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10.1 Introduction
Time series analysis is most popular method of Business forecasting.
According to Ya-lun-Chou, A time series may be defined as a collection of
readings belonging to different time periods, of some economic variable or
composite of variables such as production of steel, per capita income, gross
national products, price of tobacco or index of industrial production.
In time series, time factor plays a very important role. For example in the
study of consumption, production or price of certain good, purchase, sale,
profits or loses of certain business, agriculture or industrial production,
investments, bank deposits, prices of shares, prediction of temperature,
rainfall etc changes with time. So for predicting its future value a good
knowledge of its past values are required. In other words a statistical
analysis of such type is known as time series analysis.
Time series analysis is an indispensable tool in business, economics,
politics etc. where it is necessary to predict or forecast the values of certain
variables to take decision and adopt necessary plans to succeed.
Objectives:
At the end of this unit the student should be able to:
Understand the meaning of time series analysis
10.2 Meaning
Time series is defined as the set of ordered pair of observation taken at
successive points of time. That is it is a series of values of variables whose
values varies with passage of time.
In other words, arrangement of statistical data in chronological order is
known as time series.
Mathematically, it is defined by
the series is
Where T = Trend
S = seasonal Variation
C = Cyclical Variation
I = Irregular Variation.
In another approach, The observed variable is sum of these four
components. That is
Fig. 10.1
(b) Non-Linear trend: When the data of time series gives a curve instead of
straight line then the trend is called Non-Liner trend. Following are few
of the cases of non-linear trend.
Fig. 10.2
Uses:
1. It helps in getting idea about the pattern of behavior of study which is
very helpful for forecasting anything.
2. It is helpful in making comparison and drawing conclusions in between
two or more time series.
3. It is used in study of short time fluctuations of time series like seasonal,
cyclic and irregular variations.
(b) Seasonal Variation :
Seasonal variations are periodic movements which occur regularly after
fixed period of time. These are short term fluctuations occurring regularly
like yearly, half- yearly, quarterly, monthly or weekly. Since these variations
are repeated in short period of time like 6 months, 3 months, week etc so
they can be predicted accurately but they dont appear in series of annual
figures. Seasonal variation gives accurate result when the data are recorded
at weekly or monthly or quarterly intervals.
The two main causes of seasonal variations are :
(i) Natural cause
(ii) Social Cause
(i) Natural cause : Climate and weather conditions are important factors
causing seasonal variation. Rain fall, humidity, heat etc., affect very much
the sale of different products and industries differently. For example, during
winter there is high demand of woolen clothes whereas in summer the
demand of cotton clothes increases. The production of certain commodities
like rice, pulse, sugar etc. are carried out according to season. Similarly, the
sales of umbrella increases in rainy season and summers, the demand of
fans, A.c, coolers, ice-creams, cold drink etc. goes high in rainy seasons.
The effect of climate is that there are generally two seasons in agriculture
viz., the growing season and the harvesting season which directly affect the
income of the farmer and which in turn affect the entire business activity.
(ii) Social cause: The factors like local customs, habits, fashions, traditions
and conventions play an important role in seasonal variations. For example
on festival occasion the demand of sweets, dry fruits, gifts increases. The
price of gold, clothes increase more during marriage seasons. The sale of
books, stationary is more in the start of any academic season. The
withdrawal of money form the bank is more in the first week of every month.
Note that all these variations occur in a regular manner and they can easily
be predicted from the past experiences. Seasonal variations are also helpful
in scheduling purchase, inventory control, personnel, requirement, seasonal
financing and selling and advertising programs.
Uses:
Following are the uses of seasonal variations:
1. It is used by businessmen in formulating their strategy relating to sales
and purchase.
2. It is used by producers in making their production schedule. It helps
them to diversify their product line during different seasons.
3. It is also very much beneficial for the customers as the knowledge of
seasonal variations helps them in purchasing the things at cheap price
in off season.
4. It is used in fixing the price of articles in order to keep the things in
demand in particular time.
