1 STA 312 1.

5 TIME SERIES I

STA 312 1.5 Time Series I

1. Introduction 1.1 Definition A time series is a collection of observations of some variable made sequentially in time, in which usually the time intervals are regular intervals. Many sets of data appear as time series: a monthly sequence of the quantity of goods shipped from a factory, a weekly series of the number of road accidents, hourly observations made on the yield of a chemical process, and so on. Examples of time series abound in such fields as economics, business, engineering, marketing, process control, natural sciences and social sciences. The special feature of time series analysis is the fact that successive observations are usually not independent and that the analysis must take into account the time order of the observations. When successive observations are dependent, future values may be predicted from past observations. Time series analysis is concerned with techniques for the analysis of this dependence. Examples:
(1) Mean air temperature at Katunayake area from 1971 to 2002
Time Series Plot of Mean air temperature
28.4 28.2

Mean air temperature

28.0 27.8 27.6 27.4 27.2 27.0 1971 1976 1981 1986 Year 1991 1996 2001

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(2) Monthly totals of international air-line passengers in thousand from January 1949 to December 1960
Monthly totals of air line passengers in thousands

Time Series Plot of air line passengers

600

500

400

300

200

100 1949 1963 1977 1991 2005 2019 2033 Year 2047 2061 2075 2089

(3) Movement of rupee per USD

(Source: Financial System Stability Review 2008, Central Bank of Sri Lanka)

3 STA 312 1.5 TIME SERIES I

(4) Export earnings

Mainly there are two types of time series. 1. Continues Time Series 2. Discrete Time Series Continues Time Series A time series is said to be continuous when observations are made continuously in time. The term continuous is used for series of this type even when the measured variable can only take a discrete set of values. Eg: Uranium decay, Values of the eco diagram Discrete Time Series - A time series is said to be discrete when observations are taken only at specific times, usually equally spaced. Eg: Annual rainfall, Monthly temperature The term discrete is used for series of this type even when the measured variable is a continuous variable. 1.2 Objectives of Time Series Analysis There are several possible objectives in analyzing a time series. Among those, there are two main goals such as; i. Identifying the nature of the phenomenon represented by the sequence of the observations. ii. Forecasting the future values of the time series variables.

4 STA 312 1.5 TIME SERIES I

We can further specify the objectives of time series analysis as; i. Description Plot the data. Obtain simple descriptive measures and the main properties of the series. ii. Explanation When observations are taken on two or more variables it may be possible to use the variation in one time series to explain the variations in another time series. iii. Prediction The future values of a time series can be predicted, given an observed time series. Forecasting is usually based on what has happened in the past. iv. Control Gather information by analyzing a series of observations and the collected information is used to control the process. Can control the future values of a series by adjusting the parameters. 1.3 Uses of Time Series Analysis The time series analysis is useful in every field. It is very important in economics, business administration and planning, science, astronomy, sociology, biology research work, etc., because of the following reasons. 1. It helps in understanding past behavior and it will help in estimating the future behavior. 2. It helps in planning and forecasting. (With the help of time series we can prepare plans for the future; short range and long range estimates are also possible.) 3. Comparison between data of one period with that of another period is possible. 4. We can evaluate the progress in any field of economic and business activity. For example, with the change in price level, we can identify the change in purchasing power of money. 5. Seasonal, cyclical and trend patterns of data are useful not only to economists but also to the businessman. 1.4 Time Series Plot- In time series plot, data are plotted against time. There are several uses of time series plots. They are; i. ii. iii. iv. To detect whetherthere is a trend. To detect the seasonal fluctuation or effect. To detect whether there is an outlier in the data set. To judge whether the model is an additive or multiplicative model.

Exercise 1.1: The profits in millions of rupees of a certain firm are given below. Draw a time series plot for the data and comment on it. Year 1996 1997 1998 1999 I 10 13 16 20 II 18 21 24 29 Quarter III 14 18 22 26 IV 19 23 26 31