Time Series

Analysis
Meaning of Time Series Data
• A time series is an arrangement of statistical data in a chronological
order, i.e., in accordance with its time of occurrence.
• It reflects the dynamic pace of movements of a phenomenon over a
period of time.
Objectives of Time Series
Analysis
• To Understand the Past Behaviour
• To Evaluate Current Status
• To Facilitate Comparisons
• To do Future Planning
Components of Time Series
Analysis
• (a) Secular Trend or Long-term Movement (T).
• (b) Periodic Movements or Short-term Fluctuations :
• (i) Seasonal Variations (S),
• (ii) Cyclical Variations (C)

• (c) Random or Irregular Variations (R or I ).

a. Secular Trend
• The general tendency of the time series data to increase or decrease or
stagnate during a long period of time is called the secular trend or simple
trend.
“Trend, also called secular or long-term trend, is the basic tendency of a series to
grow or decline over a period of time. The concept of trend does not include short-
range oscillations, but rather the steady movement over a long time.”

Usually,
• upward tendency is observed in time series relating to population,
production and sales of products, prices, incomes, money in circulation,
etc.,
• Downward tendency is noticed in the time series relating to deaths,
epidemics, etc., due to advancement in medical technology, improved
medical facilities, etc.
 b. Periodic Fluctuations
A number of forces which repeat themselves periodically or almost
periodically over a period of time and thus prevent the smooth flow of the
values of the series in a particular direction.
A. Seasonal Variations: These variations in a time series are due to the
rhythmic forces which operate in a regular and periodic manner over a
span of less than a year, i.e., during a period of 12 months and have
the same or almost same pattern year after year.
B. Cyclical Variations: Oscillatory movements in a time series with
period of oscillation greater than one year are termed as cyclical
variations.
These oscillatory movements in any business activity are the outcome of the so-called
‘Business Cycles’ which are the four-phased cycles comprising prosperity (boom), recession,
depression and recovery from time to time
c. Random or Irregular
Variations
• These fluctuations are purely random and are the result of such
unforeseen and unpredictable forces which operate in absolutely erratic
and irregular manner.
• Such variations do not exhibit any definite pattern and there is no regular
period or time of their occurrence, hence they are named irregular
variations.
• Caused due to non-recurring factors like floods, famines, wars,
earthquakes, strikes and lockouts, epidemics, revolution, etc., which
behave in a very erratic and unpredictable manner.
Methods of Measurement of
Trend
• (i) Graphic (or Free-hand Curve Fitting) Method
• (ii) Method of Semi-Averages
• (iii) Method of Moving Averages
• (iv) Method of Curve Fitting by the Principle of Least Squares
1. Graphic (or Free-hand
Curve Fitting) Method
• This is the simplest method of determining the trend and making the
trend line
• This requires the plotting of given data on the graph
• Then, a free hand curve is drawn in accordance with the data plotted on
the graph by following the ups and downs
2. Method of Semi-Averages
• this method has more objective approach
• The given years are divided into two sets of equal years (if years are
even, exact half is done; if years are odd, middle year is skipped)
• Having divided the given series into two equal parts, we next compute
the arithmetic mean of time-series values for each half separately.
• These means are called semi-averages.
• Then these semi-averages are plotted as points against the middle point
of the respective time periods covered by each part.
• Trend line is drawn using these two point so plotted on the graph
2. Method of Semi-Averages
(Contd.)
Merits

(i) An obvious advantage of this method is its objectivity in the sense that it does not depend
on personal judgement and everyone who uses this method gets the same trend line and
hence the same trend values.

(ii) It is easy to understand and apply as compared with the moving average or the least square
methods of measuring trend.

(iii) The line can be extended both ways to obtain future or past estimates.

Limitations

(iv) This method assumes the presence of linear trend (in the time series values) which may not
exist.

(v) The use of arithmetic mean (for obtaining semi-averages) may also be questioned because
of its limitations. Accordingly, the trend values obtained by this method and the predicted
values for future are not precise and reliable.
3. Method of Moving
Averages
• Method of moving averages is a very simple and flexible method of
measuring trend.
• It consists in obtaining a series of moving averages, (arithmetic means),
of successive overlapping groups or sections of the time series
• When Period is Odd. If the period ‘m’ of the moving average is odd. then
the successive values of the moving averages are placed against the
middle values of the corresponding time intervals.
• When Period is Even. If the period ‘m’ of the M.A. is even, then there are
two middle periods and the M.A. values are placed in between the two
middle periods of the time intervals it covers
3. Method of Moving
Averages
Merits
• This method does not require any mathematical complexities and is quite
simple to
• Unlike the ‘free hand curve’ method, this method does not involve any
element of subjectivity
• Unlike the method of trend fitting by principle of least squares, the
moving average method is quite flexible in the sense that a few more
observations may be added to the given data without affecting the trend
values
• A proper choice of the period also reduces the irregular fluctuations to
some extent.
• In addition to the measurement of trend, the method of moving averages
3. Method of Moving
Averages
Limitations
• An obvious limitation of the moving average method is that we cannot
obtain the trend values for all the given observations
• This method cannot be used for forecasting or predicting future values
• The selection of the period of moving average is very important and is
not easy to determine
• In case of non-linear trend, which is generally the case in most of
economic and business time series, the trend values given by the moving
average method are biased and they lie either above or below the true
sweep of the data.
4. Method of Curve Fitting by
the Principle of Least
Squares
• The principle of least squares provides us an analytical or mathematical
device to obtain an objective fit to the trend of the given time series.
• Most of the data relating to economic and business time series conform
to definite laws of growth or decay and accordingly in such a situation
analytical trend fitting will be more reliable for forecasting and
predictions.
• This technique can be used to fit linear as well as non-linear trends.

• It uses regression line Y on X, where Y= a + bX

• If ∑X= 0; then a= ∑Y/N, b=∑XY/∑x 2
4. Method of Curve Fitting by
the Principle of Least
Squares
Merits
• Because of its analytical or mathematical character, this method
completely eliminates the element of subjective judgement or personal
bias on the part of the investigator.
• Unlike the method of moving averages, this method enables us to
compute the trend values for all the given time periods in the series.
• The trend equation can be used to estimate or predict the values of the
variable for any period t in future or even in the intermediate periods of
the given series and the forecasted values are also quite reliable
4. Method of Curve Fitting by
the Principle of Least
Squares
Demerits
• Diffi cult to determine the type of the trend curve to be fitted,
• A single new observation necessitates all the calculations to be done
again.
• Quite tedious and time consuming as compared with other methods.
• Future predictions or forecasts based are based only on the long-term
variations, i.e., trend and completely ignore the cyclical, seasonal and
irregular fluctuations
• It cannot be used to fit growth curves