Quantitative Techniques in Business Unit 6

Unit 6 Time Series Analysis

Structure:
6.1 Introduction
Objectives
6.2 Meaning of Time Series
6.3 Applications of Time Series
6.4 Variations in Time Series
6.5 Measurement of trend or secular trend
6.6 Measurement of seasonal variations
6.7 Summary
6.8 Glossary
6.9 Terminal Questions
6.10 Answers

6.1 Introduction
Everyone knows that future is uncertain. However one cannot afford to be
completely relaxed thinking that it is uncertain. We have to try our best to
make ourselves prepared to face it be it a very optimistic one or a worst
case scenario. Thus forecasting or prediction about the future, becomes an
important function for a manager is an essential tool in any decision making
process. The activities of a firm or a company works according to the
forecasted data. We can take the simple example of the manufacturers of
exercise books used by students where we find that the sales are more
during the beginning of an academic session so production would be
planned accordingly to supply more during those months. Similarly the sale
of umbrellas during rainy season. This forecasting ranges right from the
amount of grocery a vegetable vendor should stock to the sales of a huge
automobile manufacturing company. The quality or the accurateness of the
forecasting depends entirely on the forecasting method used and also on
the judgment and expertise of the analyst.
Time Series Analysis is one quantitative method of forecasting where
predictions are made based on past historical data.

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Objectives:
After studying this unit, you should be able to:
 understand the meaning & importance of time series
 know about different variations of time series
 discuss the different methods of measurement of trend & seasonal
variations

6.2 Meaning of Time Series

An arrangement of statistical data in accordance with the time of occurrence
or in chronological order is called a time series. In other words, the
observations in numerical form obtained at regular interval of time is known
as time series. The time frame of the observations or the recorded data
may be taken at an interval of an hour, a day , a week, a month, a year
depending upon the type of event the data refer to. Time series analysis is
used to detect patterns of change in statistical information over regular
intervals of time. Then the predictions or forecasting about the future are
made by projecting these patterns. However the forecasted figure may or
may not tally with the real values. Sometimes forecasted figure can be
closer to the actual and sometimes it can also lead to wrong conclusions.
We can understand it better through an example given below:
Year 2006 2007 2008 2009 2010 2011
Sales of Maruti cars
285 300 320 345 375 ?
(in thousand units)

Table 6.1

From the table we can see that the sales of Maruti cars are increasing year
by year, so we can predict that the sales will be increasing in the year 2011.
However predicting/ forecasting is not so simple as it looks, there are certain
systematic ways for prediction which we will be studying one by one. Before
that we will study some types of variations found in time series.

Activity 1:
Make groups of around 4 people each and discuss about the various
avenues where time series can be used to forecast about the various
decisions to be taken in a company.

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Self Assessment Questions

1. The observations in numerical form obtained at regular interval of time
are known as ____________.
2. Time Series Analysis is one ____________ method of forecasting
where predictions are made based on past _________________.
3. The data collected for time series analysis can be done at varying time
intervals.(True/False)
4. Forecasting is required only for large businesses. (True/False)
5. Forecasting always gives us the correct values. (True/False)

6.3 Applications of Time Series

1. Making comparisons: We will be able to make comparisons among the
data which are arranged chronologically between different time periods.
The data may range from sales of any product, patients affected by a
certain disease or no of births in a certain country etc.
2. Forecasting: Prediction or estimation is one of the main applications of
time series. By studying the variations and trend of the variable for a
sufficiently long time, it will be possible to forecast the variable’s future
behavior. However the forecast will be meaning full if the assumptions
taken during the forecast are satisfied in reality. For instance if the
forecast predicts increase of sales of TV during the festival season. If in
case there is a huge flood of any natural calamity during that time the
forecasting will not be true .
3. Analysis of Past Behaviour: Study of time series helps in analysing the
past behaviour of the variables which helps in identifying the various
forces that affects its behaviour.

6.4 Variations in Time Series

We now know that time series refer to a group statistical information
accumulated at regular intervals. There are four kinds of change or variation
involved in time series analysis:
1. Secular Trend
2. Cyclic Fluctuations
3. Seasonal variations
4. Irregular Variations

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Secular Trend: In this first type of change, the value of the variable tends to
either decrease or increase over a long period of time. It can be defined as
“a consistent long term change in the average level of the forecast variable
per unit of time”. The steady increase in the population of India recorded by
the census department is an example of secular trend. Table 6.2 shows a
secular trend which is showing an upward trend.

