TIME SERIES
Meaning
An arrangement of statistical data in accordance with time of occurrence
or in a chronological order is called a time series. The numerical data which we
get at different points of time-the set of observations-is known as time series.
In time series analysis, current data in a series may be compared with past
data in the same series. We may also compare the development of two or more
series over time. These comparisons may afford important guide lines for the
individual firm. In Economics, statistics and commerce it plays an important role.
Definition and Examples
A time series is a set of observations made at specified times and arranged
in a chronological order.
For example, if we observe agricultural production, sales, National Income
etc., over a period of time, say over the last 3 or 5 years, the set of observations
is called time series. Thus a time series is a set of time, quantitative readings of
some various recorded at equal intervals of time. The interval may be an hour, a
day, a week, a month, or a calendar year. Hourly temperature reading, daily sales
in a shop, weekly sales in a shop, weekly sales in a market, monthly production
in an industry, yearly agricultural production, population growth in ten years, are
examples of time series.
From the comparison of past data with current data, we may seek to
establish what development may be expected in future. The analysis of time series
is done mainly for the purpose of forecasts and for evaluating the past
performances. The chronological variations will be object of our study in time
series analysis.
The essential requirements of a time series are:
The time gap, between various values must be as far as possible, equal.
It must consist of a homogeneous set of values.
Data must be available for a long period.
Symbolically if ’t’ stands for time and ’yt‟ represents the value at time t then
the paired values (t, yt) represents a time series data.
Uses of Time Series
The analysis of time series is of great significance not only to the
economists and business man but also to the scientists, astronomists, geologists,
sociologists, biologists, research worker etc. In the view of following reasons
It helps in understanding past behavior.
It helps in planning future operations.
It helps in evaluating current accomplishments.
It facilitates comparison.
Mathematical Model
In classical analysis, it is assumed that some type of relationship exists
among the four components of time series. Analysis of time series requires
decomposition of a series, to decompose a series we must assume that some type
of relationship exists among the four components contained in it. The value Yt of
a time series at any time t can be expressed as the combinations of factors that
can be attributed to the various components. These combinations are called as
models and these are two types.
Additive model
Multiplicative model
Additive Model
In classical time series analysis it is assumed that any given observation is
made up of trend, seasonal, cyclical and irregular movements and these four
components have multiplicative relationship:
Symbolically :
yt = Tt + St + Ct + It
where
Y refers to the original data
T refers to Secular trend
S refers to Seasonal variations
C refers to cyclical variations
I refers to irregular variations
This model assumes that all four components of the time series act independently
of each other.
Multiplicative Model
The multiplicative model assumes that the various components in a time
series operate proportionately to each other. According to this model
yt = Tt × St × Ct × It
Components of Time Series
The values of a time series may be affected by the number of movements
or fluctuations, which are its characteristics. The types of movements
characterizing a time series are called components of time series or elements of a
time series.
These are four types
Secular Trend
Seasonal Variations
Cyclical Variations
Irregular Variations
Secular Trend
Secular Trend is also called long term trend or simply trend. The secular
trend refers to the general tendency of data to grow or decline over a long period
of time. For example the population of India over years shows a definite rising
tendency. The death rate in the country after independence shows a falling
tendency because of advancement of literacy and medical facilities. Here long
period of time does not mean as several years. Whether a particular period can be
regarded as long period or not in the study of secular trend depends upon the
nature of data. For example if we are studying the figures of sales of cloth store
for 1996 - 1997 and we find that in 1997 the sales have gone up, this increase
cannot be called as secular trend because it is too short period of time to conclude
that the sales are showing the increasing tendency.
On the other hand, if we put strong germicide into a bacterial culture, and
count the number of organisms still alive after each 10 seconds for 5 minutes,
those 30 observations showing a general pattern would be called secular
movement.
Seasonal Variations
Seasonal variations occur in the time series due to the rhythmic forces
which occurs in a regular and a periodic manner with in a period of less than one
year. Seasonal variations occur during a period of one year and have the same
pattern year after year. Here the period of time may be monthly, weekly or hourly.
But if the figure is given in yearly terms then seasonal fluctuations does not exist.
There occur seasonal fluctuations in a time series due to two factors.
Due to natural forces
Manmade convention.
