Business Forecasting

ECON2209
Slides 03

Lecturer: Minxian Yang

BF-03

my, School of Economics, UNSW

Ch.4 Statistical Graphics

Lecture Plan
Graphs of data: merits and limitations
Examples: use graphs to show data features
Time series differ from random sample
Components in time series
Classical decomposition

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my, School of Economics, UNSW

Ch.4 Statistical Graphics

Statistical Graphics
Example: Anscombes quartet
obs

X1

Y1

X2

Y2

X3

Y3

X4

Y4

1
2
3
4
5
6
7
8
9
10
11

10
8
13
9
11
14
6
4
12
7
5

8.04
6.95
7.58
8.81
8.33
9.96
7.24
4.26
10.84
4.82
5.68

10
8
13
9
11
14
6
4
12
7
5

9.14
8.14
8.74
8.77
9.26
8.10
6.13
3.10
9.13
7.26
4.74

10
8
13
9
11
14
6
4
12
7
5

7.46
6.77
12.74
7.11
7.81
8.84
6.08
5.39
8.15
6.42
5.73

8
8
8
8
8
8
8
19
8
8
8

6.58
5.76
7.71
8.84
8.47
7.04
5.25
12.5
5.56
7.91
6.89

Why identical
regression line?
BF-03

y = 3.00 + 0.50 x,
(1.12)

R 2 = 0.67

(0.12)

my, School of Economics, UNSW

Ch.4 Statistical Graphics

Example
Scatter plots explain it vividly.
Y1 vs. X1

Y2 vs. X2

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9

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Y2

Y1

8
7

7
6
6

3
3

10 11 12 13 14 15

X1
Y3 vs. X3

10 11 12 13 14 15

X2
Y4 vs. X4

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13

12

12

11

11

10

10
Y4

Y3

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8

7
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6
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3

10 11 12 13 14 15

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X3

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my, School of Economics, UNSW

Ch.4 Statistical Graphics

Advantages of graphs
Graphs represent data visually and help us to see
data features/patterns.
A graph is worth a thousand of words.

Graphs make anomalies/outliers apparent.

Graphs are effective in comparing data sets.
But it is hard to visualise high dimensional data.

BF-03

my, School of Economics, UNSW

Ch.4 Statistical Graphics

Scatter plots
Useful to reveal the relationship between two
variables.
ls y c z
======================================================
Variable
Coefficient
Std. Error
t-Statistic
Prob.
eg. xyz.dat
C
10.04891
0.272825
36.83280
0.0000
Z

-0.364783

Y vs. X

0.242923

-1.501641

0.1400

Y vs. Z

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11

10

10

14

14

Weak relation?
It could be
y = b0+b1z+b2x + u

5
-3

-2

-1

-3

-2

-1

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my, School of Economics, UNSW

Ch.4 Statistical Graphics

Scatter plots
eg. xyz.dat. Partial relationship
of y and z (after controlling for x):
regress y on c x to get resid01;
regress z on c x to get resid02;
scatter plot resid01 against resid02.

EViews:
Type in top panel
ls y c x
On the result window, click
Proc, Make Residual Series,
resid01 (in Name for resid series), OK
Type in top panel
ls z c x
On the result window, click
Proc, Make Residual Series,
resid02 (in Name for resid series), OK

RESID01 vs. RESID02

Type in top panel

group grp resid02 resid01
grp.linefit

4
3

RESID01

Also compare the result of

ls resid01 resid02
against the result of
ls y c x z

1
0
-1
-2
-3
-3

-2

-1

Dependent Variable: Y,
Variable
Coefficient
C
9.884732
X
1.073140
Z
-0.638011

Sample: 1 48
Std. Error
0.190297
0.150341
0.172499

t-Statistic
51.94359
7.138031
-3.698642

Prob.
0.0000
0.0000
0.0006

RESID02

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Ch.4 Statistical Graphics

Time series plot

eg. liquor.dat, monthly sales, 1967.01 1994.12
trend (increase over time on average)
seasonality (reoccurring pattern: Dec high, Feb low)
2800
Liquor Sales
2400
2000
1600
1200
800
400
68 70 72 74 76 78 80 82 84 86 88 90 92
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my, School of Economics, UNSW