Year Population
1970 54,75,69,000
1980 68,73,32,000
1990 84,95,15,000
2000 101,59,23,000

Table 6.2
Data source: World Bank, world development indicators

Cyclic Fluctuations: The second type of variation is cyclic fluctuations

which are generally business cycles or the values of the variable under
study tend to rise and fall in line with the fluctuations of the business cycle.
The business cycle can be performing very good and rising to a peak the
trend line or is also likely to slump, hitting a low point below the trend line.
The time between hitting peaks and falling to low points is at least 1 year
and it can be as many as 15 to 20 years. Figure 6.1 illustrates a typical
pattern but it has to be noted that cyclic movements do not follow any
regular pattern but move in somewhat unpredictable manner.

Fig. 6.1

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Seasonal variation: Seasonal variations are caused by the seasonal

influence (spring, summer autumn & winter) on business and economic
activities. Seasonal variations involve pattern of changes within a year that
tend to be repeated from year to year. For Example the hotel industry can
expect a substantial increase in the number of tourists during the spring &
autumn every year. Similarly physician can expect an increase in the
number of flu cases during the summer .As they are regular pattern they are
useful in forecasting the future .Fig 6.2 show the fluctuations due to changes
in seasons.
Figure 6.2: we can see that during the month of Apr-Jun, The sales of ice
cream are more compared to other months.

Fig. 6.2

Irregular variations: This is the fourth type of change in time series

analysis. In many situations the value of a variable may be completely
unpredictable, changing in a random manner. Irregular variations describe
such movements. This can occur due to strikes, break down of plants, non-
seasonal illness, and bad weather etc. These variations either go very deep
downward or too high to attain peaks abruptly. Figure 6.3
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irregular fluctuations
1000

800
Sales of icecream

600

400
sales
200

Dec
Nov
Feb

Apr

Aug
Sep
Mar

May

Jul

Oct
Jun
Jan

Year

Fig. 6.3

Self Assessment Questions

6. Secular trend is defined as “a consistent short term change in the
average level of the forecast variable per unit of time”. (True/False)
7. Fluctuation of a business cycle is an example of seasonal variation.
(True/False)
8. Sale of umbrellas during the rainy season is an example of seasonal
variation. (True/False)
9. ______________ describe situations where the value of a variable
may be completely unpredictable, changing in a random manner.
10. ______________involve pattern of changes within a year that tend to
be repeated from year to year.

6.5 Measurement of Trend or Secular Trend

There are four possible methods of secular trend which are the following:
1. Free hand method or graphic method
2. Semi-average method
3. Moving average method
4. Least square method of fitting mathematical curves

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Free hand method or graphic method

In free hand method the given data are plotted as points on a graph paper
against time. The time series data (y) are shown along the vertical axis and
time (t) along horizontal axis. Then a smooth free hand curve is drawn
through the scatter of the plotted points, appearing to represent their pattern
of movement over time. This method gives us a quick estimate of the trend
value and can be used to obtain a preliminary knowledge of the nature of
the trend value and an approximate value. This method has a serious
disadvantage that different persons may draw the free hand line at different
positions and with different slopes. The conclusions differ from person to
person.
We will take the following example to understand it.
The no. of vehicles sold is given. Fit a trend line using free hand method
Year No of vehicles
2000 100
2001 300
2002 350
2003 750
2004 800
2005 1000

Table 6.3

Fig. 6.4

The data shows an upward trend.

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Semi-average method:
Under this method the whole series is divided into two halves and the
average for each halves are calculated. If the data is for even number or
years it can be easily divided in to two halves. But if it is for odd number of
years we leave the middle year of the time series and two halves constitute
the periods on each sides of the middle year.
The average for a half is taken to be representative of the value
corresponding to the midpoint of the time interval of that half. We thus get
two points. These two points are plotted on a graph and are joined by
straight line which provides us the required trend line.
We take a similar example to fit a trend line by the method of semi-average.

