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Time Series Analysis - An Introduction

This document provides an introduction to time series analysis. It discusses the objectives of time series analysis which include data description, interpretation, modeling, control, and prediction/forecasting. It then describes the components of a time series, including trends, seasonality, cycles, and irregular/random fluctuations. Finally, it presents two simplified time series models - a non-seasonal model with trend and a classical decomposition model with trend and seasonal components. The classical decomposition model filters out trend and seasonal components before fitting a stationary time series model to the random component.

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0% found this document useful (0 votes)
87 views38 pages

Time Series Analysis - An Introduction

This document provides an introduction to time series analysis. It discusses the objectives of time series analysis which include data description, interpretation, modeling, control, and prediction/forecasting. It then describes the components of a time series, including trends, seasonality, cycles, and irregular/random fluctuations. Finally, it presents two simplified time series models - a non-seasonal model with trend and a classical decomposition model with trend and seasonal components. The classical decomposition model filters out trend and seasonal components before fitting a stationary time series model to the random component.

Uploaded by

vijaya bharadwaj
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Time Series Analysis

-- An Introduction --

AMS 586

1
Objectives of time series analysis
Data description 
Data interpretation 

Modeling 
Control 
Prediction & Forecasting 

2
Time-Series Data
• Numerical data obtained at regular time
intervals
• The time intervals can be annually, quarterly,
monthly, weekly, daily, hourly, etc.
• Example:
Year: 2005 2006 2007 2008 2009
Sales: 75.3 74.2 78.5 79.7 80.2

3
Time Plot
A time-series plot (time plot) is a two-
dimensional plot of time series data

• the vertical axis U.S. Inflation Rate


measures the variable of 16.00
interest 14.00
Inflation Rate (%)

12.00
10.00

• the horizontal axis


8.00
6.00
corresponds to the time 4.00
2.00
periods 0.00
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
Year

4
Time-Series Components

Time Series

Trend Component Seasonal Cyclical Irregular /Random


Component Component Component

Overall, Regular periodic Repeating swings Erratic or residual


persistent, long- fluctuations, or movements fluctuations
term movement usually within a over more than
12-month period one year

5
Trend Component

• Long-run increase or decrease over time


(overall upward or downward movement)
• Data taken over a long period of time

Sales

6 Time
Trend Component
(continued)

• Trend can be upward or downward


• Trend can be linear or non-linear
Sales Sales

Time Time
Downward linear trend Upward nonlinear trend

7
Seasonal Component
• Short-term regular wave-like patterns
• Observed within 1 year
• Often monthly or quarterly
Sales
Summer
Winter
Summer
Winter Spring Fall

Spring Fall

Time (Quarterly)
8
Cyclical Component
• Long-term wave-like patterns
• Regularly occur but may vary in length
• Often measured peak to peak or trough to
trough 1 Cycle
Sales

Year
9
Irregular/Random Component

• Unpredictable, random, “residual” fluctuations


• “Noise” in the time series
• The truly irregular component may not be
estimated – however, the more predictable
random component can be estimated – and is
usually the emphasis of time series analysis via
the usual stationary time series models such as
AR, MA, ARMA etc after we filter out the trend,
seasonal and other cyclical components
10
Two simplified time series models

• In the following, we present two classes of


simplified time series models
1. Non-seasonal Model with Trend
2. Classical Decomposition Model with Trend and
Seasonal Components
• The usual procedure is to first filter out the trend
and seasonal component – then fit the random
component with a stationary time series model to
capture the correlation structure in the time series
• If necessary, the entire time series (with seasonal,
trend, and random components) can be re-analyzed
for better estimation, modeling and prediction.

11
Non-seasonal Models
with Trend

Xt = mt + Yt

Stochastic trend random


process noise

12
Classical Decomposition Model
with Trend and Season

Xt = mt + st + Yt

Stochastic trend seasonal random


process component noise

13
Non-seasonal Models
with Trend
There are two basic methods for
estimating/eliminating trend:
Method 1: Trend estimation
(first we estimate the trend either by
moving average smoothing or regression analysis –
then we remove it)

Method 2: Trend elimination by differencing

14
Method 1: Trend Estimation by
Regression Analysis
Estimate a trend line using regression analysis
Time  Use time (t) as the
Period Sales independent variable:
Year (X)
(t)
2004 0 20
2005 1 40
2006 2 30 In least squares linear, non-linear, and
2007 3 50 exponential modeling, time periods are
numbered starting with 0 and increasing
2008 4 70 by 1 for each time period.
2009 5 65
15
Least Squares Regression
Without knowing the exact time series random error correlation structure,
one often resorts to the ordinary least squares regression method, not
optimal but practical. The estimated linear trend equation is:
Time
Year Period Sales
(t) (X)
Sales trend
2004 0 20
80
2005 1 40 70
60
2006 2 30 50
sales

