective tool of forecasting.
8. State the elements of trend analysis.
9. Describe the seasonal variation in time series analysis.

A time series is a sequence of numerical data points in successive order. In investing, a

time series tracks the movement of the chosen data points, such as a security’s price, over
a specified period of time with data points recorded at regular intervals. There is no
minimum or maximum amount of time that must be included, allowing the data to be
gathered in a way that provides the information being sought by the investor or analyst
examining the activity.

A time series can be taken on any variable that changes over time. In investing, it is
common to use a time series to track the price of a security over time. This can be tracked
over the short term, such as the price of a security on the hour over the course of a
business day, or the long term, such as the price of a security at close on the last day of
every month over the course of five years. Time series analysis can be useful to see how a
given asset, security or economic variable changes over time. It can also be used to
344 Business Statistics–I
examine how the changes associated with the chosen data point compare to shifts in other
variables over the same time period.

For example, suppose you wanted to analyze a time series of daily closing stock prices
for a given stock over a period of one year. You would obtain a list of all the closing
prices for the stock from each day for the past year and list them in chronological order.
This would be a one-year daily closing price time series for the stock.

Delving a bit deeper, you might be interested to know whether the stock's time series
shows any seasonality to determine if it goes through peaks and valleys at regular times
each year. Analysis in this area would require taking the observed prices and correlating
them to a chosen season. This can include traditional calendar seasons, such as summer
and winter, or retail seasons, such as holiday seasons.

Alternatively, you can record a stock's share price changes as it relates to an economic
variable, such as the unemployment rate. By correlating the data points with information
relating to the selected economic variable, you can observe patterns in situations
exhibiting dependency between the data points and the chosen variable.

Time series forecasting uses information regarding historical values and associated
patterns to predict future activity. Most often, this relates to trend analysis, cyclical
fluctuation analysis and issues of seasonality. As with all forecasting methods, success is
not guaranteed.

A time series is a series of data points listed (or graphed) in time order. Most commonly,
a time series is a sequence taken at successive equally spaced points in time. Thus it is a
sequence of discrete-time data. Examples of time series are heights of ocean tides, counts
of sunspots, and the daily closing value of the Dow Jones Industrial Average.

Time series are very frequently plotted via line charts. Time series are used in statistics,
signal processing, pattern recognition, econometrics, mathematical finance, weather
forecasting, intelligent transport and trajectory forecasting, earthquake prediction,
electroencephalography, control engineering, astronomy, communications engineering,
and largely in any domain of applied science and engineering which involves temporal
measurements.

Time series analysis comprises methods for analyzing time series data in order to extract
meaningful statistics and other characteristics of the data. Time series forecasting is the
use of a model to predict future values based on previously observed values. While
regression analysis is often employed in such a way as to test theories that the current
values of one or more independent time series affect the current value of another time
series, this type of analysis of time series is not called "time series analysis", which
 Chapter 7: Time Series Analysis 345
focuses on comparing values of a single time series or multiple dependent time series at
different points in time.

Time series data have a natural temporal ordering. This makes time series analysis
distinct from cross-sectional studies, in which there is no natural ordering of the
observations (e.g. explaining people's wages by reference to their respective education
levels, where the individuals' data could be entered in any order). Time series analysis is
also distinct from spatial data analysis where the observations typically relate to
geographical locations (e.g. accounting for house prices by the location as well as the
intrinsic characteristics of the houses). A stochastic model for a time series will generally
reflect the fact that observations close together in time will be more closely related than
observations further apart. In addition, time series models will often make use of the
natural one-way ordering of time so that values for a given period will be expressed as
deriving in some way from past values, rather than from future values.

7.1 Introduction to Time Series

The statistical data is recorded with its time of occurrence is called a time series. The
yearly output of wheat recorded for the last twenty five years, the weekly average price of
eggs recorded for the last 52 weeks, the monthly average sales of a firm recorded for the
last 48 months or the quarterly average profits recorded for the last 40 quarter etc., are
example of time series data. It may be observed that this data undergoes changes with the
passage of time. A number of factors can be isolated with contribute to the changes
occurring overtime in such series.

In the field of economics and business, for example, income, imports exports, production,
consumption, prices these data are depend on time. And all of these data are pretentious
by seasonal changes as well as regular cyclical changes over the time period. To evaluate
the changes in business and economics, the analysis of time series plays an important role
in this regard. It is necessary to associated time with time series because time is one basic
variable in time series analysis.

7.2 Definition of time series:

A time- series may be defined as a collection of readings belonging to different time
periods, of some economic variable or composite of variables.

7.3 Role of time series Analysis

Time series Analysis is of great significance in business decision- making for the
following reason:
(1) It helps in the understanding of past behavior: By observing data over a period
of time, one can easily understand what changes have taken place in the past.
Such analysis will be extremely helpful in predicting the future behavior.
346 Business Statistics–I
(2) It helps in planning future operations: Statistical techniques have been evolved
which enable time series to be analysed in such a way that the influences which
have determined the form of that series may be ascertained. If the regularity of
occurrence of any feature over a sufficient long period could be clearly
established then, within limits, prediction of probable future variations would
become possible.

(3) It helps in evaluating current accomplishments: The actual performance can be

compared with the expected performance and the cause of variation analyzed. If
expected sales for 2011 were 95 lakhs color T.V sets and the actual sale were only
94 lakhs; one can investigate the cause for the shortfall in achievement.

(4) It facilitates comparison: Different time series are often compared and important
conclusions drawn there from.

7.4 Components of Time Series

The factors that are responsible to bring about changes in a time series, also called the
components of time series, are as follows:
1. Secular Trend (or General Trend)
2. Seasonal Movements
3. Cyclical Movements
4. Irregular Fluctuations

7.5 Components of Time Series

Secular Trend:
The secular trend is the main component of a time series which results from long term
effect of socio-economics and political factors. This trend may show the growth or
decline in a time series over a long period. This is the type of tendency which continues
to persist for a very long period. Prices, export and imports data, for example, reflect
obviously increasing tendencies over time.

Seasonal Trend:
These are short term movements occurring in a data due to seasonal factors. The
short term is generally considered as a period in which changes occur in a time series
with variations in weather or festivities. For example, it is commonly observed that the
consumption of ice-cream during summer us generally high and hence sales of an ice-
cream dealer would be higher in some months of the year while relatively lower during
winter months. Employment, output, export etc. are subjected to change due to variation
in weather. Similarly sales of garments, umbrella, greeting cards and fire-work are
subjected to large variation during festivals like Valentine’s Day, Eid, Christmas, New
Year etc. These types of variation in a time series are isolated only when the series is
provided biannually, quarterly or monthly.
 Chapter 7: Time Series Analysis 347

Cyclic Movements:
These are long term oscillation occurring in a time series. These oscillations are mostly
observed in economics data and the periods of such oscillations are generally extended
from five to twelve years or more. These oscillations are associated to the well known
business cycles. These cyclic movements can be studied provided a long series of
measurements, free from irregular fluctuations is available.

Irregular Fluctuations:
These are sudden changes occurring in a time series which are unlikely to be repeated, it
id that component of a time series which cannot be explained by trend, seasonal or cyclic
movements .It is because of this fact these variations some-times called residual or
random component. These variations though accidental in nature, can cause a continual
change in the trend, seasonal and cyclical oscillations during the forthcoming period.
Floods, fires, earthquakes, revolutions, epidemics and strikes etc,. are the root cause of
such irregularities.

7.6 Analysis of Time Series

The object of the time series analysis is to identify the magnitude and direction of trend,
to estimate the effect of seasonal and cyclical variations and to estimate the size of the
residual component. This implies the decomposition of a time series into its several
components. Two lines of approach are usually adopted in analyzing a given time series,
namely,
(i) The additive model
(ii) The multiplicative model
Thus, if we denote the time series by Y, the secular trend by T, the seasonal or short term
periodic movements by S, the long term cyclical movements by C and the irregular or
residual component by R, then the additive model can be described as
Y T  S C  R

The additive model is generally used when the time series is spread over a short time
span or where the rate of growth or decline in the trend is small. The multiplicative
model, which is more in use than the additive model, is generally used whenever the time
span of the series is large or the rate of growth or decline is would be
Y T  S  C  R

7.7 Analyzing the Secular Trend

A number of different methods are available to estimate the trend; however, suitability of
these methods largely depends on the nature of the data and the purpose of the analysis.
To measure a trend which can be represented as a straight line or some type of smooth
curve, the following are the commonly employed methods.
(1) Freehand smooth curves,
348 Business Statistics–I
(2) Semi-average method,
(3) Moving average method, and
(4) Mathematical curve fitting (Least square Method)

7.8 Method of Free-Hand Curve:

It is familiar concept, briefly described for drawing frequency curves. In case of a time
series a scatter diagram of the given observations is plotted against time on the horizontal
axis and a freehand smooth curve is drawn through the plotted points. The curve is so
drawn that most of the points concentrate around the curve, however, smoothness should
not be scarified in trying to let the points exactly fall on the curve. It would be better to
draw a straight line through the plotted points instead of a curve, if possible. The curve
fitted by this method eliminates the short term and long term oscillations and the irregular
movements from the time series and elevate the general trend. After having drawn such a
curve or line the trend values or the estimated Y values, which may be denoted by Y, can
be read from the graph corresponding to each time period.

Example: Measure the trend by method of freehand curve from the given data of
production of wheat in a particular area of the world.
Years 1981 1982 1983 1984 1985 1986 1987 1988 1989

Production Million Metric Tons 6.6 6.9 5.6 6.3 8.4 7.2 7.2 8.5 8.5

Solution:
 Chapter 7: Time Series Analysis 349
7.9 Merits and Demerits of Free-Hand Curve
Merits:
This method is very simple and easy to understand. It is applicable for linear and non-
linear trends. It gives us a idea about the rise and fall of the time series. For every long
time series, the graph of the original data enables us to decide about the application of
more mathematical models for the measurement of trend. A monthly data of 5 years has
60 values. A graph of these values may suggest that the trend is linear for the first two
years (24 values) and for the next 3 years, it is non- linear. We accordingly apply the
linear approach on the first 24 values and the curvilinear techniques on the next 36
values.

Demerits:
It is not mathematical in nature. Different persons may draw a different trend. The
method does not appeal to a common man because it seems as if it is something rough
and crude.