(c) Cyclical Variations:
These are oscillatory movements. So the movement in a time series with a
period of oscillation more than one year is known as cyclic variations. One
complete period is called cycle. The cyclic movement is generally related
to the Business Cycle. There are four well-defined periods or phases in a
business cycle, namely : (i) Prosperity (ii) decline (iii) depression (iv)
improvement.
Each phase changes gradually to the next phase. The four phase of
business cycle can very well be shown with the help of following diagram.
Fig. 10.2
In the prosperity phase the business is booming, prices are high and profits
are easily made. There is considerable expansion of business activity. But in
this situation there comes difficulty in transportation of things safely. Wages
increase and labour decrease. The demand for money increases and it
causes increase in interest rates. The situation like dearth of money in
market and price concession etc. also arises and this leads to depression. In
this period factories close, business fails, unemployment increases and the
wages and prices are low. This causes availability of money in market at low
interest, increase in demand for goods and situation starts recovering which
ultimately leads to prosperity or boom. Thus the improvement period
develops into prosperity period and a business cycle is completed. A
business cycle may complete in 3 years, 5 years, 7 years.
The major drawbacks of cyclical variations is that
(i) The period of cycle is not fixed, they differ in different situations making
the study tough and tedious.
(ii) These variations can easily mix up with erratic, random or irregular
forces which makes it almost impossible to separate the effect of
cyclical and irregular forces.
Uses:
Cyclical variations are extremely useful for following reasons:
1. It is used for making Business policies so that we can avoid fluctuations
in business and get more profits.
2. It is used in predicting the turning points in business activity.
3. It is used in finding irregular variations.
(d) Irregular Variation
Irregular variations are of irregular and do not repeat in a definite pattern. It
includes all other types of variations like seasonal, Secular trend, seasonal
and cyclical movement. Irregular variations are caused by flood,
earthquakes, strikes and wars. It also includes sudden change in demands
or very rapid technological progress. This variation is totally irregular and
unpredictable. It is almost impossible to separate out irregular movements
and cyclical movements. Thus, in time series analysis, trend and seasonal
variations are measured separately and the cyclical and irregular variations
are measured together.
3. The number of cycles above the line should be equal to the number of
cycles below it.
4. The first and the last year should be on the opposite turns of the cycle
i.e., if the rising cycle is in the first year the falling cycle should be in the
last year or vice versa.
Merits and demerits:
Merits:
1. It is the simplest method and does not require any mathematical
calculations.
2. It very flexible and we can represent both linear and non-linear trends
easily.
3. It gives us an idea about the basic character of time series and tells us
about which the type of mathematical trend will be appropriate.
Demerits:
1. Since different persons will draw different types of free hand smooth
curve, so it is highly subjective.
2. It does not measure trend values in a precise quantitative form.
3. Although this method is very simple but it takes lot of time to construct a
freehand trend if a careful job is done.
Example: Fit a trend line to the following data by the freehand method:
SAQ1. From the following data fit a free hand smooth curve
Year 1980 1981 1982 1983 1984 1985 1986 1987
Population
65 80 100 70 80 110 115 130
(in millions)
Alternatively, the trend value for different years can also be computed by
adjusting the average change between the two semi averages i.e.,
to any of semi average value in accordance with the times of
deviations from the time of any of the semi averages. Hence, the trend value
for any year is computed by
Solution: Here n = 13 (odd), so we will divide the whole data into two parts
i.e., from 1990 to 1995 and from 1997 to 2002, excluding the year 1996
= average value of first half portion of series =
Now, we will plot the values of against the mid value of two halves.
Thus the mid value for the first half i.e., from 1990- 1995 is 1st july,1992 and
the mid value for the years from 1997 to 2002 is 1st July1999
Now, join the points A [1992, ] and B [1999, ] , we get the trend lines
shown in fig.
Example: For the following data fit a trend line and determine the trend
values by the method of semi averages.
Solution: Method-I
Divide the whole data into two parts i.e from 1993 to 1995 another from
1996 to 1998
= average value of first half portion of series =
= average value of second half portion of series
=
Now, we will plot the values of against the mid value of two halves.