Ch.4 Statistical Graphics

Time series plot

eg. US 10-year treasury bond yield (monthly, %), 530obs
persistent (gentle moves with few large jumps)
random trend (ups & downs without a clear pattern)
10-year T-bond Yield
16
14
12
10
8
6
4
2
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Ch.4 Statistical Graphics

Time series plot

eg. Change of US 10-year treasury bond yield (monthly)
fluctuate about 0 (never move away for long)
volatile (change direction frequently with large spikes)
yt = yt yt 1
Change of 10-year T-bond Yield

EViews:

Read in bond10y.csv
File, Open, Foreign Data as Workfile,
bond10y.csv (in File name), Open,
Finish

Type in top panel

plot close
genr dy=close-close(-1)
plot dy
hist dy

-1

-2
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Ch.4 Statistical Graphics

Time series plot

Time series plots reveal

trends
seasonalities
volatilities (mount of variation)
breaks (pattern changes)
outliers (unusual observations)

in data.
First thing in time series analysis: plotting data

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Ch.4 Statistical Graphics

Histogram
Describes how data are distributed.
(frequency distribution)
eg. Change of US 10-year treasury bond yield (monthly)
Thick-tailed (caused by a small number of large jumps)
Change of 10-year T-bond Yield
100
Sample 1962M01 2006M02
Observations 529
80

60

40

20

Mean
Median
Maximum
Minimum
Std. Dev.
Skewness
Kurtosis

0.000926
0.010000
1.590000
-1.880000
0.348751
-0.280792
6.565498

Jarque-Bera
Probability

287.1622
0.000000

Normal distribution:
skewness = 0,
kurtosis = 3.
At the 5% level,
reject normality if
Jarque-Bera > 5.99.

0
-1.5

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-1.0

-0.5

0.0

0.5

1.0

1.5

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Ch.4 Statistical Graphics

Empirical cumulative distribution (cdf)

Another way to look at how data are distributed.
eg. Change of US 10-year treasury bond yield (monthly)
Empirical CDF

80% of
observations are
below 0.23

1.0

Probability

0.8
0.6
0.4
0.2
0.0
-1.6

-1.2

-0.8

-0.4

0.0

0.4

0.8

1.2

Change

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my, School of Economics, UNSW

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Ch.4 Statistical Graphics

QQ-plot
Check how a theoretical distribution fits data.
For a perfect fit, the QQ-plot is a straight line.
eg. Change of US 10-year
treasury bond yield:
It appears non-normal.

std normal distribution:

(1/529)th quantile = -2.90

6
4

Normal Quantile

data with 529 observations:

(1/529)th quantile = -1.88

Theoretical Quantile-Quantile

(-1.88, -2.90)

2
0
-2
-4
-6
-2

-1

Change
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Ch.4 Statistical Graphics

EViews
Commands for the examples

EViews:
Read in bond10y.csv
File, Open, Foreign Data as Workfile,
bond10y.csv (in File name), Open,
Finish
Type in top panel
genr dy=close-close(-1)
plot close dy
dy.line
dy.hist
dy.distplot cdf
dy.qqplot
scalar q80=@quantile(dy, .8)
scalar qn529=@qnorm(1/529)

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Ch.4 Statistical Graphics

Style of graphs
Easy to understand
eg. indicate the meaning of axes
Highlight the point you are trying to make
Informative
eg. make self-explained graphs
Attractive
eg. use of proper colours and symbols
Avoid chart junk
eg. abuse of colours, shadings, grids,

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Ch.4 Statistical Graphics

Decomposition of a Time Series

Time series versus random sample
A random sample
is a set of independent observations on a variable,
often collected at one point in time.
eg. Income of a randomly-selected household
Med-insurance status of a randomly-selected household

A time series
is a set of observations on a variable observed
over consecutive time intervals.
eg. T-bond rate, gold price, retail sales, (daily, annual,...)
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Ch.4 Statistical Graphics

Features of economic time series data

Trend, seasonality, fluctuation/cycle
Autocorrelation (future is influenced by present)
eg. Department stores turnover: 1982.04 1999.10
Trend (sales growing), Seasonality (peak & trough repeats)
Cycle (random fluctuations)
8.0