7.10 Method of Semi-Averages:

This method is also simple and relatively objective than the free hand method. The data is
divided in two equal halves and the arithmetic mean of the two sets of values of Y is
plotted against the center of the relative time span. If the numbers of observations are
even the division into halves will be straight forward, however, if the number of
 n 1
observations are odd, then the middle most i.e..,  th , item is dropped. The two
 2 
points so obtained are joined through a straight line which shows the trend. The trend
values of Y i.e., Y can then be read from the graph corresponding to each time period.
The arithmetic mean, since greatly affected by extreme values, is subjected to misleading
values hence the trend obtained by plotting by means might be distorted. However, if
extreme values are not apparent, this method may be fruitfully employed. To understand
the estimation of trend, using the above noted two methods, consider the following
worked example.

Example:
Measure the trend by the method of semi-average by using the following table
given below. Also write the equation of the trend line with origin at 1984-85.
Years Value in Million
1984 – 85 18.6
1985 – 86 22.6
1986 – 87 38.1
1987 – 88 40.9
1988 – 89 41.4
1989 – 90 40.1
350 Business Statistics–I
1990 – 91 46.6
1991 – 92 60.7
1992 – 93 57.2
1993 – 94 53
Solution:
Years Values Semi-Totals Semi-Average Trend Values
1984 – 85 18.6 28.664 – 3.656 = 25.008
1985 – 86 22.6 32.32 – 3.656 = 28.664
1986 – 87 38.1 161.6 32.32 32.32
1987 – 88 40.9 32.32 + 3.656 = 35.976
1988 – 89 41.4 35.976 + 3.656 = 39.632
1989 – 90 40.1 39.632 + 3.656 = 43.288
1990 – 91 46.6 43.288 + 3.656 = 46.944
1991 – 92 60.7 253.0 5.60 50.60
1992 – 93 57.2 50.60 + 3.656 = 54.256
1993 – 94 53.4 54.256 + 3.656 = 57.912

7.11 Method of Moving Averages

Suppose that there are n times periods denoted by t1 , t 2 , t 3 ,  , t n and the
corresponding values of Y variable are Y1 , Y2 , Y3 ,      , Yn . First of all we have to
decide the period of the moving averages. For short time series, we use period of 3 or 4
values. For long time series, the period may be 7, 10 or more. For quarterly time series,
we always calculate averages taking 4-quarters at a time. In monthly time series, 12-
monthly moving averages are calculated. Suppose the given time series is in years and we
have decided to calculate 3-years moving average. The moving averages denoted by
a1 , a 2 , a3 ,    , a n  2 are calculated as below:

Years (t) Variable (Y) 3-Years moving averages 3-Years moving averages centered

t1 Y1 ------ ------

Y1  Y2  Y3
t2 Y2  a1 ------
3
Y2  Y3  Y4 a1  a 2
t3 Y3  a2  A1
3 2
 Chapter 7: Time Series Analysis 351

Y3  Y4  Y5 a 2  a3
t4 Y4  a3  A2
3 2

t5 Y5

Example: Compute 5-years, 7-years and 9-years moving averages for the following data.
Years 1990 1991 1992 1993 1994 1995 1996 19997 1998 1999 2000

Values 2 4 6 8 10 12 14 16 18 20 2

Solution: The necessary calculations are given below:

5-Years Moving 7-Years Moving 9-Years Moving
Years Values Total Average Total Average Total Average
1990 2 --- --- --- --- --- ---
1991 4 --- --- --- --- --- ---
1992 6 30 6 --- --- --- ---
1993 8 40 8 56 8 --- ---
1994 10 50 10 70 10 90 10
1995 12 60 12 84 12 108 12
1996 14 70 14 98 14 126 14
1997 16 80 16 112 16 ---
1998 18 90 18 --- --- --- ---
1999 20 --- --- --- --- --- ---
2000 22 --- --- --- --- --- ---

Example: Compute 4-years moving average centered for the following time series:
Years 1995 1996 1997 1998 1999 2000 2001 2002
Production 80 90 92 83 87 96 100 110
Solution:
The necessary calculations are given below:
4-yearsMoving
4-Years Moving 4-Years Moving 2-values Moving
Year Production Average
Total Average Total
Centered
1995 80 --- --- --- ---
1996 90 345 86.25 --- ---
1997 92 352 88.00 174.25 87.125
1998 83 358 89.50 177.50 88.750
352 Business Statistics–I
1999 87 366 91.50 181.00 90.500
2000 96 393 98.25 189.75 94.875
2001 100 --- --- --- ---
2002 110 --- --- --- ---

7.12 Merits and Demerits of Semi-Averages Method

Merits:
This method is very simple and easy to understandable and also it does not require much
of calculations.

Demerits:
The method is used only when the trend is linear or almost linear. For non-linear trend
this method is not applicable. It is used on the calculation of average and the average is
affected by extreme values. Thus if there is some very large value or very small value in
the time series, that extreme value should either be omitted or this method should not be
applied. We can also write the equation of the trend line.

7.13 Least Square Method

This method is most widely used in practice. When this method is applied, a trend
line is fitted to the data in such a manner that the following two conditions are
satisfied:
i)  (Y  Ye )  0
i.e; the sum of deviation of the actual values of Y and the computed values of Y is
zero.
ii) Y  Yc ) 2 is least,
i.e.; the sum of the squares of the deviations of the actual and computed values is
least from this line. That is way this method is called the method of least squares.
The line obtained by this method is known as the line of best fit.
The method of least squares can be used either to fit a straight line trend or a
parabolic trend.
the straight line trend is represented by the equation
Ye  a  bX
where Ye denotes the trend values to distinguish them from the actual Y values, a
is the Y intercept or the value of the Y variable when X=0, b represents slope of
the line or the amount of change in Y variable that is associated with a change of
one unit in X variable. The X variable in time series analysis represents time.
In order to determine the value of the constants a and b the following two normal
equations are to be solved:
 Chapter 7: Time Series Analysis 353
 Y  Na  b X
 XY  a X  b X 2

where N represents number of years (months or any other period) for which data
are given.
It should be noted that the first equation is nearly the summation or the given
function, the second is the summation of X multiplied by the given function.
We can measure the variable X from any point of time in origin such as the first
year. But the calculation are very much simplified when the mid point in time is
taken as the origin because in that case the negative values in the first half of the
series balance out the positive values in the second half so that  X  0 . In other
words, the time variable is measured as a deviation from its mean. Since  X  0,
the above two normal equations would take the form:
Y  Na
 XY  b X 2

The values of a and b can now be determined easily.

Since  X  Na

a
Y

N
Since  XY  b X 2

b
 XY
X 2

The constant a gives the arithmetic mean of Y and the constant b indicates the rate
of change.
It should be noted that in case of odd number of years when the deviations are
taken from the middle year,  X would always be zero, provided there is no gap
in the data given. However, in case of even number of years also  X will be
zero if the X origin in placed midway between the two middle years. Hence both
in odd as well as in even number of years we can use the simple procedure of
determining the values of the constant a and b.
354 Business Statistics–I

Supplementary Theories
List of Supplementary Questions:
1. What is time series analysis? State the role/importance of time series analysis in business
and economics. (2004, 2007)
2. What is time series analysis? Discuss the different components of time series analysis.
(2005, 2006, 2008, 2010, 2011, 2012, 2013, 2014, 2015)
3. How time series analysis helps management to take decision? (2008, 2010, 2011)
4. What is business cycle? Explain the different component of a business cycle with
example. (2007)
5. Why time series considered to be an effective tool of forecasting? (2008, 2009)
6. State the elements of trend analysis. (2004)
7. Discuss the seasonal variation in time series analysis with example. (2007)
8. How do you calculate trend free data?
9. Explain the criteria of a good forecasting method.
10. Why the concept time series is crucial?

Question 1 2004, 2007

What is time series analysis? State the role/importance of time series analysis in business
and economics.
Answer:
Time series analysis:
A time series is a sequence of numerical data points in successive order. In investing, a time
series tracks the movement of the chosen data points, such as a security’s price, over a specified
period of time with data points recorded at regular intervals. There is no minimum or maximum
amount of time that must be included, allowing the data to be gathered in a way that provides the
information being sought by the investor or analyst examining the activity.

A time series is a series of data points listed (or graphed) in time order. Most commonly, a time
series is a sequence taken at successive equally spaced points in time. Thus it is a sequence of
discrete-time data. Examples of time series are heights of ocean tides, counts of sunspots, and the
daily closing value of the Dow Jones Industrial Average.

Time series are very frequently plotted via line charts. Time series are used in statistics, signal
processing, pattern recognition, econometrics, mathematical finance, weather forecasting,
intelligent transport and trajectory forecasting, earthquake prediction, electroencephalography,
control engineering, astronomy, communications engineering, and largely in any domain of
applied science and engineering which involves temporal measurements.
 Chapter 7: Time Series Analysis 355
A time series can be taken on any variable those changes over time. In investing, it is common to
use a time series to track the price of a security over time. This can be tracked over the short term,
such as the price of a security on the hour over the course of a business day, or the long term,
such as the price of a security at close on the last day of every month over the course of five
years.

Time series analysis can be useful to see how a given asset, security or economic variable
changes over time. It can also be used to examine how the changes associated with the chosen
data point compare to shifts in other variables over the same time period.

For example, suppose you wanted to analyze a time series of daily closing stock prices for a given
stock over a period of one year. You would obtain a list of all the closing prices for the stock
from each day for the past year and list them in chronological order. This would be a one-year
daily closing price time series for the stock.

Delving a bit deeper, you might be interested to know whether the stock's time series shows any
seasonality to determine if it goes through peaks and valleys at regular times each year. Analysis
in this area would require taking the observed prices and correlating them to a chosen season.
This can include traditional calendar seasons, such as summer and winter, or retail seasons, such
as holiday seasons.

Alternatively, you can record a stock's share price changes as it relates to an economic variable,
such as the unemployment rate. By correlating the data points with information relating to the
selected economic variable, you can observe patterns in situations exhibiting dependency between
the data points and the chosen variable.

Time series forecasting uses information regarding historical values and associated patterns to
predict future activity. Most often, this relates to trend analysis, cyclical fluctuation analysis and
issues of seasonality. As with all forecasting methods, success is not guaranteed.

Time series analysis comprises methods for analyzing time series data in order to extract
meaningful statistics and other characteristics of the data. Time series forecasting is the use of a
model to predict future values based on previously observed values. While regression analysis is
often employed in such a way as to test theories that the current values of one or more
independent time series affect the current value of another time series, this type of analysis of
time series is not called "time series analysis", which focuses on comparing values of a single
time series or multiple dependent time series at different points in time.

