UNIT II

TIME SERIES ANALYSIS

A series of observations recorded in accordance with the time of occurrence is called time
series. Such data are of particular interest in economics, business and commerce, where the
values of the variables are observed chronologically is in days, weeks, months, quarters or
years.
Illustration: Production, Consumption sales, profits, bank clearing during successive periods
of time.
Time Series usually refers to economic data, it equally arise to data arising in the natural
and the other social sciences. The time sequence is of prime importance and it requires
special techniques for the analysis of the series. We analyse the part in order to understand the
future.
Symbolically yt denotes the value of the variable at timet (t=1, 2,...n). In case the figure
relate to n successive periods (and not points of time), t is to be taken as the midpoint of the
tth period.
COMPONENTS OF TIME SERIES
A graphical representation of a time series will reveal the changes over time. A series which
exhibits no change during the period under consideration will give a horizontal line; however,
usually we shall come across time series showing continual change over time, giving us an
overall impression of haphazard movement. A critical study of the series will however reveal
that the change is not totally haphazard and a part of it at least, can be accounted for. The part
which can be accounted for is the systematic part and the remaining part is unsystematic or
irregular component (I). The systematic part may be attributed to several broad factors. Viz
1. SECULAR TREND (T)
Also known as Trend. It is the smooth, regular and long term movement exhibiting
the tendency of growth or decline over a period of time.
Illustration 1: An upward tendency would be seen in data pertaining to population,
currency in circulation, agricultural production.
Illustration 2: A download tendency will be noticed in data of births and deaths,
epidemics as a result of advancement in medical sciences, better
medical facilities, literacy and higher standard of living.
It may be clearly noted that trend is the general, smooth, long-term, average tendency.
It is not necessary that the increase or decline should be in the same direction
throughout the given period. However, the overall tendency may be upward,
downwards or stable. Such tendencies are the result of the forces which are more or
less constant for a long time or which change gradually and continuously over a
period of time such as the change in the population, taste habits and customs of the
people in a society and so on.

It should not be inferred that all the series must show an upward or downward trend.
We might come across certain series whose values fluctuate round a constant reading
which does not change with time example the series of barometric readings or the
temperature of a particular place.
If the time series values plotted on a graph cluster more, or less, round a straight line,
then the trend exhibited by the time series is termed as linear otherwise non-linear. In
a straight line trend, the time series values increase or decrease more or less by a
constant absolute amount i.e. the rate of growth (or decline) is constant.
2. SEASONAL TREND (S)
These variations in a time series are due to rhythmic forces which operate in a regular
and periodic manner over a span of less than a year i.e. during the period on 12
months and have the same or almost same pattern year after year. Thus seasonal
variations in a time series will be there if the data are recorded quarterly, monthly,
weekly, daily, hourly and so on.
The seasonal variations may be attributed to the following two causes:
a. Resulting from natural causes:
As the name suggest, the various seasons or weather conditions and climatic
changes play an important role in seasonal variations. For example the sale of
umbrellas pick up very fast in rainy seasons, the demand of electric fans goes up
in summer seasons.
b. Resulting from man-made conventions:
These variations in a time series within period of 12 months are due to habits,
fashions, customs and conventions of the people in the society. For example the
sale of jewellery and ornaments goes up in marriages, the sales and profits in
departmental stores goes up considerably during marriages and festivals like
Diwali, Dussehra, and Christmas etc.
Such variations operate in a regular spasmodic manner and reoccur year after year.
3. CYCLICAL VARIATION (C)
The oscillatory movements in a time series with period of oscillation more than one
year are termed as cyclic fluctuations. One complete period called Cycle. The
cyclic movements in a time series are generally attributed to the so called Business
Cycle, which may also be referred to as the four-phase cycle composed of
Prosperity (period of boom), Recession, depression and recovery. For example series
relating to prices, production and wages etc are affected by business cycles.
Remark: In a given time series, some or all of the above components may be present.
Separation of the different components of a time series is of importance, because it may be
that we are interested in a particular component or that we want to study the series after
eliminating the effects of a particular component.
4. Irregular (or Random) Component (I)
Apart from the regular variations, almost all the series contain another factor called
the random or irregular
MATHEMATICAL MODEL