40
2007 3 50 30
20
2008 4 70 10
0
2009 5 65
0 1 2 3 4 5 6

Year
16
Linear Trend Forecasting
One can even performs trend forecasting at this point – but bear in mind
that the forecasting may not be optimal.
• Forecast for time period 6 (2010):
Time
Year Period Sales
(t) (X)
2004 0 20 Sales trend
2005 1 40 80
70
2006 2 30
60
2007 3 50 50
sales

40
2008 4 70 30
20
2009 5 65
10
2010 6 ?? 0
0 1 2 3 4 5 6

Year
17
Method 2: Trend Elimination by
Differencing

18
Trend Elimination by Differencing

If the operator ∇ is applied to a linear trend function:

Then we obtain the constant function:

In the same way any polynomial trend of degree k can


be removed by the operator:
19
Classical Decomposition Model
(Seasonal Model)
with trend and season

where

20
Classical Decomposition Model
Method 1: Filtering: First we estimate and remove the
trend component by using moving average method; then
we estimate and remove the seasonal component by
using suitable periodic averages.
Method 2: Differencing: First we remove the seasonal
component by differencing. We then remove the
trend by differencing as well.
Method 3: Joint-fit method: Alternatively, we can fit a
combined polynomial linear regression and harmonic
functions to estimate and then remove the trend and
seasonal component simultaneously as the following:

21
Method 1: Filtering
(1). We first estimate the trend by the moving average:
• If d = 2q (even), we use:

• If d = 2q+1 (odd), we use:

(2). Then we estimate the seasonal component by using the average


, k = 1, …, d, of the de-trended data:

To ensure:
we further subtract the mean of

(3). One can also re-analyze the trend from the de-seasonalized data in
order to obtain a polynomial linear regression equation for modeling and
prediction
22 purposes.
Method 2: Differencing
Define the lag-d differencing operator as:

We can transform a seasonal model to a non-seasonal model:

Differencing method can then be further applied to


eliminate the trend component.

23
Method 3: Joint Modeling
As shown before, one can also fit a joint model
to analyze both components simultaneously:

24
Detrended series

25 P. J. Brockwell, R. A. Davis, Introduction to Time Series and Forecasting, Springer, 1987


Time series – Realization of a
stochastic process
{Xt} is a stochastic time series if each component
takes a value according to a certain probability
distribution function.
A time series model specifies the joint distribution
of the sequence of random variables.

26
White noise - example of a time
series model

27
Gaussian white noise

28
Stochastic properties of the process

STATIONARITY

Once we have removed the seasonal and trend .1


components of a time series (as in the classical
decomposition model), the remainder (random)
component – the residual, can often be modeled by a
stationary time series.

* System does not change its properties in time

* Well-developed analytical methods of signal analysis


and stochastic processes

29
WHEN A STOCHASTIC PROCESS IS STATIONARY?
{Xt} is a strictly stationary time series if
f(X1,...,Xn)= f(X1+h,...,Xn+h),
where n1, h – integer

Properties:
* The random variables are identically distributed.
* An idependent identically distributed (iid) sequence
is strictly stationary.

30
Weak stationarity

{Xt} is a weakly stationary time series if


EXt =  and Var(Xt) = 2 are independent of time t •
Cov(Xs, Xr) depends on (s-r) only, independent of t •

31
Autocorrelation function (ACF)

32
ACF for Gaussian WN

33
ARMA models

Time series is an ARMA(p,q) process if Xt is stationary and if


for every t:
Xt  1Xt-1 ...  pXt-p= Zt + 1Zt-1 +...+ pZt-p
where Zt represents white noise with mean 0 and variance 2

The Left side of the equation represents the Autoregressive


AR(p) part, and the right side the Moving Average MA(q)
component.

34
Examples

35
Exponential decay of ACF

MA(1) AR(1)
sample ACF

36
More examples of ACF

37
Reference
Box, George and Jenkins, Gwilym (1970) Time series analysis:
Forecasting and control, San Francisco: Holden-Day.

Brockwell, Peter J. and Davis, Richard A. (1991). Time Series:


Theory and Methods. Springer-Verlag.

Brockwell, Peter J. and Davis, Richard A. (1987, 2002).


Introduction to Time Series and Forecasting. Springer.

We also thank various on-line open resources for time series


analysis.

38

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