Time series data have a natural temporal ordering. This makes time series analysis distinct from
cross-sectional studies, in which there is no natural ordering of the observations (e.g. explaining
people's wages by reference to their respective education levels, where the individuals' data could
be entered in any order). Time series analysis is also distinct from spatial data analysis where the
observations typically relate to geographical locations (e.g. accounting for house prices by the
location as well as the intrinsic characteristics of the houses). A stochastic model for a time series
will generally reflect the fact that observations close together in time will be more closely related
than observations further apart. In addition, time series models will often make use of the natural
one-way ordering of time so that values for a given period will be expressed as deriving in some
356 Business Statistics–I
way from past values, rather than from future values. Time series analysis can be applied to real-
valued, continuous data, discrete numeric data, or discrete symbolic data.

The role/importance of Time series analysis:

Forecasting is science of estimation. Today is the day of competition so if you have to win from
competition then you must learn this science, this science can be utilized if we make time series
and on the basis we can read the history and then we can decide what happen in future. Suppose if
we can make the time series of past strategy of our competitor then on this basis we can estimate
future strategy of our competitor and on this base we can change our strategy for defeating our
competitor.

Time series is an equipment in your hand on this basis you can evaluate your business
achievements if you did good , your performance shows your good face in the time series by up-
word trend of your performance. If your business performance is very bad then you can make
new policies to stable your business.

A common goal of time series analysis is extrapolating past behavior into the future. The
STATGRAPHICS forecasting procedures include random walks, moving averages, trend models,
simple, linear, quadratic, and seasonal exponential smoothing, and ARIMA parametric time series
models. Users may compare various models by withholding samples at the end of the time series
for validation purposes.

Time series analysis and its applications have become increasingly important in various fields of
research, such as business, economics, engineering, medicine, environ-metrics, social sciences,
politics, and others. Since Box and Jenkins (1970, 1976) published the seminal book Time Series
Analysis: Forecasting and Control, a number of books and a vast number of research papers have
been published in this area. The goal of this book is to distill and integrate these research results
into cohesive and comprehensible methodologies, and to provide a streamlined approach to time
series analysis and forecasting.

The use of computers and computer software is essential in any modern quantitative analysis,
even more so in time series analysis where complex algorithms and extensive computations are
often required. With the speed and capacity of modern computers, in many situations it is
preferable to adopt a methodology that simplifies the means of conducting an analysis even if it is
at the expense of computation time. Using such an approach, we are able to provide simplified
and effective methodologies for complex subjects in time series analysis and forecasting, as will
be discussed here.

Models for time series data can have many forms and represent different stochastic processes.
When modeling variations in the level of a process, three broad classes of practical importance
are the autoregressive (AR) models, the integrated (I) models, and the moving average (MA)
models. These three classes depend linearly on previous data points. Combinations of these ideas
produce autoregressive moving average (ARMA) and autoregressive integrated moving average
(ARIMA) models.
 Chapter 7: Time Series Analysis 357
Methods for time series analyses may be divided into two classes: frequency-domain methods
and time-domain methods. The former include spectral analysis and wavelet analysis; the latter
include auto-correlation and cross-correlation analysis. In the time domain, correlation and
analyses can be made in a filter-like manner using scaled correlation, thereby mitigating the need
to operate in the frequency domain.

Additionally, time series analysis techniques may be divided into parametric and non-parametric
methods. The parametric approaches assume that the underlying stationary stochastic process has
a certain structure which can be described using a small number of parameters (for example,
using an autoregressive or moving average model). In these approaches, the task is to estimate the
parameters of the model that describes the stochastic process. By contrast, non-parametric
approaches explicitly estimate the covariance or the spectrum of the process without assuming
that the process has any particular structure.

Question 2 2005, 2006, 2008, 2010, 2011, 2012, 2013, 2014, 2015
What is time series analysis? Discuss the different components of time series analysis.
Answer:
Time series analysis:
A time series is a sequence of numerical data points in successive order. In investing, a time
series tracks the movement of the chosen data points, such as a security’s price, over a specified
period of time with data points recorded at regular intervals. There is no minimum or maximum
amount of time that must be included, allowing the data to be gathered in a way that provides the
information being sought by the investor or analyst examining the activity.

A time series is a series of data points listed (or graphed) in time order. Most commonly, a time
series is a sequence taken at successive equally spaced points in time. Thus it is a sequence of
discrete-time data. Examples of time series are heights of ocean tides, counts of sunspots, and the
daily closing value of the Dow Jones Industrial Average.
Time series are very frequently plotted via line charts. Time series are used in statistics, signal
processing, pattern recognition, econometrics, mathematical finance, weather forecasting,
intelligent transport and trajectory forecasting, earthquake prediction, electroencephalography,
control engineering, astronomy, communications engineering, and largely in any domain of
applied science and engineering which involves temporal measurements.

Time series analysis comprises methods for analyzing time series data in order to extract
meaningful statistics and other characteristics of the data. Time series forecasting is the use of a
model to predict future values based on previously observed values. While regression analysis is
often employed in such a way as to test theories that the current values of one or more
independent time series affect the current value of another time series, this type of analysis of
time series is not called "time series analysis", which focuses on comparing values of a single
time series or multiple dependent time series at different points in time.
Time series analysis can be useful to see how a given asset, security or economic variable
changes over time. It can also be used to examine how the changes associated with the chosen
data point compare to shifts in other variables over the same time period.
358 Business Statistics–I
The different components of time series analysis:
The factors that are responsible to bring about changes in a time series, also called the
components of time series, are as follows:
1. Secular Trend (or General Trend)
2. Seasonal Movements
3. Cyclical Movements
4. Irregular Fluctuations

Secular Trend:
The secular trend is the main component of a time series which results from long term effect of
socio-economic and political factors. This trend may show the growth or decline in a time series
over a long period. This is the type of tendency which continues to persist for a very long period.
Prices, export and imports data, for example, reflect obviously increasing tendencies over time. A
time series data may show upward trend or downward trend for a period of years and this may be
due to factors like increase in population, change in technological progress, large scale shift in
consumer’s demands, etc. For example, population increases over a period of time, price
increases over a period of years, production of goods on the capital market of the country
increases over a period of years. These are the examples of upward trend. The sales of a
commodity may decrease over a period of time because of better products coming to the market.
This is an example of declining trend or downward trend. The increase or decrease in the
movements of a time series is called Secular trend.

Seasonal Movement:
These are short term movements occurring in a data due to seasonal factors. The short term is
generally considered as a period in which changes occur in a time series with variations in
weather or festivities. For example, it is commonly observed that the consumption of ice-cream
during summer us generally high and hence sales of an ice-cream dealer would be higher in some
months of the year while relatively lower during winter months. Employment, output, export etc.
are subjected to change due to variation in weather. Similarly sales of garments, umbrella,
greeting cards and fire-work are subjected to large variation during festivals like Valentine’s Day,
Eid, Christmas, New Year etc. These types of variation in a time series are isolated only when the
series is provided biannually, quarterly or monthly. Seasonal variation is short-term fluctuation in
a time series which occur periodically in a year. This continues to repeat year after year. The
major factors that are responsible for the repetitive pattern of seasonal variations are weather
conditions and customs of people. More woolen clothes are sold in winter than in the season of
summer. Regardless of the trend we can observe that in each year more ice creams are sold in
summer and very little in winter season. The sales in the departmental stores are more during
festive seasons that in the normal days.

Cyclic Movements:
These are long term oscillation occurring in a time series. These oscillations are mostly observed
in economics data and the periods of such oscillations are generally extended from five to twelve
years or more. These oscillations are associated to the well known business cycles. These cyclic
movements can be studied provided a long series of measurements, free from irregular
fluctuations is available. Cyclical variations are recurrent upward or downward movements in a
 Chapter 7: Time Series Analysis 359
time series but the period of cycle is greater than a year. Also these variations are not regular as
seasonal variation. There are different types of cycles of varying in length and size. The ups and
downs in business activities are the effects of cyclical variation. A business cycle showing these
oscillatory movements has to pass through four phases-prosperity, recession, depression and
recovery. In a business, these four phases are completed by passing one to another in this order.

Irregular Fluctuations:
These are sudden changes occurring in a time series which are unlikely to be repeated, it is that
component of a time series which cannot be explained by trend, seasonal or cyclic movements. It
is because of this fact these variations some-times called residual or random component. These
variations though accidental in nature, can cause a continual change in the trend, seasonal and
cyclical oscillations during the forthcoming period. Floods, fires, earthquakes, revolutions,
epidemics and strikes etc, are the root cause of such irregularities. Irregular variations are
fluctuations in time series that are short in duration, erratic in nature and follow no
regularity in the occurrence pattern. These variations are also referred to as residual
variations since by definition they represent what is left out in a time series after trend
,cyclical and seasonal variations. Irregular fluctuations results due to the occurrence of
unforeseen events like floods, earthquakes, wars, famines, etc.
360 Business Statistics–I
Question 3 2008, 2010, 2011
How time series analysis helps management to take decision?
Answer:
Time series analysis helps management to take decision:
Time series is an equipment in your hand on this basis you can evaluate your business
achievements if you did good , your performance shows your good face in the time series by up-
word trend of your performance. If your business performance is very bad then you can make
new policies to stable your business.

Forecasting is the process of making predictions of the future based on past and present data and
analysis of trends. A commonplace example might be estimation of some variable of interest at
some specified future date. Prediction is a similar, but more general term. Both might refer to
formal statistical methods employing time series, cross-sectional or longitudinal data, or
alternatively to less formal judgmental methods. Usage can differ between areas of application:
for example, in hydrology the terms "forecast" and "forecasting" are sometimes reserved for
estimates of values at certain specific future times, while the term "prediction" is used for more
general estimates, such as the number of times floods will occur over a long period.

The use of computers and computer software is essential in any modern quantitative analysis,
even more so in time series analysis where complex algorithms and extensive computations are
often required. With the speed and capacity of modern computers, in many situations it is
preferable to adopt a methodology that simplifies the means of conducting an analysis even if it is
at the expense of computation time. Using such an approach, we are able to provide simplified
and effective methodologies for complex subjects in time series analysis and forecasting, as will
be discussed here. Risk and uncertainty are central to forecasting and prediction; it is generally
considered good practice to indicate the degree of uncertainty attaching to forecasts. In any case,
the data must be up to date in order for the forecast to be as accurate as possible.

All forecasting methods can be divided into two broad categories: qualitative and quantitative.
Many forecasting techniques use past or historical data in the form of time series. A time series is
simply a set of observations measured at successive points in time or over successive periods of
time. Forecasts essentially provide future values of the time series on a specific variable such as
sales volume. Division of forecasting methods into qualitative and quantitative categories is based
on the availability of historical time series data.

