Time

Series
Analysis:

Importance of time series:

1.Analysisofcausesandconditions
prevailingduringoccurrenceofpastchanges,
onecaneasilydeterminethefuturepoliciesand
programs
2.Estimationoffuturetrendsonthebasisof
analysisorpasttrends.
3.Trendsoftradecyclesarestudiedandtheir
effectcanbereducedtoaconsiderableextent.
4.Comparativestudywiththeothertime
series.

B.) Cyclical Fluctuations:Thefluctuationsorchanges

occurringineconomicactivitiesareknownascyclicalfluctuations.
Althoughtheyarealsoregularinnaturebutperiodofreoccurrence
ismorethanayear.Therearefourstagesincyclicalfluctuations:-
Boom,Recession,Depression,Recovery.
Irregular or random fluctuations:Whenchangesintime
seriesoccurduetosomeunforeseencausesthenitiscalledirregular
orrandomfluctuations.Predictionofirregularfluctuationsisvery
difficultastheyoccuraccidentally.Theyareoftwotypes:
A)Episodic Movement:Itoccursdueosomeunforeseen
situationforexwar,flooddrought,earthquakeetc.
B) Accidental Movements:Accidentalmovementsareof
randomnature.

Time Series
model
Analysis
includedecomposition
two steps:
Identify factors which influence the variations in
the series.
Isolating, analyzing & measuring the effect of
these factors independently.
Purpose of decomposition is to break a series
into components:
trend value (T), seasonal variations (S), cyclical

fluctuations (C) and irregular fluctuations(I).

Two models are:

Multiplicative Model.
Additive Model.

Multiplicative
Model
Y= T*C*S*I
This model is effective where the effect of C,S

and I is measured in relative sense instead of

absolute sense.
All variables are interdependent.
The geometric mean is less than 1.
EX: Sales = 423.36, Mean is 400, Current
cycle .90 and seasonality is 1.20, Random
fluctuation absent.
Expected value of sales = 400*.90*1.20=432.
Id the random factor decreases sale by 2%
then actual sales will be 432*.98= 423.36

Additive Model
Y= T+C+S+I
T, C, S, I are absolute quantities and can have

positive or negative values.

It is assumed that all four components are
independent

ANALYSIS OF TIME SERIES:

Studyofcomponentsoftimeseriesisknownasanalysisoftime
series.Theoriginaldata(O)isacombinationof,trendvalue(T),
seasonalvariations(S),cyclicalfluctuations(C)andirregular
fluctuations(I).Analysisofallthesecomponentsoftimeseries
separatelyisknownasanalysisoftimeseries.
Measures Of Secular Trend:

1.FreehandCurveMethod
2.SmoothingMethods:
SemiAverageMethod

MovingAverageMethod

4.TrendProjectionMethods
LeastSquareMethod

FREEHAND CURVE METHOD:

Itisthemostsimplestmethodaccordingtothismethod
firstlytimeseriesisplottedonthegraphpaper,keeping
inviewthedirectionoffluctuationofthetimeseries
straightlineorcurveisdrawnpassingthroughthe
midpoints.Thelineorcurverepresentsthesecular
trend.

Ex 1. Find out the secular trend by freehand curve

method:
Yr

1985 86

Prod (lacs) 15

23

87

88

89

90

19

27

24

30

P
R
O
D
U
C
T
I
O
N
YEARS

SEMI-AVERAGE METHOD:
Acctothismethodtheoriginaldataisdividedintotwo
parts.Thenthemeanofboththepartsiscalculated
separately.
Ex2.Determinethetrendbyapplyingthesemi-average
method.

Yr. 1990 91
92
93
94
95
Sales 50
58
54
71
66
74

Moving Average Method:

Thisisthesimpleandmostwidelyusedmethod
forthecalculationoftrendvalues.Inthisfirstly
wehavetodecidewhatwillbetheperiodof
movingaverage?Theperiodcanbeoddi.e3,5,
7,9,11oreveni.e2,4,6,8,10years

Table Format

Years Production/Sales.
1
2
3
4
5
6
7
8

X1
X2
X3
X4
X5
X6
X7
X8

3yearly
movingtotal
X1+X2+X3
X2+X3+X4
X3+X4+X5
.
.
.
.

3yearlymoving
average
X1+X2+X3/3
X2+X3+X4/3
X3+X4+X5/3
.
.
.
.

Ex 4Findtheseculartrendby3yearlymoving
average.
Yr
Sales(inlacs)
2001
45
2002
40
2003
48
2004
62
2005
54
2006
75
2007
50
2008
82

4 Yearly Moving Average Table Format

Year

1
2

Production/s 4YearlyMoving 4YearlyMoving

ales
TotalUn
AverageUncentered
centered
X1
X2
X1+X2+X3+X4

A+B/2
B=X2+X3+X4+X5/4

X4

B+C/2
X3+X4+X5+X6

5
6

A=X1+X2+X3+X4/4

X3
X2+X3+X4+X5

4YearlyCentered
MovingAverage
(Trend)

X5
X6

C=X3+X4+X5+X6/4

Ex5: Findtheseculartrendby4yearlymovingaverage

Yr

Value

2001

506

2002

620

2003

1036

2004

673

2005

588

2006

696

2007

1116

2008

738

2009

663

Trend
Methods
It is bestProjection
represented by straight line is
termed as long run directions(upward,
downward, constant), of any business
activity over a period of several years.
Reasons to study trend:
Helps in describing long term general

directions of any business activity over a

long period of time.
It helps in making intermediate and long
term forecasting projections.

Least Square Method:

Itiscalculatedtobethebestmethodforcalculatingthe
trendvalues.Thetrendlineobtainedbythismethodsis
calledlineofbestfit.Thislinecanbeastraightlineor
paraboliccurve.
Least Square Method: Thismethodcanbeusedinboth
caseswhenno.ofyearsareoddaswellaseven.
Y

XY =

Na+bX
aX+bX2

Function Equation

Y=a+bx

Table format of least square method

Year

Prod
/Sales

X2

XY

Trend
Values
Yc=
a+bX

.
.
.

.
.
.

.
.
.

.
.
.

.
.
.

.
.
.

X2

XY

Yc

Ex 6Fitthestraightlinetrendbyleastsquaremethod:
Yr

Production(lacs)

2002

2003

2004

2005

10

2006

12

2007

17

Ex7 Fitthestraight-linetrendbyleastsquaremethod.
Alsopredictthesalesforyear2010

Yr

Sales(000)

2003

80

2004

90

2005

92

2006

83

2007

94

2008

99

2009

92

Fitthestraight-linetrendbyleastsquaremethodby
assuming2005asthebaseyear.Alsopredictthesales
foryear2010
Yr

Value

2001

506

2002

620

2003

1036

2004

673

2005

588

2006

696

2007

1116

2008

738

2009

663