Introduction to Time Series

The statistical data is recorded with its time of occurrence is called a time series.
The yearly output of wheat recorded for the last twenty five years, the weekly
average price of eggs recorded for the last 52 weeks, the monthly average sales of a
firm recorded for the last 48 months or the quarterly average profits recorded for
the last 40 quarter etc., are example of time series data. It may be observed that
this data undergoes changes with the passage of time. A number of factors can be
isolated with contribute to the changes occurring overtime in such series.

In the field of economics and business, for example, income, imports exports,
production, consumption, prices these data are depend on time. And all of these
data are pretentious by seasonal changes as well as regular cyclical changes over
the time period. To evaluate the changes in business and economics, the analysis of
time series plays an important role in this regard. It is necessary to associated time
with time series because time is one basic variable in time series analysis.

Components of Time Series

The factors that are responsible to bring about changes in a time series, also called
the components of time series, are as follows:

1. Secular Trend (or General Trend)

2. Seasonal Movements
3. Cyclical Movements
4. Irregular Fluctuations
Secular Trend:
The secular trend is the main component of a time series which results from long
term effect of socio-economic and political factors. This trend may show the growth
or decline in a time series over a long period. This is the type of tendency which
continues to persist for a very long period. Prices, export and imports data, for
example, reflect obviously increasing tendencies over time.

Seasonal Trend:
These are short term movements occurring in a data due to seasonal factors. The
short term is generally considered as a period in which changes occur in a time
series with variations in weather or festivities. For example, it is commonly
observed that the consumption of ice-cream during summer us generally high and
hence sales of an ice-cream dealer would be higher in some months of the year
while relatively lower during winter months. Employment, output, export etc. are
subjected to change due to variation in weather. Similarly sales of garments,
umbrella, greeting cards and fire-work are subjected to large variation during
festivals like Valentines Day, Eid, Christmas, New Year etc. These types of variation
in a time series are isolated only when the series is provided biannually, quarterly
or monthly.

Cyclic Movements:
These are long term oscillation occurring in a time series. These oscillations are
mostly observed in economics data and the periods of such oscillations are
generally extended from five to twelve years or more. These oscillations are
associated to the well known business cycles. These cyclic movements can be
studied provided a long series of measurements, free from irregular fluctuations is
available.

Irregular Fluctuations:
These are sudden changes occurring in a time series which are unlikely to be
repeated, it is that component of a time series which cannot be explained by trend,
seasonal or cyclic movements .It is because of this fact these variations some-times
called residual or random component. These variations though accidental in
nature, can cause a continual change in the trend, seasonal and cyclical oscillations
during the forthcoming period. Floods, fires, earthquakes, revolutions, epidemics
and strikes etc,. are the root cause of such irregularities.

Analysis of Time Series

The object of the time series analysis is to identify the magnitude and direction of
trend, to estimate the effect of seasonal and cyclical variations and to estimate the
size of the residual component. This implies the decomposition of a time series into
its several components. Two lines of approach are usually adopted in analyzing a
given time series, namely,
 (i) The additive model
(ii) The multiplicative model

Thus, if we denote the time series by YY, the secular trend by TT, the seasonal or
short term periodic movements by SS, the long term cyclical movements
by CC and the irregular or residual component by RR, then the additive model can
be described as

Y=T+S+C+RY=T+S+C+R

While, the multiplicative model can be describe as

Y=TSCRY=TSCR

The additive model is generally used when the time series is spread over a short
time span or where the rate of growth or decline in the trend is small. The
multiplicative model, which is more in use than the additive model, is generally
used whenever the time span of the series is large or the rate of growth or decline
is would be

YT=S+C+RYT=S+C+R
or

YT=SCRYT=SCR

Similarly, a de-trended, de-seasonalized series may be obtained as

YTS=C+RYTS=C+R
or

YTS=CRYTS=CR

It is not always necessary that the time series may include all four types of
variations, rather one or more of these components might be missing altogether.
For example, using annual data the seasonal component may be ignored, while in a
time series of short span, having monthly or quarterly observations, the cyclical
component may be ignored.