Time Series Analysis

Time Series A series of observations, on a variable, recorded after successive intervals of time is known as Time Series. The successive intervals are usually equal time intervals and it can be a year, a quarter, a month, a week, a day, an hour etc. Examples- Annual sales of a company in past 10 years, weekly closing of a stock in past 52 weeks, etc. Objectives of Time Series Analysis There are three main objectives of analysis of times series data To study the past behavior To check the present performance To make forecasts for future

Components of Time Series

1. Trend: It is the general tendency of the data to increase or decrease or stagnant over a longer period of

time. When observations are plotted against time, a straight line describes the increase or decrease in the time series over a period of time. For example, data regarding industrial production, population, bank deposits, etc.

2. Cyclicality: An upward or downward movement in the variable value about the trend time over a time

period is called cyclicality. Generally cyclical variations have a time period of more than one year. For example the movement of business cycle.

3. Seasonality: It is a special case of cycle component of time series in which fluctuations are repeated

usually with in a year (e.g. daily, weekly, monthly, quarterly) with a high degree of regularity. For example, average sales of a retail store may increase in festive season.

4. Irregularity: These are rapid changes or bleeps in time series due to short term, unpredictable and

unanticipated events. These variations are caused by random factors such as strike, floods, fire, war, etc. This component is obtained after the elimination of trend, seasonal and cyclical components and hence is often termed as residual components.

Analysis of Time Series

The purpose of analysis of time series is to decompose a time series (Y t) into four components i.e. Trend (Tt), Cyclicality (Ct), Seasonality (St) and Irregularity (It). For this purpose we have two models-

a) Additive Model: This model is based on the assumption that the value of the variable of a time series, at

a point of time t, is the sum of write-

the four components. We can

Yt = Tt x Ct x St x It

Yt = Tt + Ct + St + It
This model assumes that all the four components of time series act independently of one another. This assumption implies that one component ha no effect on the others irrespective of their magnitude.
b) Multiplicative Model: This model is based on the assumption that the value of the variable of a time

series, at a point of time t, is the multiplication of the four components. We can write-

This model implies that although the four components may be due to different causes, these are, strictly speaking, not independent of each other. Trend Analysis Trend analysis often refers to techniques for extracting an underlying pattern of behavior in a time series. Trend analysis tries to predict a trend like a bull market run and ride that trend until data suggests a trend reversal (e.g. bull to bear market). Trend analysis is helpful because moving with trends, and not against them, will lead to profit for an investor. Reasons to Study Trend

The study of trend helps to describe the long-run general direction (upward, downward, and constant) of a business climate over a period of several years. The study allows us to use trend as an aid in making intermediate and long-range forecasting in the future. The study of trends helps to isolate and then eliminate its influencing effects on the time series model.

Methods of Trend Analysis: Least Square Method: The method of least squares assumes that the best-fit curve of a given type is the curve that has the minimal sum of the deviations squared (least square error) from a given set of data. The applications of the method of least squares curve fitting using polynomials are briefly discussed as followsi) Linear Trend: The linear trend line is defined by the following equation-

Y = a + bt

Where Y = Trend value at time t, a = value of trend when t = 0, b = Change in Y per unit change in time Let X = t-A such that X = 0, where A = year of origin The above equation can also be written asY = na + bX XY = nX + bX
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Since X = 0, we can write

ii) Non-Linear (Parabolic) Trend: The mathematical form of a parabolic trend is given by the following

equationY = a + bt + ct Let X = t-A such that X = 0, where A = year of origin Using the of least equations for the solution of a, b, and c areY = na + bX + cX
2 2 3 3
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a = Y- cX /n
2

and
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b = XY/X
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squares, the normal simultaneous

c = n X Y-(X ) (Y)/nX -(X )

XY = nX + bX + cX
2 2

X Y = nX + bX + cX After solving these equations we get the values of a, b, and c

Conversion of Annual Trend Equation into Monthly & Quarterly Trend: Usually a trend is fitted to the annual figure because the fitting of a monthly trend is time consuming. However, monthly or quarterly trend equations are often obtained from annual equations. Let the annual trend equation be Y = a + bX, where Y denotes annual figures and the unit of X = 1year. Monthly trend can be obtained by Y = a/12 + b/144X Quarterly trend can be obtained a/4 + b/16X (X = 1 Quarter) (X = 1 Month) by Y = a = Y/n and b = XY/X
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