Using a Centered Moving Average to Extract the Seasonal Component of a Time Series

If we are forecasting with say, quarterly time series data, a 4-period moving average should be free of seasonality since it always includes one observation for each quarter of the year

Suppose we have a quarterly time series X1, X2, X3, . . . , Xn The first value that can be calculated for this series by a 4-period MA process would use observations X1, X2, X3, and X4. Notice that our first 4-period average has a center between quarter 2 and quarter 3. Hence we will designate it X*2.5. Thus we have: X1 X 2 X 3 X 4 X * 2.5 4 The next value is:

X2 X3 X4 X5 X * 3.5 4

For the series X1, X2, X3, . . . , Xn, the formula is1 :

Xt 1 Xt Xt 1 Xt 2 X * t .5 4
This algorithm gives us a series that is free of seasonality. Alas, the location of the values of this series do not correspond to the original series.

(1)

We can correct this problem with a centered moving average

If we average adjacent pairs of X*ts, we obtain a series that is free of seasonality and is aligned correctly with our original series

To get a 4-period moving average that is centered at quarter 3 (designated by X3**), take the average of X2* and X3*:
X 3 ** X 2.5 * X 3.5 * 2

The general formula is:

Xt .5 * Xt .5 * Xt * * 2

(2)

Combining equations (2) and (3), the series Xt** can be expressed by a weighted moving average:

Xt 2 2 Xt 1 2 Xt 1 Xt 2 Xt * * 8
The seasonal index (St) can be computed by dividing Xt by Xt**. That is:

Xt St Xt * *

Example: Quarterly product sales

t 1 2 2.5 3 3.5 4 4.5 5 5.5 6 6.5 7 7.5 8 8.5 9 10 11 Xt 897 476 376 582 509 595.25 967 603 529 568.5 407 547.75 371 517.25 884 407 310 505.125 1.75 532.5 0.697 558.125 0.729 585.75 0.903 599.125 1.614 588.625 0.865 Xt* Xt** St

564.2 573.35 0.656

Notice we lose 2 data points at the beginning of the series, and 2 at the end. For monthly data, we would lose a total of 12 data points.