The most important factor causing seasonal variations is the climate changes
in the climate and weather conditions such as rain fall, humidity, heat etc. act on
different products and industries differently. For example during winter there is
greater demand for woollen clothes, hot drinks etc. Where as in summer cotton
clothes, cold drinks have a greater sale and in rainy season umbrellas and rain
coats have greater demand. Though nature is primarily responsible for seasonal
variation in time series, customs, traditions and habits also have their impact. For
example on occasions like dipawali, dusserah, Christmas etc. there is a big
demand for sweets and clothes etc., there is a large demand for books and
stationary in the first few months of the opening of schools and colleges.
Cyclical Variations or Oscillatory Variation
This is a short term variation occurs for a period of more than one year.
The rhythmic movements in a time series with a period of oscillation( repeated
again and again in same manner) more than one year is called a cyclical variation
and the period is called a cycle. The time series related to business and economics
show some kind of cyclical variations. One of the best examples for cyclical
variations is ‘Business Cycle’. In this cycle there are four well defined periods or
phases.
Boom
Decline
Depression
Improvement
Figure: Phases of Business Cycle
Irregular Variation
It is also called Erratic, Accidental or Random Variations. The three
variations trend, seasonal and cyclical variations are called as regular variations,
but almost all the time series including the regular variation contain another
variation called as random variation. This type of fluctuations occurs in random
way or irregular ways which are unforeseen, unpredictable and due to some
irregular circumstances which are beyond the control of human being such as
earth quakes, wars, floods, famines, lockouts, etc. These factors affect the time
series in the irregular ways. These irregular variations are not so significant like
other fluctuations.
Measurement of Secular trend:
Secular trend is a long term movement in a time series. This component
represents basic tendency of the series. The following methods are generally used
to determine trend in any given time series. The following methods are generally
used to determine trend in any given time series.
Free hand or Graphic method or eye inspection method
Semi average method
Method of moving average
Method of least squares
Method of Semi Averages:
Procedure:
The data is divided into two equal parts. In case of odd number of data,
two equal parts can be made simply by omitting the middle year.
The average of each part is calculated, thus we get two points.
Each point is plotted at the mid-point (year) of each half.
Join the two points by a straight line.
The straight line can be extended on either side.
This line is the trend line by the methods of semi-averages.
In this method the whole data is divided in two equal parts with respect to
time. For example if we are given data from 1999 to 2016 i.e. over a period of 18
years the two equal parts will be first nine years i.e. from 1999 to 2007 and 2008
to 2016. In case of odd number of years like 9, 13, 17 etc. two equal parts can be
made simply by omitting the middle year. For example if the data are given for
19 years from 1998 to 2016 the two equal parts would be from 1998 to 2006 and
from 2008 to 2016, the middle year 2007 will be omitted. After the data have
been divided into two parts, an average (arithmetic mean) of each part is obtained.
We thus get two points. Each point is plotted against the mid year of the each
part. Then these two points are joined by a straight line which gives us the trend
line. The line can be extended downwards or upwards to get intermediate values
or to predict future values.
Advantages:
This method is simple to understand as compare to moving average method
and method of least squares.
This is an objective method of measuring trend as everyone who applies
this method is bound to get the same result.
Disadvantages:
The method assumes straight line relationship between the plotted points
regardless of the fact whether that relationship exists or not.
The main drawback of this method is if we add some more data to the
original data then whole calculation is to be done again for the new data to
get the trend values and the trend line also changes.
As the Arithmetic Mean of each half is calculated, an extreme value in any
half will greatly affect the points and hence trend calculated through these
points may not be precise enough for forecasting the future.
Example 1:
Thus we get two points 41.75 and 53.75 which shall be plotted
corresponding to their middle years i.e. 2002.5 and 2006.5. By joining these
points we shall obtain the required trend line. This line can be extended and can
be used either for prediction or for determining intermediate values.
Example 2:
Fit a trend line by the method of semi-averages for the given data.
Solution:
Since the number of years is odd(seven), we will leave the middle year’s
production value and obtain the averages of first three years and last three years.
Example 3:
Fit a trend line by the method of semi-averages for the given data.
Solution:
Since the number of years is even(eight), we can equally divide the given data it
two equal parts and obtain the averages of first four years and last four years.