Now, join the points A [1994, ] and B [1997, ] , we get the trend lines
shown in fig.
Alternative method:
Computation of trend values by the averages change
Thus the required trend value for the year 1999 is 36.67
Example: Fit a trend value to the following series by the method of semi-
averages. Also, determine the trend values both by location and by
computation of average change.
Day Sunday Monday Tuesday Wednesday Thursday Friday Saturday
(1) (2) (3) (4) (5) (6) (7)
Sales 125 130 135 110 105 110 115
(Rs)
Solution: Since the total number of days are odd in number so we will
divide the total number in two equal halve by neglecting wednesday i.e from
Sunday to Wednesday another from Thursday to Saturday
= average value of first half portion of series =
Now, we will plot the values of against the mid value of two halves.
Now, join the points A [Tuesday, ] and B [Friday, ] , we get the trend
lines shown in fig.
Trend values
Time division from the
Year
time of origin = 110 (x)
SAQ 2: Fit a trend line to the following data by the method of semi-
averages:
Eq (2) shows that the sum of deviations of the actual values of Y and the
computed values of Y is zero and eq(3) shows that the sum of squares of
the deviations of the actual and computed values is least from the line.
Now from eq (1) is determined completely if the values of a & b are
known. In order to determine the value of the constants a and b, the
following two normal equations are solved simultaneously
(4)
(5)
Sikkim Manipal University Page No.: 307
Probability and Statistics Unit 10
Hence,
Also,
Example: Using the straight line method of least square compute the trend
and draw the line of best fit for the following series:
Day 1 2 3 4 5 6 7
Sale 20 30 40 20 50 60 80
Solution: We know
Now,
2
Days (X) Sales (Y) XY X
1 20 20 1
2 30 60 4
3 40 120 9
4 20 80 16
5 50 250 25
6 60 360 36
7 80 560 49
Total 28 300 1450 140
(6)
(7)
Implies ,
When X = 1,
When X = 2,
When X = 3,
When X = 4,
When X = 5,
When X = 6,
When X = 7,
Solution: We know
Where a and b are constants which can be determined by the following
normal equation
Now,
Deviation from the 2
Year Sales (Y) XY X
middle year (X)
2004 80 -3 -240 9
2005 90 -2 -180 4
2006 92 -1 -92 1
2007 83 0 0 0
2008 94 1 94 1
2009 99 2 198 2
2010 92 3 276 9
N=7 630
Hence,
When X = 2,
When X = 3,
Example: Fit a straight line trend by the method of least squares to the
following data and find the trend values
Solution: We know
Now,
Deviation from
2
Year Sales (Y) 2007 year XY X
(X)
2005 10 -2 -20 4
2006 13 -1 -13 1
2007 16 0 0 0
2008 21 1 21 1
2009 24 2 48 4
2010 30 3 90 9
N=7 114
Hence,
(i) Obtain the least square line fitting the data and construct the graph of
the trend line.
(ii) Compute the trend values for the year 1994-2004 and estimate the
production of commodity during the years 2005 and 2006.
When the time origin is taken between middle years and would be
zero.
So the above equations become
(9)
(10)
(11)
Now, we need to find the constants a, b and c. That is we need to solve the
following equations simultaneously
Time
Value deviations
Year from 1995 XY
(Y)
(X)
1992 95 -3 -285 9 855 -27 81
1993 160 -2 -320 4 640 -8 16
1994 255 -1 -255 1 255 -1 1
1995 380 0 0 0 0 0 0
1996 535 1 535 1 535 1 1
1997 720 2 1440 4 2880 8 16
1998 935 3 2805 9 8415 27 81
Total 0
=> (12)
(13)
(14)
When X = -2, =
When X = 0, = 380
When X = 1, = 535
When X = 2, = 720
When X = 3, = 935
When X = 4, = 1180
Now, we need to find the constants a, b and c. That is we need to solve the
following equations simultaneously
Time
Price deviations
Year from 2007 XY
(Y)
(X)
2005 100 -2 -200 4 400 -8 16
2006 107 -1 -107 1 107 -1 1
2007 128 0 0 0 0 0 0
2008 140 1 140 1 140 1 1
2009 181 2 362 4 724 8 16
2010 192 3 576 9 1728 27 81
Total 27
N=6
Thus,
= = 97.744
When X = -1,
= = 110.426
When X = 0,
= = 126.680
When X = 1,
= = 146.506
When X = 2,
= = 169.904
When X = 3,
= = 196.874
When X = 6,
= = 299.216
SAQ 4: Fit the second degree parabolic trend curve to the following data
and obtain the trend values. Also draw the graph showing trend value and
actual graph.
