IBA-JU WMBA Course Instructor: Dr Swapan Kumar Dhar Time Series: Time series is a collection of data recorded over

a period of time usually weekly, monthly, quarterly, or yearly. Some examples of time series are: (i) The Annual Production of Rice over the last 10 years (ii) The daily closing price of a share on a stock exchange for a week (iii) The monthly electric bills for 12 months. The purpose of time series analysis is to describe the past movements and fluctuations to analyze their causes and interrelationship, to examine the causal factors operating in the present and to explain what significance the present combination of causal factors has in relation to the future. Components of Time Series: There are four components to a time series: (i) Trend or secular trend (ii) The seasonal variation (iii) The cyclical variation (iv) The irregular variation. Secular Trend: The smooth, regular and gradual movement of a time series which shows the increase or decline over a long period of time is called the secular trend. Over a long period of time, if observed, most time series reveal either an inclining or a declining tendency. This general tendency of a time series over a fairly long period of time is termed a secular trend. This frequently happens with business and economic time series. Inclining tendency is observed in case of population, agricultural production, money in circulation etc. whereas declining tendency is inherent in time series relating to birth rate, death rate and epidemic deaths etc. Due to advancement of medical science, facilities of health care and higher literacy, birth rate, death rate and deaths due to epidemics are gradually decreasing. Seasonal Variation: Another component of a time series is seasonal variation. Many sales, production and other series fluctuate with the season. For example, the sale of woolen electric fan rises in summer. The sales of clothing and shoes rise extremely before Eid and Durga Puja.

For the following two reasons seasonal fluctuations take place: (i)Natural Causes: Seasonal variation take place due to climatic changes. For example, during winter sale
of wool increases, during summer demand for ice cream, cold drinks, and electric fan etc. increases; in rainy season demand for umbrella, rain coat etc, increases. (ii)Rituals and Social Customs: Man made rituals, social customs and traditions are also responsible for seasonal fluctuations of a time series. For example, just on the eve of new year the sale of greeting cards increases to a great extent. In the beginning of an academic session sale of book, paper, uniforms etc. increase. Cyclical Variation: It is another component of a time series. A typical business cycle consists of a period of prosperity followed by periods of recession, depression and recovery. Most of the business and economic time series increase or decrease periodically with some amount of regularity. In general the periodicity of this type of variation is more than one year. This periodic movement of a time series is termed as cyclical fluctuations, for this happens due to business cycles. A business cycle has got four phases namely prosperity or boom, recession, depression and recovery. The time period between two successive booms or depressions is known as periodic time or length of a cycle. Note: Though seasonal fluctuations and cyclical variations both are periodic in nature, there is a significant difference between the two types of movements. First, seasonal fluctuations take place within

one year whereas in case of cyclical variations the time period is generally more than one year. Cyclical variations take place in 3 to 10 years time period. Secondly, in case of seasonal variation the periodic time remains the same but in case of cyclical fluctuations the periodic time does not remain the same. Cyclical variations take place only with some rough regularity. Lastly, seasonal variations are mainly attributed to climatic changes, and man made rituals and social customs whereas economic factors are responsible for cyclical fluctuations. Increase or decrease in price, production, sales, demand etc. is some of the economic phenomena which are responsible for cyclical fluctuations. Irregular Variation: These variations are accidental or residual and are due to wars, floods, droughts, famines etc. There is no definite explanation for these variations. But these events influence the business activities to a great extent and cause irregular variation in time series data. Methods of Measuring Secular Trend: The following methods are used to measure secular trend: (i) Graphical Method (ii) Least Squares Method (ii) Semi-average Method (iv) Moving Average Method (i) Graphical method: Here time series values are plotted on a graph taking time variable along the Xaxis and the other variable along the Y-axis. The plotted points are then joined by straight lines or by a free-hand smooth curve. The straight line is drawn through the plotted points in such a manner that half of the points remain in one side of this straight line. The line indicates the nature of trend (rising or falling) eliminating the effect of seasonality, cyclical variations and irregular fluctuations. Example: Fit a trend line to the following data by the graphical method: Year Sales of a firm(in million Taka) 1970 62 1971 64 1972 66 1973 63.5 1974 67 1975 64.5 1976 69 1977 67

Solution: Required trend line by the freehand method is drawn in the following diagram:

Trend Line by Graphical Method

71 69 Sales of firms 67 65 63 61 59 57 55 1970 1971 1972 1973 1974 1975 1976 1977 Years

Merits: (i)It is the simplest way of measuring trend.