Time series data, for example records of stock market indices, are in general not susceptible to
classical statistical analysis, since observations tend to be correlated in time. Time series analysis
is a specialized branch of statistical science which deals with such data sets, providing an
essential toolset for finance and business analysis, economic forecasting, and decision-making.

The course covers the fundamental concepts required for the description, modeling and
forecasting of time series data. A particular emphasis is placed on the analysis of real-world data
sets from finance and economics, and a practical laboratory component introduces students to the
software package R (or other software).
 Chapter 7: Time Series Analysis 361
Time series analysis can be useful to see how a given asset, security or economic variable
changes over time. It can also be used to examine how the changes associated with the chosen
data point compare to shifts in other variables over the same time period.

For example, suppose you wanted to analyze a time series of daily closing stock prices for a given
stock over a period of one year. You would obtain a list of all the closing prices for the stock
from each day for the past year and list them in chronological order. This would be a one-year
daily closing price time series for the stock.

Question 4 2007
What is business cycle? Explain the different component of a business cycle with example.
Answer:
Business Cycle:
The business cycle or economic cycle is the downward and upward movement of gross domestic
product (GDP) around its long-term growth trend.[1] These fluctuations typically involve shifts
over time between periods of relatively rapid economic growth (expansions or booms), and
periods of relative stagnation or decline (contractions or recessions). Used in the indefinite sense,
a business cycle is a period of time containing a single boom and contraction in sequence.

Business cycles are usually measured by considering the growth rate of real gross domestic
product. Despite being termed cycles, these fluctuations in economic activity can prove
unpredictable. A boom-and-bust cycle is one in which the expansions are rapid and the
contractions are steep and severe.

The business cycle is the fluctuation in economic activity that an economy experiences over a
period of time. A business cycle is basically defined in terms of periods of expansion or
recession. During expansions, the economy is growing in real terms (i.e. excluding inflation), as
evidenced by increases in indicators like employment, industrial production, sales and personal
incomes. During recessions, the economy is contracting, as measured by decreases in the above
indicators. Expansion is measured from the trough (or bottom) of the previous business cycle to
the peak of the current cycle, while recession is measured from the peak to the trough. In the
United States, the National Bureau of Economic Research (NBER) determines the official dates
for business cycles.

The business cycle can be effectively used to position one’s investment portfolio. For instance,
during the early expansion phase, cyclical stocks in sectors such as commodities and technology
tend to outperform. In the recession period, the defensive groups like health care, consumer
staples and utilities outperform because of their stable cash flows and dividend yields.

The different component of a business cycle:

A business cycle refers to the periodic expansion and contraction a company experiences. While
the concept often is used in relation to the larger economy, its phases have applications to each
particular business or industry. As generally defined, the business cycle has four components -
contraction, recession, expansion and peak. It takes years for the domestic economy to cycle
through all four components, but these components can occur on an annual basis for seasonal
businesses.
362 Business Statistics–I
1. Expansion: In an expansion, the business is on the rise and consumer confidence
grows. Companies take the opportunity to expand, incomes generally rise and spending
follows suit. Although it may take time for consumers to fully recover the former
spending habits that they had to curtail in dark economic times, they are more willing to
make major purchases. A business selling appliances, for example, may find its sales
increase as customers take advantage of the good times to replace their old refrigerators.

2. Peak: Peak periods are those where the economy is maximizing its growth and a
business is booming. In the larger economy during these periods, consumer confidence
peaks, wages and spending rise, and increased profits free up money for business
investment and expansion. A business selling holiday ornaments, for example, could
expect to see their business peak in December each year, expanding their wares and
maximizing their profits to take advantage of seasonal shoppers.

3. Contraction: In an economic downturn, businesses stop growing. The inflationary

tendencies of the peak period have a dragging effect on sales, and businesses may find
themselves with excess capacity both in terms of inventory and in their workforce. In
some industries, this follows predictable patterns based on sales. An auto dealer, for
example, can expect that the customers he sold a car to today won’t buy another new
vehicle tomorrow as well, so a period of peak sales restricts the potential customer base
for the following months.

4. Trough or Recession: A trough witnesses an economy or a business being reduced

for an extended period. In a recession, unemployment tends to rise and production
decline. Because of the jolt to economic confidence, consumers spend less. In a cyclical
business, an owner may choose to wait for better times and minimize expenses as best he
can. A store that sells costumes might not close in April if its owner is confident it can
make it to Halloween in October, but it likely will cut back on staff and perhaps reduce
hours.

Question 5 2008, 2009

Why time series considered being an effective tool of forecasting?
Answer:
Time series considered being an effective tool of forecasting:
Time series forecasting can be an effective tool for businesses forecast sales, revenue, production
requirements and more. Time series analysis is a branch of the field of econometrics. Time series
analysis proceeds from the premise that much can be deduced about a particular variable on the
basis of the past behavior of that variable. As is generally true in econometrics, a key objective of
time series analysis is prediction of future values of the variable of interest. In the case of time
series analysis, however, such prediction often is based on some form of extrapolation of the past
behavior of the variable.

The distinguishing characteristic of a time series of a variable is that observations are ordered
along the dimension of time. Thus one might have monthly sales data for a business from January
1991 to May 1999. In this case, the analyst has 101 observations ([8 × 12] + 5) on the firm's sales
 Chapter 7: Time Series Analysis 363
ordered from the beginning to the end of the observation period. A graph of this data might reveal
that the firm's sales have trended upward over time. Other characteristics of the series might
reflect periodic bursts and lulls in sales, as might be the case if the firm's sales picked up
particularly in holiday seasons or, say, over the summer months. In addition, the firm's sales
might be related to general business conditions (i.e., the business cycle). Finally, some part of
movement in the series will simply appear to be random, as the firm's sales are influenced by a
variety of external factors that cannot easily be accounted for. The important point to note in this
discussion is that some movement in a time series is systematic and some movement is random.
The systematic factors in our hypothetical firm's sales are the upward trend, the dependency on
business conditions, and the seasonal behavior of sales. More formally, a time series can be
thought of as having a trend component, a cyclic component, a seasonal component, and a
random component.

A variety of techniques of varying levels of sophistication have developed over the years by
which to conduct time series analysis. The simplest and least costly to apply techniques are
deterministic. That is, these techniques do not attempt to account for the random (or stochastic)
nature of a time series at all. Such models fall under the heading of extrapolation models. Two of
the most commonly used extrapolation models are the linear trend model and the moving average
model.

A second class of deterministic time series model is the moving average model. The simplest type
of moving average model states the dependent variable as an average of past values of itself. So,
for example, we might expect sales at a business to equal average sales at the business over the
last four quarters or over the last 12 months. A more sophisticated approach would give heavier
weight in the averaging of past values of the dependent variable to more recent occurrences. A
model that accomplishes this task is the exponentially weighted moving average model. The
reader should note that moving average models are mechanical and non-statistical. As a result, it
is not possible to determine the degree of confidence one could have in the forecasting ability of
the model as would be the case with a statistical model (even one as simple as the linear trend
model). The benefit of using a moving average model, however, is the ease with which it may be
applied.

More sophisticated, statistical models of time series can be attributed to the seminal work of G. E.
P. Box and G. M. Jenkins, who developed the autoregressive integrated moving-average
(ARIMA) technique. This technique incorporates the random element of time series in the
estimation process. Box-Jenkins methodology relies on four distinct steps—identification of a
suitable model for the series at hand, estimation of the model, diagnostic checking and re-
estimation of the model if necessary, and forecasting future values of the series. Though ARIMA
modeling constitutes an important step forward in time series analysis, it is worth noting that such
models are limited in the sense that forecasts are obtained only on the basis of past behavior of
the series in question and lagged random disturbances in that series.

Work in time series analysis in the 1980s and 1990s concentrated on development of time series
models that merge the causal framework of econometrics with the univariate approach of ARIMA
modeling. This work led to a variety of important developments such as transfer function
modeling, vector auto-regression models, unit root tests, error correction models, and structural
time series models. Though application of these techniques can be rather complicated, their
364 Business Statistics–I
adoption has led to significant improvements in understanding of time series processes and in
forecasting ability. It is fair to say that the biggest advancements in the field of econometrics in
recent years have occurred in the area of time series analysis.

Question 6 2004
State the elements of trend analysis.
Answer:
The elements of trend analysis:
In statistics, trend analysis often refers to techniques for extracting an underlying pattern of
behavior in a time series which would otherwise be partly or nearly completely hidden by noise.
A simple description of these techniques is trend estimation, which can be undertaken within a
formal regression analysis.The factors that are responsible to bring about changes in a time series,
also called the components of time series, are as follows:
1. Secular Trend (or General Trend)
2. Seasonal Movements
3. Cyclical Movements
4. Irregular Fluctuations

Secular Trend:
The secular trend is the main component of a time series which results from long term effect of
socio-economic and political factors. This trend may show the growth or decline in a time series
over a long period. This is the type of tendency which continues to persist for a very long period.
Prices, export and imports data, for example, reflect obviously increasing tendencies over time.

Seasonal Trend:
These are short term movements occurring in a data due to seasonal factors. The short term is
generally considered as a period in which changes occur in a time series with variations in
weather or festivities. For example, it is commonly observed that the consumption of ice-cream
during summer us generally high and hence sales of an ice-cream dealer would be higher in some
months of the year while relatively lower during winter months. Employment, output, export etc.
are subjected to change due to variation in weather. Similarly sales of garments, umbrella,
greeting cards and fire-work are subjected to large variation during festivals like Valentine’s Day,
Eid, Christmas, New Year etc. These types of variation in a time series are isolated only when the
series is provided biannually, quarterly or monthly.

Cyclic Movements:
These are long term oscillation occurring in a time series. These oscillations are mostly observed
in economics data and the periods of such oscillations are generally extended from five to twelve
years or more. These oscillations are associated to the well known business cycles. These cyclic
movements can be studied provided a long series of measurements, free from irregular
fluctuations is available.

Irregular Fluctuations:
These are sudden changes occurring in a time series which are unlikely to be repeated, it is that
component of a time series which cannot be explained by trend, seasonal or cyclic movements. It
 Chapter 7: Time Series Analysis 365
is because of this fact these variations some-times called residual or random component. These
variations though accidental in nature, can cause a continual change in the trend, seasonal and
cyclical oscillations during the forthcoming period. Floods, fires, earthquakes, revolutions,
epidemics and strikes etc, are the root cause of such irregularities.

Question 7 2007
Discuss the seasonal variation in time series analysis with example.
Answer:
The seasonal variation in time series analysis:
In statistics, time series data is data collected at regular intervals. When there are patterns that
repeat over known, fixed periods of time within the data set, such patterns are known as
seasonality, seasonal variation, periodic variation, or periodic fluctuations. This variation can
be either regular or semi-regular.