Year No of vehicles
2000 100
2001 300
2002 350
2003 750
2004 800
2005 1000
2006 1100

Table 6.4

Solution: Since there are seven years or seven observations, we have to

exclude the middle one i.e. the fourth one and take the average of the first
three and the last three.
Year No of vehicles average of three years average
2000 100
2001 300 750 250
2002 350
2003 750
2004 800
2005 1000 2900 967
2006 1100
Table 6.5

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Thus we get two points i.e. 250 and 967 for the year 2001 & 2005
respectively. We shall now join these two points to form a trend line. The
line can be extended and can be used either for prediction or for
determining intermediate value Figure 6.5

Fig. 6.5

Although this method has a better approach than the free hand method, it
also has certain short comings. Any extreme value present in the mean of
each halves will affect the points and such trend may not show the accurate
picture in the series and thus may not be predictive enough for predictive
purpose.
Method of moving average
A moving average is an average of fixed number of items in a series which
moves through the series by dropping the top item of the previous averaged
group and adding the next item below in each.
Thus a moving average is computed by adding all the values of a certain
number successive periods and then dividing the sum obtained by the
number of periods included. This average is considered as the trend value
for the unit of time falling at the center of the period used in the calculation
of the average.

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We can understand it better with the following example:

Year Sales of biscuit in pkts

1999 200
2000 300
2001 275
2002 396
2003 450
2004 651
2005 537
2006 698
2007 700
2008 550

Table 6.6

To get three yearly averages we leave the first one and take the total of
1999, 2000 & 2001 i.e. we add 200,300 & 275, and write next to the year
2000. The next will be the addition of 300,275 & 396 and so on.
We can then find the average by dividing the total by three to get the
3 yearly moving averages.
Sales of biscuit 3 yearly 3 yearly moving
Year
in pts moving total average trend
1999 200 - -
2000 300 775 258.33
2001 275 71 323.67
2002 396 1121 373.67
2003 450 1497 499.00
2004 651 1638 546.00
2005 537 1886 628.67
2006 698 1935 645.00
2007 700 1948 649.33
2008 550 - -
Table 6.7

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Following is another example of 5 yearly moving averages where number of

new car registrations in different years is given.

Year No of new car registration

1992 786
1993 1011
1994 1193
1995 1125
1996 1068
1997 1119
1998 1120
1999 990
2000 1099
2001 1304
2002 1676
2003 1658
2004 1247
2005 1180
2006 1271
2007 1288

Table 6.8

Solution:
No of new car 5 year total 5 year moving
Year
registration average trend average
1992 786 - -
1993 1011 - -
1994 1193 5183 1036.6
1995 1125 5516 1103.2
1996 1068 5625 1125.0
1997 1119 5422 1084.4
1998 1120 5396 1079.2
1999 990 5632 1126.4

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2000 1099 6189 1237.8

2001 1304 6727 1345.4
2002 1676 6984 1396.8
2003 1658 7065 1413.0
2004 1247 7032 1406.4
2005 1180 6644 1328.8
2006 1271 - -
2007 1288 - -

Table 6.9

Calculations of moving average for even number of years:

The calculation for moving average for even number of years is little
different from the calculation of odd number: We will understand it with an
example:
Value in 4 yearly 4 yearly 2 year 2 yearly
Year thousands moving moving centered centered
tons total average moving total moving average
(1) (2) (3) (4) (5) (6)
1960 105

1961 125
445 111.25
1962 115 218.75 109.375
430 107.5
1963 100 205 102.5
390 97.5
1964 90 190 95
370 92.5
1965 85 182.5 91.25
360 90
1966 95 178.75 89.375
355 88.75
1967 90 176.25 88.125
350 87.5
1968 85 175 87.5
350 87.5

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1969 80 175 87.5

350 87.5
1970 95 175 87.5
350 87.5
1971 90 175.5 87.75
352 88
1972 85 172.25 86.125
337 84.25
1973 82

1974 80

Table 6.9.1

Here we add 4 yearly values for first 4 years and write the sum (445)
between 1961 & 1962 in 3rd column. Then we delete 105 and add 90 and
write the value 430 between the year 1962 and 1963. Thus preceding we
complete 4 yearly moving totals in Column 3. Two blank spaces for the year
1960, 1961 from beginning and 1973 & 1974 will be present in the end. Now
each moving total is divided by 4 to get yearly moving average for each year
in column 4 .Now we make 2 period centered moving total of column 4 and
put them in column 5. Now each value in column 5 is divided by 2 to give
centered moving average in column 6.
Method of least Squares:
This is the most widely used method and provides us with a mathematical
device to obtain an objective fit to the trend of a given time series. This
method can be used to fit either a straight line trend .The straight line trend
has an equation of the type:

Yc  a  bX

Where Yc denotes the trend value of the dependent variable i.e. of the Y
series. X is the independent variable i.e. time series of X series. The
constants a denotes the value of Yc when X  0 and b denoting the

change of Yc for a unit change in X variable.