(ii)This method can be used for measuring both type of trend-linear or non-linear. Demerits: (i)This method is subjective. This graphical form may vary from person to person. (ii)It is not useful for forecasting purpose. (iii)Only experienced and technically sound individuals should use this method.

(ii) Method of Least Squares: If the trend is linear i.e., the points on the graph paper follow a straight line pattern, then the equation of the straight line is taken as

y = a + bx

where

a=

x y b n n

and

b=

xy
2

Example : The average yearly death in a certain city is given below. Fit a straight line (linear) trend by the method of least squares. Tabulate the tend values. Also estimate the death rate for the year 1962. Year Number of death (yearly average) Solution: Here the number of years 1954 940 1955 912 1956 1055 1957 1002 1958 977 1959 961 1960 888

x x n

( x)( y ) n
2

( n)

is 7, i.e., odd. Then we choose the origin as the middle year.

We take 1957 as origin (i.e. x = 0) and unit of Table: Calculations for fitting a straight line Year

x as 1 year. x2
9 4 1 0 1 4 9 28

x
-3 -2 -1 0 1 2 3 0

Number of Death

xy
-2820 -1824 -1055 0 977 1922 2664 -136

Trend value

( y)

1954 1955 1956 1957 1958 1959 1960 Total

= x

=y

940 912 1055 1002 977 961 888 6735

= x2

= xy

976.72 971.86 967.00 962.14 957.28 971.86 976.72 -

Let y = a + bx be the equation of the straight line.

(1)

a =

6735 136 = 962.14 and b = = 4.86 . 7 28 Putting these values of a and b in equation (1), the required
becomes

equation of straight-line (linear) trend (2)

y = 962.14 4.86 x

with origin 1957 and unit 1 year.

Putting the values of x in the trend equation (2) we get the corresponding trend values which are shown in the table. Again, the value of x for the year 1962 is 5. Hence putting x = 5 the equation (2), we have the estimate Death rate for 1962 which is

y = 962.14 4.86 5 = 962.14 24.3 = 937.84

Example: Fit a straight-line trend by the method of least squares to the following data: 1980 1981 Year x Sales (in tons) 210 225 Find also the trend values and estimate the sales in 1987. Solution: Here the number of years 1983 and unit of 1982 275 1983 220 1984 240 1985 235

( n)

is 6, i.e. even. We choose the origin at the middle of 1982 and

x=

and 1 and other values of

1 2

year. Then the values of

corresponding to the years 1982 and 1983 will be 1

are calculated accordingly.

Table: Calculations for a fitting a straight line Year 1980 1981 1982 1983 1984 1985 Total

x
-5 -3 -1 +1 +3 +5 0

Sales (in tons)

x2
25 9 1 1 9 25 70

xy
-1050 -2025 -275 220 720 1175 1235

Trend values 145.97 181.25 216.53 251.81 287.09 322.37 -

Let y = a + bx be the equation of the straight line.

= x

=y

210 225 275 220 240 235 1405

= x2 1235 = 17.64 . 70

= xy

(1)

a =

1405 = 234.17 6

and

b=

The trend equation is therefore

y = 234.17 + 17.64 x

(2)

with origin middle of 1982-83 and unit -

The trend values are calculated by substituting the values of x in equation (2) and are shown in the table. For the year 1987, the value of x = 9 . (For one year the difference of x is 2). Hence, the estimate for sales in 1987 is y = 234.17 + 17.64 9 = 234.17 + 158.76 = 392.93 (tons) (iii) Semi-Average Method: In this method the given time series is broken up into two equal halves. If the series contains odd number of observations, then the middle most observation is omitted. Suppose we are given data for 15 years starting from 1960 to 1974. Then omitting the middle year 1967, the two equal halves are from 1960 to 1966 and 1968 to 1974. If the series contains even number of observations then it clearly contains two equal halves. Arithmetic means of the two halves are plotted on a graph against the

1 2

year.

mid-time points of the respective two halves. Then these two points are joined by a straight line. This line indicates the nature of secular trend. Example: Draw a trend line by the Semi- Average Method using the following data: Year 1973 1974 1975 1976 1977 1978 Production of Steel(in lakh tons) 253 260 255 263 259 264

253 + 260 + 255 = 256 lakh tons. 3 263 + 259 + 264 The average production of steel for the last three years = = 262 lakh tons. 3
Solution: The average production of steel for the first three years = Thus we get two points 256 and 262 which are plotted against the respective middle years (mid-points) 1974 and 1977 of two parts 1973-75 and 1976-78. By joining these two points, the required trend line is obtained as shown in the following figure.

