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FUNDAMENTAL ANALYSIS TOOLS

What Is a Time Series and How Is It Used

to Analyze Data?
By ADAM HAYES Updated June 12, 2022
Reviewed by GORDON SCOTT

Fact checked by AMANDA JACKSON

Investopedia / Crea Taylor

What Is a Time Series?

A time series is a sequence of data points that occur in successive order over
some period of time. This can be contrasted with cross-sectional data, which
captures a point in time.

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
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information being sought by the investor or analyst examining the activity.

KEY TAKEAWAYS
A time series is a data set that tracks a sample over time.
In particular, a time series allows one to see what factors influence
certain variables from period to period.
Time series analysis can be useful to see how a given asset, security, or
economic variable changes over time.
Forecasting methods using time series are used in both fundamental
and technical analysis.
Although cross-sectional data is seen as the opposite of time series, the
two are often used together in practice.

Understanding Time Series

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 also can be used to examine how the
changes associated with the chosen data point compare to shifts in other
variables over the same time period.

Time series is also used in several nonfinancial contexts, such as measuring the
change in population over time. The figure below depicts such a time series for
the growth of the U.S. population over the century from 1900 to 2000.
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A time series graph of the population of the United States from 1900 to 2000.
C.K. Taylor

Time Series Analysis

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 analyze time series data with technical analysis
tools to know whether the stock’s time series shows any seasonality. This will
help to determine if the stock goes through peaks and troughs 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.

Important: One potential issue with time series data is that since
each variable is dependent on its prior state or value, there can be a
great deal of autocorrelation, which can bias results.

Time Series Forecasting

Time series forecasting uses information regarding historical values and
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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.

The Box-Jenkins Model, for instance, is a technique designed to forecast data

ranges based on inputs from a specified time series. It forecasts data using
three principles: autoregression, differencing, and moving averages. These
three principles are known as p, d, and q, respectively. Each principle is used in
the Box-Jenkins analysis, and together they are collectively shown as an
autoregressive integrated moving average, or ARIMA (p, d, q). ARIMA can be
used, for instance, to forecast stock prices or earnings growth.

Another method, known as rescaled range analysis, can be used to detect and
evaluate the amount of persistence, randomness, or mean reversion in time
series data. The rescaled range can be used to extrapolate a future value or
average for the data to see if a trend is stable or likely to reverse.

Cross-Sectional vs. Time Series Analysis

Cross-sectional analysis is one of the two overarching comparison methods for
stock analysis. Cross-sectional analysis looks at data collected at a single point
in time, rather than over a period of time. The analysis begins with the
establishment of research goals and the definition of the variables that an
analyst wants to measure. The next step is to identify the cross section, such as
a group of peers or an industry, and to set the specific point in time being
assessed. The final step is to conduct analysis, based on the cross section and
the variables, and come to a conclusion on the performance of a company or
organization. Essentially, cross-sectional analysis shows an investor which
company is best given the metrics that they care about.

Time series analysis, known as trend analysis when it applies to technical

trading, focuses on a single security over time. In this case, the price is being
judged in the context of its past performance. Time series analysis shows an
investor whether the company is doing better or worse than before by the
measures that they care about. Often these will be classics like earnings per
share (EPS), debt to equity, free cash flow (FCF), and so on. In practice, investors
will usually use a combination of time series analysis and cross-sectional
analysis before making a decision—for example, looking at the EPS over time
and then checking the industry benchmark EPS.

What Are Some Examples of Time Series?

A time series can be constructed by any data that is measured over time at
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evenly spaced intervals. Historical stock prices, earnings, gross domestic
product (GDP), or other sequences of financial or economic data can be
analyzed as a time series.
How Do You Analyze Time Series Data?
Statistical techniques can be used to analyze time series data in two key ways:
to generate inferences on how one or more variables affect some variable of
interest over time, or to forecast future trends. Unlike cross-sectional data,
which is essentially one slice of a time series, the arrow of time allows an
analyst to make more plausible causal claims.

What Is the Distinction Between Cross-Sectional and Time

Series Data?
A cross section looks at a single point in time, which is useful for comparing and
analyzing the effect of different factors on one another or describing a sample.
Time series involves repeated sampling of the same data over time. In practice,
both forms of analysis are commonly used, and when available, they are used
together.

How Are Time Series Used in Data Mining?

Data mining is a process that turns reams of raw data into useful information.
By utilizing software to look for patterns in large batches of data, businesses
can learn more about their customers to develop more effective marketing
strategies, increase sales, and decrease costs. Time series, such as a historical
record of corporate filings or financial statements, are particularly useful here to
identify trends and patterns that may be forecasted into the future.

The Bottom Line

A time series is a sequence of numerical data points in successive order. In
investing, it tracks the movement of the chosen data points at regular intervals
and over a specified period of time.
In investing, a time series records chosen data points (such as a security’s price)
at regular intervals and tracks their movement over a specified period of time.

Time series analysis can be useful to see what factors influence certain
variables from period to period. It can also provide insights into how an asset,
security, or economic variable changes over time.

A variety of financial and economic data, such as historical stock prices,

earnings, and GDP, can be analyzed as a time series.
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