2000

7.6

1600

7.2
1200

6.8
800

6.4
400

6.0
5.6

0
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84

86

88

90

92

94

96

98

82

84

Retail Turnover ($M)

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log Retail Turnover

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Ch.4 Statistical Graphics

Features of economic time series data

eg. Gold price ($US per fine ounce, London 3pm, 1/80-11/99)
- sub-samples very different; varying trends (randomly);
- persistent with few large jumps
Gold Price (USD/fine ounce, London 3pm)
700

600

500

400

300

200
80
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Ch.4 Statistical Graphics

Trend, seasonality and cycle

Let yt be a time series (observable).
Trend, mt, is the smoothly evolving part of yt.
It represents the long-run movement of yt.
log Retail Turnover: Trend

eg.
Trend in log retail turnover

8.0
7.6
7.2
6.8
6.4
6.0
5.6
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Ch.4 Statistical Graphics

Trend, seasonality and cycle

Seasonality, st, is the repetitive part of yt.
It repeats over a fixed number of periods.
eg. quartly seasonality repeats over 4 quarters.
eg. Log retail turnover: raw trend = detreded
= seasonality + cycle
log Retail Turnover: Trend & Seasonality

Cycle

Raw-Trend

Seasonality

.8

7
.4

6
5

.0

.12

.08

.00

-.04

-.08

-1

-.12

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.04

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Ch.4 Statistical Graphics

Trend, seasonality and cycle

Cycle, xt, is the random fluctuation in yt, aka
irregular component. It is a RV for each t.
eg. Interesting to know how xt and xt -1 are associated.
eg. Log retail turnover: cycle = raw trend seasonality
Theoretical Quantile-Quantile

Cycle
3

.08

Normal Quantile

.12

.04
.00
-.04

1
0
-1

-.08

-2

-.12

-3
-.12

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98

-.08

-.04

.00

.04

.08

.12

Cycle

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Ch.4 Statistical Graphics

Classical decomposition of yt
CD is a model that splits the observable time
series, yt, into three unobserved components:
Normalized to zero:
trend (mt), seasonality(st), cycle(xt)
so that each
component is
Additive decomposition
identified.
yt = mt + st + xt ,

st + p = st ,

s
i =1

t +i

= 0,

E( xt ) = 0,

where p is the number of periods in a season.

eg. p = 12 for monthly series
Multiplicative decomposition: Yt = Mt St Xt
But log(Yt) has an additive decomposition.
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Ch.4 Statistical Graphics

Classical decomposition of yt
e.g. Department stores turnover: 1982.04 1999.10
log Retail Turnover

Trend

8.0

8.0

7.6

7.5

7.2
7.0
6.8
6.5
6.4
6.0

6.0
5.6

5.5
82

84

86

88

90

92

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96

98

82

84

86

88

Seasonality

90

92

94

96

98

Cycle

1.5

.3

1.0

.2
.1

0.5
.0
0.0
-.1
-0.5

-.2

-1.0

-.3
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Ch.4 Statistical Graphics

Data and EViews

EViews:
Read in data by clicking
File, New, Workfile, Dated (in Workfile structure), Monthly (in Frequency),
1982:01 (in Start date), 1999:10 (in End date), OK;
Proc (on Workfile window), Import, Import from file,
departstoresTurnover05.xls (in File name), Open, Finish, OK
Time series plot of log sales by typing in top panel
genr y=log(sales)
y.line
Generate MA trend
genr ma12b=(y(-6)+y(-5)+y(-4)+y(-3)+y(-2)+y(-1)+y+y(1)+y(2)+y(3)+y(4)+y(5))/12
genr ma12f=(y(-5)+y(-4)+y(-3)+y(-2)+y(-1)+y+y(1)+y(2)+y(3)+y(4)+y(5)+y(6))/12
genr ma12=0.5*(ma12b+ma12f)
De-trended series
genr ydt=y-m12
plot y ma12
plot y ma12 ydt

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Ch.4 Statistical Graphics

Summary
List the types of graphs we used today.
Why plotting data is important?
What are the major components in a time series?
What is the additive decomposition?
Why must the seasonal component sum to zero
over a season?
Why is the mean of cycle component normalised
to zero?

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