In the classical or traditional approach, it is assumed that there is a multiplicative relationship

between the four components, i.e. any particular observation is considered to be the product
of the effects of four components (When the components of time series are dependent on each
other):
y t =T S C I

(Multiplicative model)

Another approach is to assume an additive relation between them,

y t =T + S+C + I (Additive model)
This model, however is generally used when all the components of time series are
independent of each other.
MEASUREMENTS OF TRENDS
There are four methods of isolating secular trend in time series:
1. Free-hand method (Graphical Method)
In Free-hand method, the given data are plotted as points on a graph paper against
time. The time series data (yt) are shown along the vertical axis and time (t) along the
horizontal axis. Then a smooth curve is drawn through the scatter of the plotted
points, which appears to represent their pattern of movement over time. The distance
of this line, known as trend line, gives the trend value for each period.
Advantage:
Quick estimate of trend.
Demerit:
Depends on individual judgement and different person will obtain different
trend values from the same data
This does not enable us to trend.
2. Semi-average method
In this method, the whole data is divided into two parts with respect to time and then
finding the average for each part. These averages are plotted as points on a graph
paper against the mid-point of the time interval covered by each part. For example if
we are given yt for t from 1991-2002, i.e. over a period of 12 years, the two equal
parts will be the data from 1991-1997 and 1997-2002. In case of odd numbers of
years the two parts are obtained by omitting the value corresponding the middle year.
For data from 1991-2001 two equal parts will be 1991-1995 and 1997-2001.
Merit:
As compared with graphical method, this method is more accurate and
everyone who applies this method will get the same result.
Demerit:
This method assumes linear relationship between the plotted points which may
not exists.
3. Moving average method:

This method is very commonly used for the isolation of trend and in smoothing out
fluctuations in time series. In this method, a series of arithmetic means of successive
observations, known as moving averages are calculated from the given data and these
moving averages are used as a trend values. Precisely moving averages of period n are
a series of arithmetic means of groups of successive n observations, and shown
against the mid-points of the intervals covered by the respective groups.
Merit:
This method is very simple and needs no complicated mathematical
calculations.
Demerit:
Some trend values at the beginning and at the end of the series cannot be
obtained.
4. Fitting mathematical curves (or Least square method)
This is one of the best method and most objective method for determining the trend.
In this method appropriate type of mathematical equation is selected for trend, and the
constants appearing in the trend equation are determined on the basis of the given
time series data. The objective of this method is to minimise the error. The choice of
the appropriate type of equation is facilitated by graphical representation of the data.
The various types of curves that may be used to describe the given data in practice
are:
i.
Straight Line: y= a + bx
(a & b are constants)
As there are two constants so we require two equations to estimate the value of
a and b. The two equations are known as normal equations:
y =na+b x

xy=a x+ b x2

ii.

Solving these two equations simultaneously we get the value of a and b.

Putting these values back into the straight line equation. The equation so
formed will give trend values.
2
Second degree parabola (or quadratic curve): y=a+bx+ c x
(a, b and
c are the constants). To estimate the value of these constants we require three
normal equations:
y =na+b x +c x2

xy=a x+ b x2 +c x 3
2

x y=a x +b x +c x

iii.

Solving these equations simultaneously we get the value of a, b and c. Putting

these values back into the equation. The equation so formed will give trend
values.
x
Exponential equation: y=ab
Taking log both side
log y=log a+ x log b

Let log y = Y, log a=A log b = B

New equation so formed is Y=A + Bx which is a straight line equation.
Merits

The method of fitting mathematical curves completely eliminates personal

bias
Trend values for all the given time periods can be obtained.
This method enables us to forecast future trends.

Demerits

The choice of the type of the curve is rather subjective.

The calculations for this method are more difficult than in the other methods.