3/3/2013

Time series and trend analysis

Additive and Multiplicative Model

STA117

Week 7 Lecture
By: Abdullah

Review and introduction

Recall the four components of the time series

Secular trend (T) Seasonal variation (S) Cyclical variation (C) Irregular variation (I)

We will focus on trend and seasonal variation And residue (cyclical + Irregular variation)only.

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Additive or multiplicative model?

In an additive model, the seasonal effect is the same (roughly constant) in the same period over different years Sometimes the seasonal effect is a proportion of the underlying trend value. They increase as the trend increases. It is then appropriate to use a multiplicative model

Deseasonalising time series

Like de-trending, may also de-seasonalise the series by removing the seasonal effect For an additive model, the de-seasonalised series is obtained as Di = Yi Si For a multiplicative model, the deseasonalised series is obtained as Di = Yi/Si A de-seasonalised series shows the pattern of change over time with all seasonal effects removed. This allows direct comparisons between time points in this series, unaffected by seasonal changes.

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The additive model

Assumes time series is made up of sum of the different components (i.e. Y = T+S+R).
T = trend, S = Seasonal variation, R= Residue (Cyclical variation + Irregular variation)

Appropriate when the series is a constant difference from the trend

The seasonal component is found by subtracting the trend from the series
When the series is above the trend the difference is positive. When below the trend, it is negative

Estimating the seasonal effect

Recall that Y = T + S +R. We will only focus on seasonal variation and combine cyclical and irregular into R as residue
Thus Y-T = S + R

The seasonal effects occur when the series repeats systematically in short periods (often within a year) of time Seasonal effects need to be removed before we can compare similar time periods in different seasons

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Additive Model - Example

year Quarter Oil consumption ('000 tons)(Y) 280 230 200 270 302 247 220 292 320 270 236 311 245.00 250.50 254.75 259.75 265.25 269.75 275.50 279.50 284.25 247.75 252.63 257.25 262.50 267.50 272.63 277.50 281.88 -47.8 17.4 44.8 -15.5 -47.5 19.4 42.5 -11.9 Four Quarter moving average Centred moving average(T) Difference to trend (Y-T) Q1 2005 Q2 Q3 Q4 Q1 2006 Q2 Q3 Q4 Q1 2007 Q2 Q3 Q4

Seasonal differences

The seasonal difference varies from quarter to quarter but also from year to year

We need to average out the different values so that we have a single value for each quarter

These averages differences should sum to zero

If they do not sum to zero, we will need to adjust the averages

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Averaging seasonal variation

Quarter 2005 2006 2007 Average 1 44.8 42.5 43.65 2 -15.5 -11.9 -13.7 3 -47.8 -47.5 -47.65 4 17.4 19.4 SUM 18.4 0.7

Adjustment -0.175 -0.175 Adjusted Average 43.48 -13.88

-0.175 -0.175 -47.83 18.23 0.0

Forecasting trend

We will use linear regression on centred moving average (against time).

Regression equation for the above example:

Y = 232.89 + 4.93x Thus estimates for 2008 are as follows.
When x = 13, y =296.98 lets say 297 When x = 14, y =301.91 lets say 302 When x = 15, y =306.84 lets say 307 When x = 16, y =311.77 lets say 312

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Adjusting trend for seasonal component

Forecasts for 2008 Quarter 1 2 3 4 Forecasted trend 297 302 307 312 Seasonal Forecast Difference 43.5 -13.9 -47.8 18.2 341 288 259 330

The multiplicative model

The multiplicative model is applicable when the seasonal swings are a constant proportion of the trend. The seasonal factors are found by dividing the series by the trend to give the ratio to the trend When the series is above the trend the factor will be above 1 (or 100%) When below the factor will be less than 1 (or 100%) The sum of the factors will be the number of periods of the data for quarters it should be 4 (or 400%)

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Multiplicative Model - Example

year Quarter Oil consumption ('000 tons) 280 230 200 270 302 247 220 292 320 270 236 311 245.00 250.50 254.75 259.75 265.25 269.75 275.50 279.50 284.25 247.75 252.63 257.25 262.50 267.50 272.63 277.50 281.88 0.807 1.069 1.174 0.941 0.822 1.071 1.153 0.958 Four Quarter Centred moving moving average average Ratio to trend

Q1 2005 Q2 Q3 Q4 Q1 2006 Q2 Q3 Q4 Q1 2007 Q2 Q3 Q4

Averaging seasonal variation

Quarter 2005 2006 2007 Average 1 1.174 1.153 1.1635 2 0.941 0.958 3 0.807 0.822 4 1.069 1.071 SUM 1.070 3.998

0.950 0.8145

Adjustment 1.001 1.001 1.001 1.001 Adjusted Average 1.1641 0.949975 0.8149 1.07054

4.00

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Adjusting trend for seasonal component Multiplicative Model

Forecasts for 2008 Quarter 1 2 3 4 Forecasted trend 297 302 307 312 Seasonal factor 1.164 0.950 0.815 1.071 Forecast 346 287 250 334