and so on
and so on
The average of each group are placed in the middle of the group in the
adjacent column. If the number of items in a group is odd, the moving
average is placed against the mid-value of the time intervals, and if it is
even, the average will be placed between the two middle values of the time
interval it covers.
Note: In case of period of even moving average say, 4-yearly, 6-yearly,
8-yearly the moving average are placed at the center of the time span
between two time periods. But this placement is inconvenient since the
moving average placed at this place would not coincide with an original time
period. So we apply a process called centering. It is taking a two-period
moving average of the moving averages. Another way of doing it is,
suppose we are calculating 4-yearly moving average, we will first take
4-yearly totals and of these totals, we will again take 2-yearly totals and
divide these totals by 8.
Example: Calculate 3 yearly and 5 yearly moving averages for the following
time series.
Year Sales Year Sales
1988 500 1994 600
1989 540 1995 640
1990 550 1996 620
1991 530 1997 610
1992 520 1998 640
1993 560
Solution: For 3-yearly moving average, we will divide the series in a group
of 3 i.e.
After getting these moving average next step is to place the moving
average. Since 3 is odd number so the average calculated will be placed
opposite to 2nd number i.e., the value of will be placed in front of sales
of year 1989 and proceed accordingly.
In a similar way we can calculate 5-yearly moving average
And the first moving average ( ) will be placed in front of sales of third
year i.e., in front of 1990 and move accordingly.
3-yearly 5-yearly
Year Sales moving moving
average average
1988 500 ----- ------
1989 540 530 ------
1990 550 540 528
1991 530 533.3 540
1992 520 536.67 552
1993 560 560 570
1994 600 600 588
1995 640 620 606
1996 620 623.3 622
1997 610 623.3 -----
1998 640 ------ ------
Solution:
4-yearly moving total i.e. 2-yearly
Year Sales moving totals 4-yearly moving
of col (ii) average trend
(i) (ii) (iii) values, i.e, (iv)/8
(iv)
Of all these methods, here we are going to discuss Simple averages method
only
3. Divide each total by the number of years for which data are given. For
example if we are given monthly data for 4 years then we shall first
obtain total for each month for 4 years and divide each by 4 to obtain an
average.
4. Compute an average of monthly averages i.e.,
5. Then seasonal indices for different months are obtained by expressing
monthly averages as percentage of . That is
Example: Using the method of simple averages, find the seasonal indices
for the following data:
Month Jan Feb Mar Apr May June July Aug Sept Oct Nov Dec.
Year
1996 15 16 18 18 23 23 20 28 29 33 33 38
1997 23 22 28 27 31 28 22 28 32 37 34 44
1998 22 25 35 36 36 30 30 34 38 47 41 53
Solution:
Year
Seasonal
Seasonal Index
1996 1997 1998 Seasonal Total
Average
(ii) (iii) (iv) (v)=(ii)+(iii)+(iv)
Month (vi)=(v) / 3
(i)
Jan 15 23 25 63 21 =70
Feb. 16 22 25 63 21 =70
Mar. 18 28 35 81 27 =90
Apr. 18 27 36 81 27 =90
May 23 31 36 90 30 =100
June 23 28 30 81 27 =90
July 20 22 30 72 24 =80
Aug. 28 28 34 90 30 =100
Sept. 29 32 38 99 33 =110
Oct. 33 37 47 117 39 =130
Nov 33 34 41 108 36 =120
Residual Method:
Multiplicative model:
1. Find the Trend values(T) and seasonal indices (S.I.)
2. Divide the original data by T to get SCI and then divide SCI by S to get
CI, thus
CI = TSCI/TS or Y?TS
3. Find the weighted moving average (usually 3 months with weights 1,2
and 1 for the three months resp.or 1,2,4,2 and 1 to be 5 months resp.) of
the CI values thus obtained.
