Time Series Analysis

Time Series Analysis
If the data are arranged according to time

order (chronological order) then it is known as
the Time Series.
Components of time series
Long term trend / Secular trend (T)

Cyclic Variation (C )
Seasonal Variation (S)
Random Variation (R)
Long term trend

The upward or downward pattern of
movement of the data is known as trend.
Its duration is more than one year may be
several years.
Trend presents in the data due to the
changes in technology, population, wealth
value, effect of competition etc.
Systematic in nature.
Seasonal variation
Short term regular periodic variation,
Occur within short period of time (yearly,
quarterly, monthly, weekly or daily data).
More or less systematic.
Occur due to seasons, weather, festivals,
social customs, religions, culture, etc
Cyclic Variation
Regular patterns that repeat over a long period
of time.
Movement are cyclical.
Occur more than one year.
Four phases exist such as; prosperity (growth),
recession (contraction) , depression (trough) and
recovery (expansion)
Due to the combination of numerous factors,
however, economic booms and depression are
the major causes.
Random (Irregular) Fluctuation

Variations due to accidents, random or
simply due to the chance factors.
Unsystematic in nature
Occur due to famines, strikes, war, political
situations etc.
Almost impossible to measure or isolate the
value.
Short duration and non-repetitive in nature.
Analysis of Time Series

Case I: If the data are given in the form of
more than one year then
Additive model
yi Ti Ci I i
Multiplicative model
yi Ti * Ci * I i
Where Yi = Value at time i.

Ti =Value of the trend component
Ci = Value of cyclic component
Ii = Value of the irregular component
Case II: If the data are given in the form of
less than one year then the

Additive model
yi Ti Ci Si I i
Multiplicative model
yi Ti * Ci * Si * I i
Where Yi = Value at time i.

Ti =Value of the trend component
Ci = Value of cyclic component
Si = Value of seasonal component
Ii = Value of the irregular component
Smoothing in Time Series

Smoothing is a procedure to remove the
effect of several components (such as
seasonal and irregular) associated with time
series data. In smoothing process, therefore,
we attempt to remove the effect of irregular
Components of the time series.
Smoothing the annual time series

First plot the given annual data and examine
the tendency over the time. If the time series
are fairly stable with no significant trend,
cyclic and seasonal effect.
There may be the two cases:
Data series may move long term upward or
downward movement
Data may oscillate about the horizontal line
over the time period.
In such situation, the best way of removing the

random fluctuation is to smooth the time
series are MOVING AVERAGES and
EXPONENTIAL SMOOTHING
Moving Average Method

Concept: Any large irregular component of
time series at any point of time will have a
less significant effect on trend if the
observation at that point of time is
averaged with such values immediately
after and before the observation under the
consideration.
Procedure:
Determine the moving average period
(such as 3-yearly, 5-yearly, 7-yearly, etc)
Obtain the total of moving values and

calculate the average of the total of moving
values.
Place the moving average at the middle
value of the time series.
Continue the process until all the moving
average is not computed.
Note:
Remember that one value at the beginning
and the last of the data will not computed
in case of 3-yearly moving averages.
Compute the 3-yearly and 7-yearly moving average from

the following information
Year
Sales
Year
Sales
1970
5.3
1982
6.2
1971
7.8
1983
7.8
1972
7.8
1984
8.3
1973
8.7
1985
9.3
1974
6.7
1986
8.6
1975
6.6
1987
7.8
1976
8.6
1988
8.1
1977
9.1
1989
7.9
1978
9.5
1990
7.5
1979
1991
1980
7.1
1992
7.2
1981
6.8
Year
3yearly
Total
Sales
3- yearly
MA
7early
Total
7-yearly
MA
1970
5.3 -
1971
7.8
20.9
7 -
1972
7.8
24.3
8.1 -
1973
8.7
23.2
7.7
51.5
7.4
1974
6.7
22
7.3
55.3
7.9
1975
6.6
21.9
7.3
57
8.1
1976
8.6
24.3
8.1
58.2
8.3
1977
9.1
27.2
9.1
56.6
8.1
1978
9.5
27.6
9.2
56.7
8.1
1979
25.6
8.5
50.1
7.2
1980
7.1
22.9
7.6
41.5
5.9
1981
6.8
13.9
4.6
32.4
4.6
1982
6.2
14
4.7
31.6
4.5
1983
7.8
22.3
7.4
40.2
5.7
1984
8.3
25.4
8.5
48
6.9
1985
9.3
26.2
8.7
56.1
8.0
1986
8.6
25.7
8.6
57.8
8.3
1987
7.8
24.5
8.2
57.5
8.2
1988
8.1
23.8
7.9
56.2
8.0
1989
7.9
23.5
7.8
54.1
7.7
1990
7.5
22.4
7.5 -
1991
21.7
7.2 -
1992
7.2 -
Decision: It is obvious that 7-yearly moving average fits the data well
than 3-years moving average.
Limitations of Moving Averages