Method of Moving Average:
It is a method for computing trend values in a time series which eliminates
the short term and random fluctuations from the time series by means of moving
average. Moving average of a period m is a series of successive arithmetic means
of m terms at a time starting with 1st, 2nd , 3rd and so on. The first average is the
mean of first m terms; the second average is the mean of 2nd term to (m+1)th
term and 3rd average is the mean of 3rd term to (m+2)th term and so on.
If m is odd then the moving average is placed against the mid value of the
time interval it covers. But if m is even then the moving average lies between the
two middle periods which does not correspond to any time period. So further
steps has to be taken to place the moving average to a particular period of time.
For that we take 2-yearly moving average of the moving averages which
correspond to a particular time period. The resultant moving averages are the
trend values.
Advantages:
This method is simple to under stand and easy to execute.
It has the flexibility in application in the sense that if we add data for a few
more time periods to the original data, the previous calculations are not
affected and we get a few more trend values.
It gives a correct picture of the long term trend if the trend is linear.
If the period of moving average coincides with the period of oscillation
(cycle), the periodic fluctuations are eliminated.
The moving average has the advantage that it follows the general
movements of the data and that its shape is determined by the data rather
than the statistician’s choice of mathematical function.
Disadvantages:
For a moving average of 2m+1, one does not get trend values for first m
and last m periods.
As the trend path does not correspond to any mathematical; function, it
cannot be used for forecasting or predicting values for future periods.
If the trend is not linear, the trend values calculated through moving
averages may not show the true tendency of data.
The choice of the period is sometimes left to the human judgment and
hence may carry the effect of human bias.
Example:
Compute 5-year, 7-year and 9-year moving averages for the following data.
Years 1990 1991 1992 1993 1994 1995 1996 19997 1998 1999 2000
Values 2 4 6 8 10 12 14 16 18 20 22
Solution:
The necessary calculations are given below:
5-Year Moving 7-Year Moving 9-Year Moving
Years Values Total Average Total Average Total Average
1990 2 --- --- --- --- --- ---
1991 4 --- --- --- --- --- ---
1992 6 30 6 --- --- --- ---
1993 8 40 8 56 8 --- ---
1994 10 50 10 70 10 90 10
1995 12 60 12 84 12 108 12
1996 14 70 14 98 14 126 14
1997 16 80 16 112 16 ---
1998 18 90 18 --- --- --- ---
1999 20 --- --- --- --- --- ---
2000 22 --- --- --- --- --- ---
Example:
Compute 4-year moving averages centered for the following time series:
Years 1995 1996 1997 1998 1999 2000 2001 2002
Production 80 90 92 83 87 96 100 110
Solution:
The necessary calculations are given below:
4-Year 4-Year
2-values 4-year Moving
Year Production Moving Moving
Moving Total Average Centered
Total Average
1995 80 --- --- --- ---
1996 90 345 86.25 --- ---
1997 92 352 88.00 174.25 87.125
1998 83 358 89.50 177.50 88.750
1999 87 366 91.50 181.00 90.500
2000 96 393 98.25 189.75 94.875
2001 100 --- --- --- ---
2002 110 --- --- --- ---
Method of Least Squares:
The method of least squares as studied in time series analysis is used to find
the trend line of best fit to a time series data.
If a straight line is fitted to the data it will serve as a satisfactory trend,
perhaps the most accurate method of fitting is that of least squares. This method
is designed to accomplish two results.
(i) The sum of the vertical deviations from the straight line must equal zero.
(ii) The sum of the squares of all deviations must be less than the sum of the
squares for any other conceivable straight line.
There will be many straight lines which can meet the first condition.
Among all different lines, only one line will satisfy the second condition. It is
because of this second condition that this method is known as the method of least
squares. It may be mentioned that a line fitted to satisfy the second condition, will
automatically satisfy the first condition.
The secular trend line (Y) is defined by the following equation:
Yt = a + b X
Where, Y = predicted value of the dependent variable
a = Y-axis intercept i.e. the height of the line above origin (when X = 0, Y = a)
b = slope of the line (the rate of change in Y for a given change in X)
When b is positive the slope is upwards, when b is negative, the slope is
downwards
X = independent variable (in this case it is time)
To estimate the constants a and b, the following two equations have to be solved
simultaneously:
ΣY = na + b ΣX
ΣXY = aΣX + bΣX2
Advantages
This is a mathematical method of measuring trend and as such there is no
possibility of subjectiveness i.e. everyone who uses this method will get
same trend line.
The line obtained by this method is called the line of best fit.