Trend Line by the Semi-Average M ethod

266 264 262 Production 260 258 256 254 252 1972 1973 1974 1975 1976 1977 1978 1979 Years

Merits and Demerits of the Method: Merits: (i)This method is very simple in comparison to moving average method or least squares method for determination of trend. (ii)This method is objective. Everyone will get the same straight line from the same set of data. Demerits: (i)In this method it is assumed that the independent variable (time) and the other variable (data) are linearly related. This assumption is not true in case of business and economic time series. (ii)Since arithmetic averages are greatly affected by extreme values, the trend determined on the basis of simple arithmetic averages is also likely to be influenced by extreme values present in the time series. (iv) The Method of Moving Average Example: From the following data calculate 3 yearly moving averages: Year 196 196 196 1963 196 1965 1966 1967 0 1 2 4 Productio 17.2 17.3 17.7 18.9 19.2 19.3 18.1 20.2 n(lakh tons)

196 8 25.3

196 9 24.9

197 0 23.2

197 1 24.3

Solution: Calculation of 3 yearly moving averages Year Production(lakh tons) 3 yearly moving total 1960 17.2 ----------------1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 17.3 17.7 18.9 19.2 19.3 18.1 20.2 25.3 24.9 23.2 24.3 52.2 53.9 55.8 57.4 56.6 57.6 63.6 70.4 73.4 72.4 -------------------

3 yearly moving average -----------52.2 =17.40 3 17.96 18.60 19.13 18.87 19.20 21.20 23.47 24.47 24.13

Production and 3 yearly moving average 28 24 20 16 12 8 4 0 1960

Production

1962

1964

1966 year

1968

1970

1972

Example: Calculate trend value by the 4-yearly moving average method for the following data: Year 199 199 199 1994 199 1996 1997 1998 199 200 200 2002 1 2 3 5 9 0 1 Value 41 61 55 48 53 67 62 60 67 73 78 76 Solution: Calculation of 4-yearly moving averages: Year Value 4-yearly totals 4-yearly average moving 2-period totals moving Centered moving average (Trend

Values) 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 41 61 55 217 48 223 53 230 67 242 62 256 60 262 67 278 73 78 76 294 ----------73.50 ----------69.50 65.50 64.00 60.50 57.50 55.75 54.25 ----------205 ------------51.25

105.50 110.00 113.25 118.00 124.50 129.50 135.00 143.00

52.75 55.00 56.63 59.00 62.25 64.75 67.50 71.63

4 yearly Centred Moving Average 80 70 60 50 40 30 20 10 0 1991 1993 1995 1997 1999 2001 Years

Example: From the following table find three yearly weighted moving average taking 1, 2, and 1 as weights: Year 1 2 3 4 5 6 7 Sales(Lakh Taka) 2 4 5 7 8 10 13 Solution: Calculation of 3-yearly weighted moving average: Year 2001 2002 2003 Sales 2 4 5 3-year weighting moving total ---------------3-yearly weighted moving average --------3.75 5.25

Trend values

2 1 + 4 2 + 5 1 = 15 4 1 + 5 2 + 7 1 = 21

2004 2005 2006 2007 * Column 4 = Column 3

7 5 1 + 7 2 + 8 1 = 27 8 7 1 + 8 2 + 10 1 = 33 10 8 1 + 10 2 + 13 1 = 41 13 ---------------- Total weight, where total weight = 1 + 2 + 1 = 4.