Solution:
Note: The weighted average in the last column of the table is obtained by
dividing the weighted totals by sum of weights 1.e., 1+2+1 = 4
Solution:
Index of I
% deviations
Month Index CI Index C i.e.,
i.e. I-100
I= CI/C 100
Jan 88.5 91.8 96.4 -3.6
Feb 91.2 90.9 100.3 3
Mar 89.6 91.4 98 -2
Apr 96.4 93 103.7 3.7
May 92.3 94.3 97.9 -2.1
June 95 95.3 99.7 -0.3
July 99.1 95.3 104 4
August 91.2 94.4 96 -3.4
Sept 94.6 94.2 100.4 0.4
Oct 94.4 94.6 99.8 -0.2
Nov 95.2 95 100.2 0.2
Dec 95.4 96 99.4 -0.6
10.8 Summary
In this unit we summarize the concept of time series, its components and
discuss its different methods of measurement with plenty of practical
examples.
2. Fit a straight line trend by the method of least squares to the following
data relating to the sales of clothes. Also calculate the predicted
earnings for the year 2006.
3. Fit a straight line trend to the following data by the method of least
squares and obtain two monthly trend vales for Nov. 2000 and Sept.
1999.
Year 1996 1997 1998 1999 2000 2001 2002 2003 2004
Monthly
12.6 14.8 18.6 14.8 16.6 21.2 18 17.4 15.8
profit
4. Fit a parabolic curve for the second degree to the data given below and
estimate the value for 1999. Also, show the curves for both the original
and trend values.
5. Use the method of simple average to determine the monthly indices for
the following data of production of a commodity for the years 2002,
2003, 2004
10.10 Answers
Self Assessment Questions
1. From above it is observed that there is a gradual rise in the trend value
as against zig zag yearly values. The trend line thus drawn above can
be extended to forecast the values for the future year.
2. Since the given data is odd in number so we will divide the total number
in two equal halves by neglecting 2007 i.e from 2004 to 2006 another
from 2008 to 2010
= average value of first half portion of series =
= average value of second half portion of series
Now, we will plot the values of against the mid value of two
halves.
Now, join the points A [2005, ] and B [2009, ] , we get the trend
lines shown in fig.
Now,
Deviation from 2
Year Sales (Y) XY X
2007 year (X)
1994 66.6 -5 -333 25
1995 84.9 -4 -339.6 16
1996 88.6 -3 -265.8 9
1997 78 -2 -156.0 4
1998 96.8 -1 -96.8 1
1999 105.2 0 0 0
2000 93.2 1 93.2 1
2001 111.6 2 223.2 4
2002 88.3 3 264.9 9
2003 117.0 4 468 16
2004 115.2 5 576 25
N = 11 1,045.4
Hence,
When X = -4, =
When X = -3, =
When X = -2, =
When X = -1, =
When X = 0, =
When X = 1, =
When X = 2, =
When X = 3, =
When X = 4, =
When X = 5, =
Time
Price deviations
Year from 1995 XY
(Y)
(X)
1990 17 -5 -85 25 425 -125 425
1991 20 -4 -80 16 320 -64 256
1992 19 -3 -57 9 171 -27 81
1993 26 -2 -52 4 104 -8 16
1994 24 -1 -24 1 24 -1 1
1995 40 0 0 0 0 0 0
1996 35 1 35 1 35 1 1
1997 55 2 110 4 220 8 16
1998 51 3 153 9 459 27 81
1999 74 4 256 16 1184 64 256
2000 79 5 395 25 1975 125 625
Total N = 6 0
Thus,
Terminal Questions
1.
5.
Jan Feb Mar Apr May June July Aug Sep
Seas. 104.886 97.566 90.25 112.21 112.21 114.62 119.52 92.66 82.98
Index