It avoids the values for the first and last
years of the data.
It always provides the same weights for all
the observations irrespective of the
number of the time periods taken into
consideration
Exponential smoothing
Exponential smoothing is just the modified form of
moving average in which it assigns more
weights for the time series data, which are more
important.
For example, it is logical to assign more weight for
the most recent data as compared with too old
data for the future prediction.
Therefore, exponential smoothing uses the
moving average with appropriate weights
assigned to the values taken into consideration
in order to arrive at a more accurate forecast.
Mathematically, the form of exponential smoothing is

S1 =Y1
S2 = y1 +(1)S1
In general, we have
St = y1 +(1)St-1
Where, St = exponential smoothed time series.

Yi = time series at time t.
St-1 = exponentially smoothed time series at
time t-1.
Alpha ( )= smoothing constant
The value of this constant is decided by the

decision maker on the basis of degree of
smoothing required. Smaller value of alpha
means a greater degree of smoothing and
large value of alpha means very little
smoothing.
If =1, there is no smoothing at all.
Example: Following information gives the sales of

petrol in 16 months. Apply the exponential smoothing
technique when alpha is 0.2 and 0.7.
Month
Sales
Month
Sales
39
41
37
10
69
61
11
49
58
12
66
18
13
54
56
14
42
82
15
90
27
16
66
Solution:
month
Smoothing
when alpha =
0.2
sales
Smoothing when
alpha = 0.7
39
39
39
37
38.6
37.6
61
43.1
54.0
58
46.1
56.8
18
40.5
29.6
56
43.6
48.1
82
51.2
71.8
27
46.4
40.4
41
45.3
40.8
10
69
50.1
60.6
11
49
49.8
52.5
Contd
12
66
53.1
61.9
13
54
53.3
56.4
14
42
51.0
46.3
15
90
58.8
76.9
16
66
60.2
69.3
Decision: From the graph, It is obvious that that smoothing is less for
alpha=0.7 , while smoothing is too much when alpha = 0.2. Therefore,
alternative value of Alpha may have better explanation.
Analysis of Trend
Trend is one of the important factors of
analyzing time series analysis.
This is particularly important because it is
used as a forecasting model and it has
various advantages over the other
components.
In practice, we use two types of trend
equations: linear and curvilinear model to
study the trend.
Least Square fitting of Linear Trend

As in regression analysis, we can estimate the
linear trend equation by using principle of least
square. Let the linear equation be
yi 0 1 xi
And its estimated or fitted equation is
y b0 b1 xi
The two constants b0 and b1 are estimated

Coefficients.
Where
Y = Actual value of the time series in period
time t.
n= number of the periods.
y = Average value of the time series.
x = Average value of the time (xi)
As mentioned previously,
b1
n xy x y
n x ( x)
2
Then the intercept can be obtained as
b0 y b1 x
Example: A car fleet owner have been in the

fleet for several different years. The manager
wants to establish if there is linear relationship
between the age of car and repair in hundred of
dollar for a given year. The following is the
information provided.
Car
Age (x)
Repair (y)
Obtain the repair cost for the 6 years old car.
Solution:
car
age (x)
Repair (y)
(Rs. 000)
18
21
35
25
54
36
Total
18
33
132
80
xy
x2
Now we compute linear trend equation to analyse

the time data for this problem.
b1
n xy x y
n x ( x )
2
5 *132 18 * 33
b1
0.87
2
5 * 80 (18)
and b0 y b1 x
606 0.87 * 306 3.47
Hence the fitted time series mod el
is y 3.47 0.87 x
Estimation: Now we have to estimate the

repair cost for 6 years old car. Therefore, the
estimated repair cost is
3.47+0.87*6 =Rs. 8.69 thousands
where x is time and it is 6 years
Fitting of Quadratic Model

Sometimes the straight line equation may be
inappropriate to describe the time series
data and time series are best described by
the curves. To overcome this problem, we
prefer the parabolic curve, which is explained
mathematically by a second-degree equation.
The general form of estimated second degree
2
equation is
y a bt ct
Least square estimates of the coefficients
The least square estimate of the coefficients

of second degree trend is given by
y an b t c t
ty a t b t c t
t y a t b t c t
2
Where a= estimated y-intercept

b= estimated linear effect on y
c= estimated curvilinear effect on y
Example: Following data provides the total sales of