6.75 8.25 10.25 ----------

3 Year Weighted Moving Average

12 Moving Average 10 8 6 4 2 0 2001 2002 2003 2004 Year 2005 2006 2007

Example: Determine trend and short-term variation from the following data by using 3 yearly moving averages. Draw the graph of the original series and trend the values on the same paper. Year 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Production('000 tons) 21 22 23 25 24 22 25 26 27 26 Solution: 3 yearly moving Year Production 3 yearly moving average Short term variation total 1996 21 --------------------1997 22 66 22.00 0.00 1998 23 70 23.33 -0.33 1999 25 72 24.00 1.00 2000 24 71 23.67 0.33 2001 22 71 23.67 -1.67 2002 25 73 24.33 -0.67 2003 26 78 26.00 0.00 2004 27 79 26.33 0.67 2005 26 -----------------

3 yearly m oving average

30 25 20 15 10 5 0 1995

Production

1997

1999
Year

2001

2003

2005

Merits and Demerits of Moving Average Method: Merits: (i)In comparison to the least squares method, this method is simple. (ii)There is some inherent flexibility in this method. Addition of a few new values only increases the grand value and this has no effect on previous calculations. (iii)If the period of moving average is equal to the average period of cycles, then this method completely eliminates the effect of cyclical fluctuations. Demerits: (i)In this method some M. As. are lost in the beginning and at the end of the series. (ii)This method is not suitable for forecasting purpose. (iii)If the time series reveals linear trend only then this method is applicable Measurement of Seasonal Variation : (1) Method of Average Example: Compute the average seasonal variations by the method of averages for the following data: Year 1989 1990 1991 Solution: Year 1989 1990 1991 Total Average (Total 3) I 37 41 35 113 Productions (000 tons) II III IV 38 37 40 34 25 31 37 35 41 109 97 112 36.33 32.33 37.33 Total 431 143.66 0.41 -3.59 1.41 I 37 41 35 Total production of paper (000 tons) Quarter II III 38 37 34 25 37 35

IV 40 31 41

113 = 37.67 3
1.75

431 3

Seasonal variation = (Average Grand average)

-0.02

Grand average = 143.66

4 = 35.92

The seasonal variations for the quarters I, II, III, IV are 1.75, 0.41, -3.59, 1.41 respectively. The total of seasonal variations for the 4 quarters must be approximately zero.

Example : Compute the seasonal indices by the method of averages from the data given in the previous example. Average 100 Solution: Here another method is applied. Seasonal Index = Grand average Production I II III IV Total 1989 37 38 37 40 1990 41 34 25 31 1991 35 37 35 41 Total 113 109 97 112 431 Average 37.67 36.33 32.33 37.33 143.66 Seasonal Index 104.87 101.14 90.00 103.92 399.93 The seasonal indices for the quarters I, II, III and IV are 104.87, 101.14, 90.00, 103.92 and the total must be approximately 400. (2) Method of Moving average or Ratio to moving average method: It eliminates the trend, cyclical and irregular components from the original data. Here I refer trend, C to cyclical, S to seasonal and I to irregular variation. The numbers that result are called the typical seasonal index. Example: For the following data determine a quarterly seasonal index using the ratio to moving average method. Year 1989 1990 1991 Solution: Year Production (1) 1990 I II III IV I II 1991 III IV I 162 1992 II III IV 40 169 38 48 42.25 40.50 41.37 96.69 33 151 41 157 43 39.25 39.87 107.85 37.75 38.50 106.49 34 32 133 31 136 36 138 37 140 34 145 36.25 37.00 89.19 35.00 35.62 95.45 34.50 34.75 106.47 34.00 34.25 105.11 33.25 33.62 92.21 I 34 37 43 Total production of paper (00,000 tons) Quarter II III 32 31 34 33 40 38 4-quarter moving total (2) Four quarter moving average (3) Centered moving average (4) Year

IV 36 41 48 Ratio to moving average (%) (5)

10

Note: (5) =

100 = 92.21 (4) 33.62 Calculation of Seasonal Index Year 1990 1991 1992 Total Average (Total 2) Seasonal Index Average = 100 Grand average I 106.47 107.85 214.32 107.16 107.23 Ratio to moving average (%) II III IV 92.21 105.11 95.45 89.19 106.49 96.69 192.14 181.4 211.6 96.07 90.7 105.8 96.14 90.76 105.87 Total 399.73 400

(1)

100 =

31

Grand average

Total average 399.73 = = 99.93 4 4

The seasonal indices for the quarters I, II, III and IV are 107.23, 96.14, 90.76, 105.87 respectively.

11