Seasonality may be caused by various factors, such as weather, vacation, and holidays and
usually consists of periodic, repetitive, and generally regular and predictable patterns in the levels
of a time series. Seasonality can repeat on a weekly, monthly or quarterly basis, these periods of
time are structured and occur in a length of time less than a year. Seasonal fluctuations in a time
series can be contrasted with cyclical patterns. The latter occurs when the data exhibits rises and
falls that are not of a fixed period. These fluctuations are usually due to economic conditions and
are often related to the "business cycle." The fixed period of time usually extends beyond a single
year and the fluctuations are usually of at least two year and do not repeat over fixed periods of
time.

Organizations facing seasonal variations, such as ice-cream vendors, are often interested in
knowing their performance relative to the normal seasonal variation. Seasonal variations in the
labor market can be attributed to the entrance of school leavers into the job market; as they aim to
contribute to the workforce during their vacations, or upon the completion of their schooling.
These regular changes are of less interest to those who study employment data than the variations
that occur due to the underlying state of the economy. Where their focus is on how
unemployment in the workforce has changed, despite the impact of the regular seasonal
variations.

It is necessary for organizations to identify and measure seasonal variations within their market to
help them plan for the future. This can prepare them for the temporary increases or decreases in
labor requirements and inventory as demand for their product or service fluctuates over certain
periods. This may require training, periodic maintenance, and so forth that can be organized in
advance. Apart from these considerations, the organizations need to know if variation they have
experienced have been more or less than the expected amount, beyond what the usual seasonal
variations account for.

A seasonal pattern exists when a series is influenced by seasonal factors (e.g., the quarter of the
year, the month, or day of the week). Seasonality is always of a fixed and known period. Hence,
seasonal time series are sometimes called periodic time series. The following three examples
shows different types of seasonal and cyclic patterns.
366 Business Statistics–I

The top plot shows the famous Canadian lynx data — the number of lynx trapped each year in the
McKenzie river district of northwest Canada (1821-1934). These show clear aperiodic population
cycles of approximately 10 years. The cycles are not of fixed length — some last 8 or 9 years and
others last longer than 10 years.

The middle plot shows the monthly sales of new one-family houses sold in the USA (1973-1995).
There is strong seasonality within each year, as well as some strong cyclic behaviour with period
about 6 – 10 years.

The bottom plot shows half-hourly electricity demand in England and Wales from Monday 5 June
2000 to Sunday 27 August 2000. Here there are two types of seasonality — a daily pattern and a
weekly pattern. If we collected data over a few years, we would also see there is an annual
pattern. If we collected data over a few decades, we may even see a longer cyclic pattern.
 Chapter 7: Time Series Analysis 367
Question 8
How do you calculate trend free data?
Answer:
How to calculate trend free data:
Trend estimation is a statistical technique to aid interpretation of data. When a series of
measurements of a process are treated as a time series, trend estimation can be used to make and
justify statements about tendencies in the data, by relating the measurements to the times at which
they occurred. This model can then be used to describe the behavior of the observed data.

In particular, it may be useful to determine if measurements exhibit an increasing or decreasing

trend which is statistically distinguished from random behavior. Some examples are determining
the trend of the daily average temperatures at a given location from winter to summer, and
determining the trend in a global temperature series over the last 100 years. In the latter case,
issues of homogeneity are important (for example, about whether the series is equally reliable
throughout its length).

Given a time series of (say) temperatures, the trend is the rate at which temperature changes over
a time period. The trend may be linear or non-linear. However, generally, it is synonymous with
the linear slope of the line fit to the time series. Simple linear regression is most commonly used
to estimate the linear trend (slope) and statistical significance (via a Student-t test). The null
hypothesis is no trend (ie, an unchanging climate).

The non-parametric (i.e., distribution free) Mann-Kendall (M-K) test can also used to assess
monotonic trend (linear or non-linear) significance. It is much less sensitive to outliers and
skewed distributions. (Note: if the distribution of the deviations from the trend line is
approximately normally distributed, the M-K will return essentially the same result as simple
linear regression.)

There are numerous caveats that should be kept in mind when analyzing trend. Some of these
include: (1) Long term, observationally based estimates are subject to differing sampling
networks. Coarser sampling is likely to result in larger uncertainties. Variables which have a large
spatial autocorrelation (e.g., temperature, sea level pressure) may have smaller sampling errors
than (say) precipitation which generally has lower spatial correlation; (2) The climate system
within which the observations are made is not stationary; (3) Station, ship and satellite
observations are subject to assorted errors. These could be random, systematic and external such
as changing instruments, observation times or observational environments. Much work has been
done on creating time series that takes into account these factors; (4) While reanalysis projects
provide unchanging data assimilation and model frameworks, the observational mix changes over
time. That may introduce discontinuities in the time series that may cause a trend to be estimated
significant when in fact it is an artifact of the discontinuities; (5) Even a long series of random
numbers may have segments with short term trends. For example, the well known surface
temperature record from the Climate Research Unit which spans 1850-present, shows an
undeniable long-term warming trend. However, there are short term negative trends of 10-15
years embedded within this series. Also, the rate of warming changes depending on the starting
date used in that time series; (6) As noted above, a series on N observations does not necessarily
368 Business Statistics–I
mean these observations are independent. Often, there is some temporal correlation. This should
be taken into account for example when computing the degrees of freedom of the t-test.

Question 9
Explain the criteria of a good forecasting method.
Answer:
The criteria of a good forecasting method:
It is course difficult to state which of the methods is best. The suitability of the method depends
of nature of manufactured product, available time, wealth and energy, necessary amount of
accuracy etc. of an enterprise. However, in general, a good forecasting method possesses the
qualifications as below:

(1) Accuracy: Various important plants are prepared on the basis of forecasts. In case of wrong
forecasting, the business may be in trouble and suffer heavy losses. Hence it is necessary to have
such forecasting system which amounts to maximum accuracy.

(2) Simplicity: Forecasting method should be as simple as possible. If it is difficult or technical

then the person, who is engaged in forecasting job, will not do his job properly and there will be
chances always for mistake. Some information may also require being collected from outsiders. If
the method is complex or difficult then they may not be able to reply reasonably and accurately.

(3) Availability: The objects and scope of forecasting should be as such as the relevant
information are collected immediately with reasonable accuracy. Immediate availability of data is
a vital requirement in forecasting method. The technique should yield quick and meaningful
result. Delay in result will adversely affect the managerial decision.

(4) Stability: The data of forecasting must be such wherein the future changes are expected to be
minimum and are reliable for planning.

(5) Economy: Costs must be weighed against the importance of the forecast to the operations of
the business. Cost is a primary consideration which should be weighed against the importance of
the forecasts to the business operation. There is no point in adopting very high levels of accuracy
at great expense, if the forecast has little importance in the business.

(6) Utility: The forecasting techniques must be easily understandable and reliable to the
management.

(7) Plausibility: The management should have good understanding of the technique chose and
they should have confidence in the technique adopted. Then only proper interpretation will be
made. According to Joel Dean, the plausibility requirements can often increase the accuracy of
the result. Accuracy entails the executives to accept the results. Experienced executives will have
a market feel and they can contribute effectively.

Question 10
Why the concept time series is crucial?
Answer:
 Chapter 7: Time Series Analysis 369
Why the concept time series is crucial:
Financial planning and budgeting, supply chain management, retail replenishment and planning –
these are just a few of the critical business functions that benefit greatly from data mining,
forecasting and time series analysis, three established disciplines of analytics. These three
disciplines are used in many industries for many different functions, but now leading
organizations are recognizing the impact of combining them to create a more powerful brand of
predictive analytics. Before describing the wide array of business advantages that can be gained
by integrating data mining, time series analysis and forecasting, let’s look at some definitions.

Data mining is a collection of analytical techniques that enable automated search for patterns and
relations within a large portfolio of characteristics to find relationships that can be used for
improved decision-making. For example, based on the characteristics of a customer – such as age,
demographics, product portfolio, contact history and others – data mining can be used to identify
a set of customers most likely to respond to a specific marketing offer.

Time series analysis and forecasting are used to detect temporal patterns from historical time-
dependent data and project the detected patterns (such as trend or seasonality) into the future. For
example, time series analysis plays a crucial role in forecasting electricity demand for the utilities
industry. Electricity demand follows long-term trends, such as population growth and industrial
activity, as well as shorter seasonal cycles for time of year (summer versus winter), day of the
week (business days versus weekends) and time of day (peak demand to drive air conditioning on
hot summer afternoons, and low demand in the middle of the night). Good software detects and
reconciles the various temporal patterns and provides both the long-range and near-term forecasts
that utility companies require.
370 Business Statistics–I
Symbols
SYMBOLS MEANING

X Sample Mean (X Bar)

a Linear Equation Constant

b Linear Equation Coefficient

c Quadratic Equation Coefficient

X Linear Observation

X2 Quadratic Observation

log Common Logarithms

----- Trend Line

_______ Actual Line

Break Line
 Chapter 7: Time Series Analysis 371
Formulas
(1) For semi-average method:
First Half Years Total
Semi-average =
No. of First Half Years

(2) For moving average method:

abc
3 Yearly Moving Average =
3
abcd
4 Yearly Moving Average =
4
(3) For least square method:
Y XY
Yc = a + bX, where a = , b=
N X 2
(4) For parabolic method,
Yc = a + bX + cX2,
XY N(X 2 Y)  (X 2 )(Y) Y  cX 2
where b = , c = , a = .
X 2 N(X 4 )  (X 2 ) 2 N

(5) For exponential method:

Y = abx
or log Y = log a + x log b,
 log Y X log Y
where log a = , log a = .
N X 2
372 Business Statistics–I

Problems & Solutions

Problem 1 BBA (Professional) 2004; BBA (Professional) 2005

Given below are the figures of production (in million tones) of a cement factory:
Year 1998 1999 2000 2001 2002 2003 2004
Production 77 88 94 85 91 98 90
(i) Fit a straight-line trend by the least squares method.
(ii) Estimate the trend value for the year 2010.

