An Introduction to Time Series and its Analysis 1.What is a time series?

A time series is a collection of observations made sequentially in time where the interval between successive time points are equal.. Examples occur in a variety of fields, ranging from economics to engineering, and methods of analyzing time series constitute an important area of statistics. Many time series arise in economics. Examples include share prices on successive days, export totals in successive months, average incomes in successive months, company profits in successive years, and so on. The analysis of sales figures in successive weeks or months is an important problem for any manufacturing company. In process control, the problem is to detect changes in the performance of a manufacturing process by measuring a variable which shows the quality of the process. These measurements when collected (can be plotted )against time they become a time series. [One or two examples with time-plots here.] 2.Why Analyze time series?(Objective of time series analysis) There are several possible objectives in analyzing a time series. These objectives may be classified as description, explanation and prediction. (a) Description : When presented with a time series, the first step in the analysis is usually to plot the data and to obtain simple descriptive measures of the main properties of the series (will be discussed shortly). For example, looking at quarterly sales figures of an air-conditioner it can be seen that there is a regular seasonal effect, with sales 'low' in winter and high' in summer. For some series, the variation is dominated by such 'obvious' features, and a fairly simple model, which only attempts to describe trend and seasonal variation, may be perfectly adequate to describe the variation in the time series. For other series, which is more complex1, more sophisticated techniques will be required to provide an adequate analysis. Then a more complex model needs to be constructed & fitted. Another feature to look for in the graph of the time series is the possible presence of turning points, where, for example, an upward trend has suddenly changed to a downward trend. If there is a turning point, different models may have to be fitted to the two parts of the series. (b) Explanation :When observations are taken at the same time on two or more variables, it may be possible to use the variation in one time series to explain the variation in another series. This may lead to a deeper understanding of the
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We will discuss what are those complexities in3.

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mechanism which generated a given time series. (Multiple ) Regression models may be helpful tools here for providing an idea and extent of such explanation. (c) Prediction :Given an observed time series, one may want to predict the future values of the series. This is the most important task in sales forecasting, and in the analysis of economic and industrial time series. 3.What is the main difference between time series data and cross section data? One distinguishing feature of time series data as opposed to data collected at a particular point in time (i.e. cross-sectional data) is that the observations are not assumed to vary independently. In fact , it is precisely the nature of the dependence that is of interest. In the sections that flow we introduce tools and models that attend to account for this dependence. To the extent that do, the fitted models can be used to generate forecast of future values. The validity of forecasting procedures developed from models that have been suggested by and fitted to historical data necessarily relies on the assumption 4.What are the different techniques of analyzing time series?(Approaches to Time-Series data Analysis) There are various approaches to time-series analysis . In order to appreciate these different approaches it would be of help if we find the answer of the following two questions 4.1.Why time series data are referred to as realization of stochastic processes? Think of a random variable which is changing over time in an uncertain way. This is the simplest possible description of a stochastic process. The most common example is a share price changing over time in day of trading. At every time instant when its price is recorded , one can think it is a realization of a (random) variable. That is why often time series data are referred to as realization of stochastic (random) process. 4.2. What is stationarity (and non-stationarity) of Time Series? If a time series appears to vary about a fixed level the series is said to be stationary (in the mean.) On the other hand time series that exhibit a trend or a wander away from a fixed level are said to be non-stationary . For stationary series the overall behavior of the observations stays roughly same over time. Non stationary series are those series whose statistical properties change over time. Non stationary series can occur when the underlying physical mechanism changes that is , when the principal movements of the series are due to a shift in factor that occur on occasion. A sudden shift in Indian economic policy may have a severe effect on the interest rates

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of 6-months T Bills. In fact a contraction of the money supply would drive the interest rate upward. (Figure& illustration should be there ) 4.3.Why is stationarity so important in time series analysis, especially in Econometrics? On a technical level, stationarity simplifies statements of the law of large numbers and the central limit theorem, although we will not worry about formal statements. On a practical level, if we want to understand the relationship between two or more time series variables using regression analysis, we need to assume some sort of stability over time. If we allow the relationship between two variables (say, yt and xt) to change arbitrarily in each time period, then we cannot hope to learn much about how a change in one variable affects the other variable if we only have access to a single time series realization. In stating a multiple regression model for time series data, we are assuming a certain form of stationarity in that the regression coefficients do not change over time. In financial markets the modeling procedures for return data and for price data are different. To understand why, one needs to draw the basic distinction between stationary and non-stationary time series, Daily return data on most financial markets are generated by stationary processes and consequently returns are stationary(mean-reverting) . The statistical concepts and methods that apply to return data do not apply to price data, For example, volatility and correlation are concepts that only apply to stationary processes, It makes no sense to try to estimate volatility or correlation on price data. Daily (log) price data are commonly assumed to be generated by a non-stationary stochastic process. Let us now try to find the answer of 4 i.e. what are the various approaches to timeseries analysis. First of all, there are simple descriptive techniques, which consist of plotting the data and looking for trends, seasonal fluctuations, cyclical fluctuations and irregular fluctuations. This is known as deterministic multiplicative decomposition of a time series . This is very effective in short term forecasting provided the components of the series remain essentially at the same level in the future. This what we will be presently concentrating on in our analysis of time series. However, for time series where the components change fairly quickly over time (in other words, time series which are non stationary ) this deterministic multiplicative decomposition is inadequate-especially wrt explanation and description purpose. Hence the need to introduces a variety of probability models for time series, and ways of fitting these models to the observed time series. The major diagnostic tool which is used for this purpose of indentifying an appropriate time series model is a function called the autocorrelation function. It helps to describe the evolution of a process through time. Inference based on this function is often called an analysis in the time domain. Since economic and financial data are full of non-stationary behavior, these type of sophisticated analysis will be dealt in Financial econometrics. In (financial) econometrics we shall see identifying an Page 3 of 4

appropriate model for a non-stationary time series is often a two step procedure. First, transform the non-stationary series to a stationary series and then select a model for the stationary series taking into account the transformation . One useful transformation for this purpose is the difference transformation, or the operation of creating a new series by taking the successive difference of the original series.

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