Trend values can be obtained for all the given time periods in the series.
Disadvantages
Great care should be exercised in selecting the type of trend curve to be
fitted i.e. linear, parabolic or some other type. Carelessness in this respect
may lead to wrong results.
The method is more tedious and time consuming.
Predictions are based on only long term variations i.e trend and the
impact of cyclical, seasonal and irregular variations is ignored.
Example 1
Fit a straight line trend on the following data using the Least Squares Method.
Period 1996 1997 1998 1999 2000 2001 2002 2003 2004
(year)
Y 4 7 7 8 9 11 13 14 17
Solution:
Total of 9 observations are there. So, the origin is taken at the Year 2000 for
which X is assumed to be 0.
YEAR Y X = Year - 2000 XY X2
Trend
1996 4 -4 -16 16
4.12
1997 7 -3 -21 9
5.59
1998 7 -2 -14 4
7.06
1999 8 -1 -8 1
8.53
2000 9 0 0 0
10
2001 11 1 11 1
11.47
2002 13 2 16 4
12.94
2003 14 3 42 9
14.41
2004 17 4 68 16
15.88
Total (Σ) ΣY = 90 ΣX = 0 ΣXY = 88 SΣX2 =60 90
From the table we find that value of n is 9, value of ΣY is 90, value of ΣX
is 0, value of ΣXY is 88 and value of ΣX2 is 60.
Substituting these values in the two given equations,
ΣY = na + b ΣX
90 = 9(a) + b(0)
90 = 9a
a = 90/9
a = 10
ΣXY = aΣX + bΣX2
88 = 10(0) + b(60)
88 = 60b
b = 88/60
b = 1.47
Trend equation is:
Yt = 10 + 1.47 X
For X = -4, Yt = 10 + 1.47(-4) = 4.12
For X = -3, Yt = 10 + 1.47(-3) = 5.59
For X = -2, Yt = 10 + 1.47(-2) = 7.06
For X = -1, Yt = 10 + 1.47(-1) = 8.53
For X = 0, Yt = 10 + 1.47(0) = 10
For X = 1, Yt = 10 + 1.47(1) = 11.47
For X = 2, Yt = 10 + 1.47(2) = 12.94
For X = 3, Yt = 10 + 1.47(3) = 14.41
For X = 4, Yt = 10 + 1.47(4) = 15.88
Example 2
Fit a straight line trend on the following data using the Least Squares Method.
Year 2000 2001 2002 2003 2004 2005 2006 2007
Sales 80 90 92 83 94 99 92 104
Solution:
Total of 9 observations are there. So, the origin is taken at the Year 2000 for
which X is assumed to be 0.
YEAR Y X = Year - 2003.5 XY X2
Trend
2000 80 -3.5 -560 12.25
74.25
2001 90 -2.5 -450 6.25
79.25
2002 92 -1.5 -276 2.25
84.25
2003 83 -0.5 -83 0.25
89.25
2004 94 0.5 94 0.25
94.25
2005 99 1.5 297 2.25
99.25
2006 92 2.5 460 6.25
104.25
2007 104 3.5 728 12.25
109.25
Total ΣY = ΣXY = 734
ΣX = 0 SΣX2 =42
(Σ) 734 210
From the table we find that value of n is 8, value of ΣY is 734, value
of ΣX is 0, value of ΣXY is 210 and value of ΣX2 is 42.
Substituting these values in the two given equations,
ΣY = na + b ΣX
734 = 8(a) + b(0)
734 = 8a
a = 734/8
a = 91.75
ΣXY = aΣX + bΣX2
210 = 91.75(0) + b(42)
210 = 42b
b = 210/42
b=5
Trend equation is:
Yt = 91.75 + 5 X
For X = -3.5, Yt = 91.75 + 5(-3.5) = 74.25
For X = -2.5, Yt = 91.75 + 5(-2.5) = 79.25
For X = -1.5, Yt = 91.75 + 5(-1.5) = 84.25
For X = -0.5, Yt = 91.75 + 5(-0.5) = 89.25
For X = 0.5, Yt = 91.75 + 5(0.5) = 94.25
For X = 1.5, Yt = 91.75 + 5(1.5) = 99.25
For X = 2.5, Yt = 91.75 + 5(2.5) = 104.25
For X = 3.5, Yt = 91.75 + 5(3.5) = 109.25