Solution:
(i) Fitting Straight Line Trend by the Method of Least Squares
Production Trend Values
Year Y X XY X 2 Yc = 89 + 2X
1998 77 -3 - 231 9 83
1999 88 -2 - 176 4 85
2000 94 -1 - 94 1 87
2001 85 0 0 0 89
2002 91 +1 + 91 1 91
2003 98 +2 + 196 4 93
2004 90 +3 + 270 9 95
N = 7 ∑Y = 623 ∑X = 0 ∑XY = 56 ∑ X = 28 ∑Yc = 623
2

 Y 623  XY 56
Where, a    89 ; b   2
N 7  X 2 28
The equation of straight line trend is Yc = a + bX
 Yc = 89 + 2X (Ans).
(ii) For the year 2010, X = 9.
 Y2010 = 89 + 2X = 89 + 2(9) = 107 (Ans).

Problem 2 BBA (Honours) 2005

Figures of production (in 000 quintals) of a sugar factory is given below:
Year 2000 2001 2002 2003 2004 2005 2006
Production (in 000 quintals) 80 90 92 83 94 99 92
(i) Fit a straight line to these figures by the method of least squares.
(ii) Show the given data and the trend line on the graph paper.
(iii)Estimate the production for 2008.
 Chapter 7: Time Series Analysis 373
Solution:
(i) Fitting Straight Line Trend by the Method of Least Squares
Production Trend Values
Year Y X XY X2 Y c = 88.43 + 5.04X
2000 80 –3 – 240 9 73.31
2001 90 –2 – 180 4 78.35
2002 92 –1 – 92 1 83.39
2003 83 0 0 0 88.43
2004 94 +1 + 94 1 93.47
2005 99 +2 + 198 4 98.51
2006 92 +3 + 276 9 103.54
N = 7 ∑Y = 630 ∑X = 0 ∑XY = 56 ∑ X2 = 28 ∑Yc = 619

 Y 630  XY 56
Where, a    90 ; b   2
N 7  X 2 28

The equation of straight line trend is Yc = a + bX

 Yc = 90 + 2X (Ans).

(ii) Graph of trend line:

Actual Line
Trend Line

100
Production

95

90

85

80
2001
2000

2002

2003

2004

2005

2006

(iii) For the year 2008, X = 5.

 Y2008 = 90 + 2X = 90 + 2(5) = 100 (Ans)

Problem 3 BBA (Professional) 2006; 2009; 2011

374 Business Statistics–I
Calculate the trend values by the method of least square and estimate the profit of 2002:
Year 1994 1995 1996 1997 1998 1999 2000
Profit (lakh Tk) 60 72 75 65 80 85 95

Solution: (i) Fitting Straight Line Trend by the Method of Least Squares
Production Trend Values
Year Y X XY X 2 Y c = 76 + 4.86X

1994 60 -3 - 180 9 61.42

1995 72 -2 - 144 4 66.28
1996 75 -1 - 75 1 71.14
1997 65 0 0 0 76
1998 80 +1 + 80 1 80.86
1999 85 +2 + 170 4 85.72
2000 95 +3 + 285 9 90.58
N=7 ∑Y = 532 ∑X = 0 ∑XY = 136 ∑ X2 = 28 ∑Yc = 532
 Y 532  XY 136
Where, a    76 ; b    4.86
N 7  X2 28
The equation of straight line trend is Yc = a + bX
 Yc = 76 + 4.86X (Ans).
(ii) For the year 2002, X = 5.
 Y2002 = 76 + 4.86X = 76 + 4.86(5) = 100.3 (Ans).

Problem 4 BBA (Professional) 2006

Below are given the figures of production (in thousand quintals) of a sugar factory:
Year 1990 1991 1992 1993 1994 1995 1996
Production 80 91 85 110 98 120 116
Fit a straight line trend to these figures by the method of least squares. Show the trend
line on the graph.
Solution: (i) Fitting Straight Line Trend by the Method of Least Squares
Production Trend Values
Year Y X XY X2 Yc = 100 + 6.39X
1990 80 -3 - 240 9 80.83
1991 91 -2 - 182 4 87.22
1992 85 -1 - 85 1 93.61
1993 110 0 0 0 100
1994 98 +1 + 98 1 106.39
1995 120 +2 + 240 4 112.78
1996 116 +3 + 348 9 119.17
N=7 ∑Y = 700 ∑X = 0 ∑XY = 179 ∑ X2 = 28 ∑Yc = 700
 Y 700  XY 179
Where, a    100 ; b    6.39
N 7  X2 28
The equation of straight line trend is Yc = a + bX
 Chapter 7: Time Series Analysis 375
 Yc = 100 + 6.39X (Ans).
Actual Line
Trend Line

120
Production

110

100

90

80
1990

1991

1992

1993

1994

1995

Years 1996

Problem 5 BBA (Honours) 2006

Fit a trend line by the method of least squares to the following data:
Year 2000 2001 2002 2003 2004 2005 2006 2007
Sales (in Tk lac) 38 40 65 72 69 60 87 95
Plot the given data on a graph paper showing also the trend line. Estimate the sales for 2008.

Solution: Fitting Straight Line by the Method of Least Squares

Sales
Year (in lac) X XY X2 Trend Values
Y Yc = 93 + 2.48X
2000 38 -7 - 266 49 Yc = 65.75 + 3.67(-7) = 40.06
2001 40 -5 - 200 25 Yc = 65.75 + 3.67(-5) = 47.40
2002 65 -3 - 195 9 Yc = 65.75 + 3.67(-3) = 54.74
2003 72 -1 - 72 1 Yc = 65.75 + 3.67(-1) = 62.08
2004 69 +1 + 69 1 Yc = 65.75 + 3.67(+1) = 69.42
2005 60 +3 + 180 9 Yc = 65.75 + 3.67(+3) = 76.76
2006 87 +5 + 435 25 Yc = 65.75 + 3.67(+5) = 84.10
2007 95 +7 + 665 49 Yc = 65.75 + 3.67(+7) = 91.44
N = 8 ∑Y = 526 ∑X = 0 ∑XY = 616 ∑ X2 = 168 ∑Yc = 526
(i) The equation of straight line trend is Yc = a + bX.
 Y 526  XY 616
Where, a    65.75 ; b    3.67
N 8  X 2 168
 Yc = a + bX or Yc = 65.75 + 3.67X [Ans]
[NB: The graph must be drawn by the students on the graph paper.]
(ii) For 2008, X = + 9,
376 Business Statistics–I
 Y2008 = 65.75 + 3.67(9) = 98.78 [Ans.]

Problem 6 BBA (Professional) 2007

Given the following data:
Year Employees (in thousand)
2000 45.6
2001 42.2
2002 41.1
2003 39.3
2004 34.0
2005 30.0
(i) Determine the least square trend equation.
(ii) Estimate the number of employees in 2010.

Solution:
(i) Fitting Straight Line Trend by the Method of Least Squares
Production Trend Values
c = 38.7 – 1.49X
Year Y X XY X 2 Y
2000 45.6 –5 – 228 25 46.15
2001 42.2 –3 – 126.6 9 43.17
2002 41.1 –1 – 41.1 1 40.19
2003 39.3 +1 + 39.3 1 37.21
2004 34.0 +3 + 102 9 34.23
2005 30.0 +5 + 150 25 31.25
N = 6 ∑Y = 232.2 ∑X = 0 ∑XY = –104.4 ∑ X2 = 70 ∑Yc = 232.2

 Y 232 .2  XY 104 .4
Where, a    38.7 ; b    1.49
N 6  X2 70

The equation of straight line trend is Yc = a + bX

 Yc = 38.7 – 1.49X (Ans).

(ii) For the year 2010, X = 15, Y2010 = 38.7 – 1.49X = 38.7 – 1.49(15) = 16.35 (Ans).

Problem 7 BBA (Honours) 2007; BBA (Honours) 2010

Calculate 4-yearly moving average from the following data and show its trend.
Year 1996 1997 1998 1999 2000 2001 2002 2003
Price (Tk) 153 170 120 200 240 280 300 120

Solution:
 Chapter 7: Time Series Analysis 377
Calculation of 4 – Yearly Moving Averages
Years Price 4-Yearly 4-Yearly 4-Yearly
(Tk) Moving Moving Centered
Y Totals Averages Averages
1996 153 – –

1997 170 – – –
643 160.75
1998 120 171.63
730 182.50
1999 200 196.25
840 210
2000 240 232.50
1020 255
2001 280 245
940 235
2002 300 – – –

2003 120 – –

Problem 8 BBA (Professional) 2008

Calculate the trend values by the method of least squares from the data given below and
estimate the sales for the year 2005:
Year 1996 1997 1998 1999 2000
Sales of TV sets (in 000) 12 18 20 23 27
Solution: (i) Fitting Straight Line Trend by the Method of Least Squares
Production Trend Values
Year Y X XY X 2 Yc = 20 + 3.5X
1996 12 –2 – 24 4 20 + 3.5(– 2) = 13
1997 18 –1 – 18 1 20 + 3.5(– 2) = 16.5
1998 20 0 0 0 20 + 3.5(– 2) = 20
1999 23 +1 + 23 1 20 + 3.5(– 2) = 23.5
2000 27 +2 + 54 4 20 + 3.5(– 2) = 27
N = 5 ∑Y = 100 ∑X = 0 ∑XY = 35 ∑ X = 10 2
∑Yc = 100
 Y 100  XY 35
Where, a    20 ; b    3.5
N 5  X 2 10
The equation of straight line trend is Yc = a + bX = 20 + 3.5X (Ans).

(ii) For the year 2005, X = 7, then Y2005 = 20 + 3.5X = 20 + 3.5(7) = 44.5 (Ans).
Problem 9 BBA (Honours) 2008
378 Business Statistics–I
Fit a trend line by the method of least squares to the following data:
Year 1999 2000 2001 2002 2003 2004 2005
Production 78 88 94 85 91 98 90
(i) Fit a straight line by the least square method and calculate the trend values.
(ii) Which components of time series are left over after eliminating the trend?
(iii) What is the monthly production of sugar?
Solution:
Fitting Straight Line by the Method of Least Squares
Sales Trend Values
Year (in lac) X XY X 2 Yc = 89.14 + 1.89X
Y
1999 78 -3 - 234 9 Yc = 89.14 + 1.89(-3) = 83.47
2000 88 -2 - 176 4 Yc = 89.14 + 1.89(-2) = 85.36
2001 94 -1 - 94 1 Yc = 89.14 + 1.89(-1) = 87.25
2002 85 0 0 0 Yc = 89.14 + 1.89(0) = 89.14
2003 91 +1 + 91 1 Yc = 89.14 + 1.89(+1) = 91.03
2004 98 +2 + 196 4 Yc = 89.14 + 1.89(+2) = 92.92
2005 90 +3 + 270 9 Yc = 89.14 + 1.89(+3) = 94.81
N = 7 ∑Y = 624 ∑X = 0 ∑XY = 53 ∑ X2 = 28 ∑Yc = 624

(i) The equation of straight line trend is Yc = a + bX.