Quartz watch company in different years.
Year
Sales
1991
13
1992
24
1993
39
1994
65
1995
106
Choose an appropriate fitting line of trend and

estimate the sales for year 2000.
Solution: Since the nature of the data shows not

uniform increase in the data level therefore,
second degree equation may be the best fit for the
data. Now first convert the given year in
appropriate time period by assuming the year 1993
as 0, we have
Year
t= year-1993
1991
-2
1992
-1
1993
1994
1995
Sales (y)
Year (t)
t2
t4
Y*t
t2*y
13
-2
16
-26
52
24
-1
-24
24
39
65
65
65
106
16
212
424
247
10
37
227
565
Now we estimate the value of the constant by substituting these values

in the normal equations as mentioned previously, then we get
a= 39.3, b= 22.7 and c= 5.07
2
39
.
3
22
.
7
t
5
.
07
t
Now the fitted trend equation is
Here we have to forecast the volume of sales for

the year 2000, therefore, we have
t = 2000-1993=7 then
y= 39.3+22.7t+5.07t2
Estimated value for the year 2000 =39.3+22.7*
7+5.07*72 =446.6
Year
Sales
Fitted value
1991
13
14
1992
24
22
1993
39
39
1994
65
67
1995
106
105
Now comparing the observed and fitted

values through graph
Facts to be considered during the selection of

fitting model
Linear trend is used when the time series

increases or decreases by equal absolute
amount. On plotting the data, it gives the
straight line.
In other words, a linear trend is assumed
to be perfect one when the consecutive
difference of the observations in the series
are if same. For example;
Year
1992
1993
1994
1995
1996
1997
1998
1999
2000
Age
33
36
39
42
45
48
51
54
57
I Diff.
Second degree model is preferred when it

shows curvilinear (either concave upward or
downward) graph on plotting in logarithmic
scale.
In other words, second degree model is
appropriate when second difference between
consecutive pairs of observations in the series
are same throughout. For example;
Year
1991
1992
1993
1994
1995
1996
1997
1998
1999
weig
hts
30
31
33.5
37.5
43.0
50.0
58.5
68.5
80.0
I Diff
1.0
2.5
4.0
5.5
7.0
8.5
10.0
11.5
II Dif
1.5
1.5
1.5
1.5
1.5
1.5
1.5
1.5
Example
Following is the information about the sales
obtained during five years.
Year
Sales
1921
11.4
1931
12.1
1941
13.9
1951
17.3
1961
18.0
Compute the second degree trend equation

and determine the trend value for 1971.
Solution: First, we need to obtain the normal

equations to get the value of the constants.
Year
Sales
t= (x-1941)/10
t2
t3
t4
t*y
t3*y
1921
11.4
-2
-8
16
-22.8
45.6
1931
12.1
-1
-1
-12.1
12.1
1941
13.9
1951
17.3
17.3
17.3
1961
18
16
36
72
72.7
10
34
18.4
147
Total
Now the normal equation are

5a 10c 72.7
18.4 10b
147.0 10a 34c
On solving these equations, we get
a 14.312
b 1.84
c 0.11
Now the fitted trend equation is
14.312 1.84t 0.11t 2
y

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Time Series Analysis - Economics

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If the data are arranged according to time

Components of time series

Long term trend / Secular trend (T)

Long term trend

Random (Irregular) Fluctuation

Analysis of Time Series

Where Yi = Value at time i.

Case II: If the data are given in the form of

less than one year then the

Where Yi = Value at time i.

Smoothing in Time Series

Smoothing the annual time series

In such situation, the best way of removing the

Moving Average Method

Obtain the total of moving values and

Compute the 3-yearly and 7-yearly moving average from

Limitations of Moving Averages

Mathematically, the form of exponential smoothing is

Where, St = exponential smoothed time series.

The value of this constant is decided by the

Example: Following information gives the sales of

Least Square fitting of Linear Trend

And its estimated or fitted equation is

The two constants b0 and b1 are estimated

Then the intercept can be obtained as

Example: A car fleet owner have been in the

Obtain the repair cost for the 6 years old car.

Now we compute linear trend equation to analyse

Estimation: Now we have to estimate the

Fitting of Quadratic Model

Least square estimates of the coefficients

The least square estimate of the coefficients

Where a= estimated y-intercept

Example: Following data provides the total sales of

Choose an appropriate fitting line of trend and

Solution: Since the nature of the data shows not

Now we estimate the value of the constant by substituting these values

Here we have to forecast the volume of sales for

Now comparing the observed and fitted

Facts to be considered during the selection of

Linear trend is used when the time series

Second degree model is preferred when it

Compute the second degree trend equation

Solution: First, we need to obtain the normal

Now the normal equation are

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