 Y 624  XY 53
Where, a    89.14 ; b    1.89
N 7  X 2 28
 Yc = a + bX or Yc = 89.14 + 1.89X [Ans]
(ii) After eliminating trend (T), we are left over
T  S C  I
 S  C  I , which means we are left over seasonal (S), cyclical (C) and
T
irregular (I) variations.
(iii) We know, yearly production = b
So, the monthly production = b/12 = 1.89/12 = 0.1575 [Ans.]

Problem 10 BBA (Professional) 2009; BBA (Professional) 2011

The following are annual profits (in thousands of taka) in a business firm:
Year 2001 2002 2003 2004 2005 2006 2007
Profits (in ’000 Tk) 60 72 75 65 80 85 95
(i) Use the method of least squares to fit a straight line to the above data;
(ii) Plot the above figures and draw the line;
(iii) Also make an estimate of the profits for the year 2010.
Solution: Same to Year Q. 2006– Q9(b). (Please see that solution).
(i)
 Chapter 7: Time Series Analysis 379
95 Actual Line
Trend Line
90

Production (million tonnes)

85

80

75

70

65

60
2001

2002

2003

2004

2005

2006

2007
Years

Problem 11 BBA (Honours) 2009

Using the least square method, draw a line from the following information:
Year 1992 1993 1994 1995 1996 1997 1998 1999 2000
Production 102.3 101.9 105.8 112.0 114.8 118.7 124.5 129.9 134.8
Solution:
Fitting Straight Line Trend by the Method of Least Squares
Year Production
(thus. tons.) Trend Values
2 Y
Y X XY X c = 116.1 + 4.3X
1992 102.3 -4 - 409.2 16 98.9
1993 101.9 -3 - 305.7 9 103.2
1994 105.8 -2 - 211.6 4 107.5
1995 112.0 -1 - 112.0 1 111.8
1996 114.8 0 0 0 116.1
1997 118.7 +1 + 118.7 1 120.4
1998 124.5 +2 + 249.0 4 124.7
1999 129.9 +3 + 389.7 9 129
2000 134.8 +4 + 539.2 16 133.3
N=9 ∑Y = 1044.7 ∑X = 0 ∑XY =258.1 ∑ X2 = 60 ∑Yc = 1044.7
The equation of straight line trend is Yc = a + bX.
 Y 1044.7  XY 258.1
Where, a    116.1 ; b    4.3
N 9  X2 60

 Yc = a + bX or Yc = 116.1 + 4.3X (Ans)

380 Business Statistics–I
140 Actual Line

Production (million tonnes)

Trend Line
130

120

110

100

90
1992

1993

1994

1995

1996

1997

1998

1999

2000
Years

fig: Least Square Trend Line

Problem 12 BBA (Professional) 2010

You are given below the figures of annual production (in thousand tones) of a sugar mill:
Year 2003 2004 2005 2006 2007 2008 2009
Production 70 75 90 91 95 98 100
(i) Use the method of least squares to fit a straight line to the above data;
(ii) Estimate likely production for 2012.
(iii) Plot the above figures and draw the line.

Solution:
(i) Fitting Straight Line Trend by the Method of Least Squares
Production Trend Values
Year Y X XY X 2 Y c = 88.43 + 5.04X
2003 70 –3 – 210 9 73.31
2004 75 –2 – 150 4 78.35
2005 90 –1 – 90 1 83.39
2006 91 0 0 0 88.43
2007 95 +1 + 95 1 93.47
2008 98 +2 + 196 4 98.51
2009 100 +3 + 300 9 103.54
N = 7 ∑Y = 619 ∑X = 0 ∑XY = 141 ∑ X2 = 28 ∑Yc = 619
 Y 619  XY 141
  88 .43 ; b 
Where, a    5.04
N 7  X2 28
The equation of straight line trend is Yc = a + bX = 88.43 + 5.04X (Ans).

(ii) For the year 2012, X = 6, then Y2012 = 88.43 + 5.04X = 88.43 + 5.04(6) = 118.67 (Ans)
 Chapter 7: Time Series Analysis 381
(iii)
Actual Line
Trend Line

120
Production

110

100

90

80
2003

2004

2005

2006

2007

2008

Years 2009

Problem 13 BBA (Honours) 2011

From the following data, calculate trend values using 3-yearly moving average:
Year 1981 1982 1983 1984 1985 1986 1987
Production 412 438 446 454 470 483 490
Solution:
Calculation of 3-Yealy Moving Averages
Years Price 3-Yearly 3-Yearly
(Tk) Moving Moving
Y Totals Averages
1981 412 – –
1982 438 1296 432
1983 446 1338 446
1984 454 1370 456.67
1985 470 1407 469
1986 483 1443 481
1987 490 – –
Problem 14 BBA (Honours) 2011
Find out seasonal index by ratio-to-trend method from the data given below:
Year 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
1987 30 40 36 34
1988 34 52 50 44
1989 40 58 54 48
1990 54 76 62 62
1991 80 92 65 82
382 Business Statistics–I
Solution:
Calculation of the Seasonal Indices by Ratio to Moving Average Method
Year Quarter Given 4-figure 2-figure 4-figure Given figure
Figures moving moving moving as % of moving
totals totals average average
(1) (2) (3) (4) = +(3) (5) = +(4) (6) = (5)  8 (7) = (3)  (6)
1987 I 30
II 40
170
III 36 314 39.25 91.72
144
IV 34 300 37.5 90.67
156
1988 I 34 326 40.75 83.44
170
II 52 350 43.75 118.86
180
III 50 366 45.75 109.29
186
IV 44 378 47.25 93.12
192
1989 I 40 388 48.5 82.47
196
II 58 396 49.5 117.17
200
III 54 414 51.75 104.35
214
IV 48 446 55.75 86.10
232
1990 I 54 472 59 91.53
240
II 76 494 61.75 123.08
254
III 62 534 66.75 92.88
280
IV 62 576 72 86.11
296
1991 I 80 595 74.375 107.56
299
II 92 618 77.25 119.09
319
III 65
IV 82
 Chapter 7: Time Series Analysis 383
Calculation of the Seasonal Indices
Year 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr.
1987 – – 91.72 90.67
1988 83.44 118.86 109.29 93.12
1989 82.47 117.17 104.35 86.10
1990 91.53 123.08 92.88 86.11
1991 107.56 119.09 – –
Total 365 478.2 398.24 356
Average (X) 91.25 119.55 99.56 89

91 .25  119 .55  99 .56  89

Average of averages ( X ) =  99.84
4
Quartly Average (X)
We know, Seasonal Index (S.I.) = 100
Average of averages (X)
91 .25
S.I. of 1st Qtr. = 100  91 .40
99 .84
119 .55
S.I. of 2nd Qtr. = 100  119 .74
99 .84
99 .56
S.I. of 3rd Qtr. = 100  99 .72
99 .84
89
S.I. of 4th Qtr. = 100  89 .14
99 .84
S.I. = 400 (Proved)

Problem 15 BBA (Professional) 2012

The following are annual profits (in thousand Taka) in a tea stall:
Year 2006 2007 2008 2009 2010 2011 2012
Profit 80 90 92 83 94 99 92
(i) Use the method of least square to fit a straight line to the above data.
(ii) Estimate likely profit in 2015.
(iii) Plot the above figures and draw the line.
Solution:
(i) Fitting Straight Line Trend by the Method of Least Squares
Production Trend Values
Year Y X XY X 2 Y c = 88.43 + 5.04X
2006 80 –3 – 240 9 73.31
2007 90 –2 – 180 4 78.35
2008 92 –1 – 92 1 83.39
2009 83 0 0 0 88.43
384 Business Statistics–I
2010 94 +1 + 94 1 93.47
2011 99 +2 + 198 4 98.51
2012 92 +3 + 276 9 103.54
N=7 ∑Y = 630 ∑X = 0 ∑XY = 56 ∑ X = 28
2
∑Yc = 619

 Y 630  XY 56
Where, a    90 ; b   2
N 7  X 2 28

The equation of straight line trend is Yc = a + bX

 Yc = 90 + 2X (Ans).

(ii) Graph of trend line:

Actual Line
Trend Line

100
Production

95

90

85

80
2006

2007

2008

2009

2010

2011

2012

(iii) For the year 2015, X = 6.

 Y2008 = 90 + 2X = 90 + 2(6) = 102 (Ans)

Problem 16 BBA (Professional) 2013

Below are given the figures of production (in million tones) of a cement factory:
Year 2004 2006 2007 2008 2009 2010 2013
Production 77 88 94 85 91 98 90
(in m. tones)
(i) Fit a straight line trend by the least squares method and tabulate the trend
values.
(ii) Eliminate the trend. What components of the time series are thus left over?
(iii) What is monthly increase in the production of cement?
 Chapter 7: Time Series Analysis 385

Solution:
Fitting Straight Line by the Method of Least Squares
Sales Trend Values
Year (in lac) X XY X2 Yc = 89.14 + 1.89X
Y
1999 77 -3 - 234 9 Yc = 89.14 + 1.89(-3) = 83.47
2000 88 -2 - 176 4 Yc = 89.14 + 1.89(-2) = 85.36
2001 94 -1 - 94 1 Yc = 89.14 + 1.89(-1) = 87.25
2002 85 0 0 0 Yc = 89.14 + 1.89(0) = 89.14
2003 91 +1 + 91 1 Yc = 89.14 + 1.89(+1) = 91.03
2004 98 +2 + 196 4 Yc = 89.14 + 1.89(+2) = 92.92
2005 90 +3 + 270 9 Yc = 89.14 + 1.89(+3) = 94.81
N=7 ∑Y = 623 ∑X = 0 ∑XY = 53 ∑ X2 = 28 ∑Yc = 624

(i) The equation of straight line trend is Yc = a + bX.

 Y 623  XY 53
Where, a    89 ; b    1.89
N 7  X 2 28
 Yc = a + bX or Yc = 89 + 1.89X [Ans]
(ii) After eliminating trend (T), we are left over
T  S C  I
 S  C  I , which means we are left over seasonal (S), cyclical (C) and
T
irregular (I) variations.
(iii) We know, yearly production = b
So, the monthly production = b/12 = 1.89/12 = 0.1575 [Ans.]

Problem 17 BBA (Professional) 2014

No math question from this chapter (Time Series) in this year.
Solution: Not applicable.

Problem 18 BBA (Professional) 2015

Given the following information:
Year 2010 2011 2012 2013 2014 2015
Sales 10 12 15 16 18 19
(i) Fit a straight line trend to the above figures by the method of least squares and
also calculate the trend values.
(ii) Find the slope of the straight line trend.
(iii) Do the figures show a rising trend or a falling trend?
(iv) Draw the trend line.
386 Business Statistics–I
(v) Estimate the trend value for 2018.
Solution:
(i) Fitting Straight Line Trend by the Method of Least Squares
Sales Trend Values
Year Y X XY X2 Yc = 15 + 0.91X
2010 10 –5 – 50 25 10.45
2011 12 –3 – 36 9 12.27
2012 15 –1 – 15 1 14.09
2013 16 +1 + 16 1 15.91
2014 18 +3 + 54 9 17.73
2015 19 +5 + 95 25 19.55
N = 6 ∑Y = 90 ∑X = 0 ∑XY = 64 ∑ X2 = 70 ∑Yc = 90
Where, a   Y  90  15 ; b   XY 
64
 0.91
N 2
6 X 70
The equation of straight line trend is Yc = a + bX
 Yc = 15 + 0.91X (Ans).

(ii) The slope of the straight line trend is b = 0.91 (Ans).

(iii) The figures show a rising trend.

(iv) Graph of trend line:

20 Actual Line
Trend Line
18

16
Production

14

14

12

10
2010

2011

2012

2013

2014

2015

(v) For the year 2018, X = 11, Y2018 = 15 + 0.91X = 15 + 0.91(11) = 25.01 (Ans).
 Chapter 7: Time Series Analysis 387
Questions
1. What is time series analysis? State the role of time series analysis.
2. Describe the components of time series with examples.
3. What is meant by secular trend? Explain how is it measured?
4. How do you calculate trend free data?
5. Explain the criteria of a good forecasting method.
6. State the elements of trend analysis.
7. Why the concept time series is crucial?
8. Write down the uses of time series in business.
9. Indicate its importance in business and economics.
10. What is business cycle? Explain the different component of a business cycle with
example.
11. Briefly describe any one method of smoothing the time series data.
12. Discuss the seasonal variation in time series analysis with example.
13. Why is time series considered to be an effective tool of forecasting?
14. How time series analysis helps management to take decision?
15. How does analysis of time series helps in making business forecast? Describe the
seasonal variations and cyclical variations in a time series.
16. Write short notes:
(i) Business Forecasting;
(ii) Method of least square;
(iii) Trend;
(iv) Moving Average;
(v) Secular trend;
388 Business Statistics–I
Exercises
Type I: Moving Average Method
Exercise 1
The following series relate to the profits of commercial concern for 8 years.
Year Profits Year Profits
(Tk.) (Tk.)
2006 15420 2010 26120
2007 14420 2011 31950
2008 15520 2012 35670
2009 21020 2013 35670
Find out 3-yearly moving average the trend profits. Ignore decimals.
[Answers: 15120, 16987, 20887, 26363, 31143, 34327]

Exercise 2
Calculate the 5-yearly and 7-yearly moving average for the following data of a number of
commercial industrial failures in a country during 1998-2013. Ignore decimals.
Year No. of failures Year No. of failures
1998 23 2006 9
1999 26 2007 13
2000 28 2008 11
2001 32 2009 14
2002 20 2010 12
2003 12 2011 9
2004 12 2012 3
2005 10 2013 1
[Answers: 5-yearely = 26, 24, 21, 17, 13, 11, 11, 11, 12, 12, 10, 8; 7-yearely = 22, 20,
18, 15, 12, 12, 12, 11, 10, 9.]
Exercise 3
Work out the centered 4-yearly moving average for the following data:
Year No. of failures Year No. of failures
2002 1102 2008 1452
2003 1250 2009 1549
2004 1180 2010 1586
2005 1340 2011 1476
2006 1212 2012 1624
2007 1317 2013 1586
[Answers: 4-yearely = 1231.75, 1253.87, 1296.25, 1356.37, 1429.25, 1495.87, 1537.25,
1563.37.]
Type II: Semi Average Method
 Chapter 7: Time Series Analysis 389
Exercise 4
Fit a trend line to the following data by the method of semi-averages:
Year Sales (thousand Tk) Year Sales (thousand Tk)
2007 102 2011 108
2008 105 2012 116
2009 114 2013 112
2010 110
[Answers: The two semi-averages = 107 and 112.]
Exercise 5
The sales of a commodity (in tones) varied from January 2013 to December 20013 in the
following manner:
280 300 280 280 270 240
230 230 220 200 210 200
Fit a trend line by the method of semi-averages:
[Answers: The two semi-averages = 275 and 215.]
Exercise 6
Apply the method of semi-average for determining trend to the following data and
estimate the value for 2013:
Year Sales Year Seals
(Thousand unit) (Thousand units)
2007 20 2010 30
2008 24 2011 28
2009 22 2012 32
If the actual figure of sales for 2013 is 35000 units, how do you account for difference
between the figure you obtain and the actual figure given to you?
[Answers: The two semi-averages = 22 and 30.]
Type III: Seasonal Index Method
Exercise 7
Assuming that trend is absent, determine if there is any seasonality in the data given
below:
Year 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
2010 3.7 4.1 3.3 3.5
2011 3.7 3.9 3.6 3.6
2012 4.0 4.1 3.3 3.1
2013 3.3 4.4 4.0 4.0
[Answers: SI = 98.7%, 110.7%, 95.3%, 95.3%.]
Exercise 8
In order to find quarterly seasonal indices, first of all the quarter wholesale price for five
years (2009-2013) were reduced as percentage of their centered moving averages of four
390 Business Statistics–I
quarters. These percentages are set out in the following table. You are required to
calculate the quarterly seasonal indices.
Year I II III IV
2009 – – 127 134
2010 130 122 122 132
2011 120 120 118 128
2012 126 116 121 130
2013 127 118 – –
[Answers: SI = 101%, 95.6%, 98.4%, 105%.]

Type IV: Ratio-to-Moving Method

Exercise 9
Calculate seasonal indices by the ‘ratio-to-moving average method’ from the following data:
Year I Quarter II Quarter III Quarter IV Quarter
2011 68 62 61 63
2012 65 58 66 61
2013 68 63 63 67
[Answers: RMI = 105.30%, 95.21%, 100.97%, 98.52%.]

Type V: Least Square Method

Exercise 10
Figures of production (in m. tonnes) of a sugar factory is given below:
Year 2007 2008 2009 2010 2011 2012 2013
Production (in 000 quintals) 80 90 92 83 94 99 92
(i) Fit a straight line to these figures by the method of least squares.
(ii) Show the given data and the trend line on the graph paper.
(iii) Estimate the production for 2014.
[Answers: (i) Yc = 90 + 2X, (iii) Y2014 = 98]

Exercise 11
Apply the method of least squares to obtain the trend values from the following data:
Year Sales (in lakh tonnes) Year Sales (in lakh tonnes)
2009 100 2012 140
2010 120 2013 80
2011 110
Also predict the sales for the year 2015.
[Answers: (i) Yc = 110 – 2X, (ii) Y2015 = 114]
Exercise 12
Calculate the trend values by the method of least squares from the data given below and
estimate the sales for the year 2016.
 Chapter 7: Time Series Analysis 391
Year 2009 2010 2011 2012 2013
Sales of T.V. Sets (in lakh) 12 18 20 23 27

[Answers: (i) Yc = 20 + 3.5X, (ii) Y2016 = 37.5]

Exercise 13
Fit a straight line trend by the method of least squares to the following data and find the
trend values:
Year 2008 2009 2010 2011 2012 2013
Sales of airconditioners (in lakh) 10 13 16 21 24 30

[Answer: Yc = 17.029 + 3.943X]

Exercise 14
Fit a straight line trend to the following time series data:
Year 2009 2010 2011 2012 2013
Sales of sugar (in thousand kg) 80 90 92 83 94
Eliminate trend from the series. What components are left over?
[Answer: Yc = 87.8 + 2.1X]
Exercise 15
Below are given the figures of production (in million tonnes) of a cement factory:
Year 2004 2006 2007 2008 2009 2010 2013
Sales of sugar (in thousand kg) 77 88 94 85 91 98 90
(i) Fit a straight line trend by the least squares method and tabulate the trend values.
(ii) Eliminate the trend. What components of the time series are thus left over?
(iii)What is monthly increase in the production of cement?
[Answer: (i) Yc = 88.8 + 1.38X; (iii) 0.115]
Exercise 16
Given below are the figures of production of a sugar factory:
Year 2007 2008 2009 2010 2011 2012 2013
Sales of sugar (in thousand kg) 40 45 46 42 47 49 46
Fit a straight line trend by the method of least squares and estimate the value for 2017.
[Answer: (i) Yc = 45 + 0.964X; (ii) Y2017 = 51.748]
Exercise 17
Fit a straight line trend by the method of least squares to the data given below:
Year 2007 2008 2009 2010 2011 2012 2013
Sales (in tonnes) 9 11 13 12 14 15 17
Estimate the likely sales for the year 2014.
[Answer: (i) Yc = 13 + 1.179X; (ii) Y2014 = 20.074]
392 Business Statistics–I
Exercise 18
Fit a straight line trend by the method of least squares to fit the following data on sales
(Tk in lakh) for the period 2006-2013:
Year 2006 2007 2008 2009 2010 2011 2012 2013
Sales (Tk lakh) 76 80 130 144 138 120 174 190

(a) Calculate the trend values from 2006 to 2013.

(b) What will be predicted sales for 2008, assuming that the same rate of change
continues.

[Answer: (a) Yc = 131.5 + 7.333X; (ii) Y2008 = 179.165]

Exercise 19
Fit a straight line trend for the following data and find the trend values. Estimate the sales
for 2019.
Year 2007 2008 2009 2010 2011 2012 2013
Sales (Tk lakh) 33 35 60 67 68 82 90

[Answer: (i) Yc = 62.143 + 0.964X; (ii) Y2019 = 149.893]

Exercise 20
Fit a straight line trend by the method of least squares to the following data:
Year 2007 2008 2009 2010 2011 2012 2013
Production (in tonnes) 12 10 14 11 13 15 16
Calculate the trend values and estimate the likely production for the year 2020. Interpret
the value of a and b.

[Answer: (i) Yc = 13 + 0.75X; (ii) Y2020 = 20.5]

Exercise 21
The time series given below shows the number of tables sold by a small company since it
started:
Year 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Table sold 42 50 61 75 92 111 120 127 140 138
Find the linear equation that describes the trend in the number of tables sold. Also
estimate the sales of tables in 2015.
[Answer: (i) Yc = 95.6 + 5.994X; (ii) Y2015 = 174]