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In order to determine the value of the constants a & b the following normal
equations are to be solved

 Y  na  b X
 XY  a X  b X
2

Where n represents the number of years in the series .We can understand it
with an example:
Following table shows the computation for fitting a straight line trend by
method of least squares

Sales in 2 computed Y in
Year X XY X
cores (Y) crores
2003-2004 83 1 83 1 67
2004-2005 92 2 184 4 84
2005-2006 71 3 213 9 101
2006-2007 90 4 360 16 118
2007-2008 169 5 845 25 135

Table 6.9.2
From the above table note that,
n  5 ;  Y  505 ;  X  15 ;  XY  1685 ;  X 2  55
The normal equations are given below:

 Y  na  b X
 XY  a X  b X
2

Putting the above values in the equations we get

505 =5 a +15 b
1685=15 a +55 b
We solve the above simultaneous equations
1515 =15 a +45 b
1685=15 a +55 b
-170 = -10 b
b = 17 and a =50

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Substituting the values in the equation of a straight line we get

Y  50  17 x
This is the equation of the straight line trend for the data given in table.
Now we can compute all the values of Y
When X =1, Y = 67; When X =2, Y = 84; When X =3, Y = 101; When
X =4, Y = 118; When X =5, Y = 135
The procedure to be followed is given below:
1. Convert the years into natural numbers (1,2,3,…. ) and denote it by X
and find X
X
2
2. Find the squares of X and obtain
3. Multiply the values of X & Y and find  XY
4. Find the sum of all the values of Y to get  Y Put these values in the
two normal equations given above and solve for a and b
5. Substitute the values of a & b in the equation Y  a  bX and then
find the trend values for various values of X
Self Assessment Questions
11. The conclusions drawn by a free hand method by different persons will
always be the same .(True/False)
12. The predicted data computed by the method of semi –averages is
likely to be affected by extreme values. (True/False)
13. The straight line trend has an equation of the type Y  C  a  bX
(True/False)

6.6 Measurement of Seasonal Variations

The effects of trend cycles, irregular variations must be first eliminated from
the original time series to obtain an estimate of seasonal variation. Once
they are eliminated we get measures of seasonal variation in the behavior of
any variable. These measures are called seasonal indexes.
Following are the methods of constructing seasonal index
1. Method of simple Averages ( Weekly ,Monthly or quarterly)
2. Ratio-to-Trend Method
3. Moving Average Method
4. Link Relatives Methods

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We will be studying the first two methods in greater detail.

Method of simple Averages: This is the simplest method of obtaining a
seasonal index
Following are the steps in computed the seasonal index
1. Arrange the unadjusted data by years, months or quarters if quarterly
data are given
2. The sum of each month or quarter over all the years are obtained
3. The average for each month or quarter is obtained
4. Compute the seasonal index using the formula;
Seasonal index for a month or quarter

monthly or quartely average for the month or quarter

  100
Average of monthly (quartely ) averages or general average

It can also be given by

S1
Seasonal Index   100
S2

Where S1 the average of first quarter or month & S 2 is the average of all
quarters or months.
We will understand it with an example
Compute the seasonal index for the following series

Quarterly Production
Year I II III IV
2004 3.5 3.9 3.4 3.6
2005 3.5 4.1 3.7 4
2006 3.5 3.9 3.7 4.2
2007 4 4.6 3.8 4.5
2008 4.1 4.4 4.2 4.5
Total 18.6 20.9 18.8 20.8
Seasonal average 3.72 4.18 3.76 4.16
Table 6.9.3

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Quartely Average
Seasonal Index   100
General Average
Now General average = 3.72+4.18+3.76+4.16
4
= 3.95
Seasonal index for 1st quarter = 3.75 × 100 =94.17
3.95
Seasonal index for 2nd quarter = 4.18 × 100 =105.8
3.95
Seasonal index for 3rd quarter = 3.76 × 100 =95.19
3.95
Seasonal index for 4th quarte r= 4.16 × 100 =105.3
3.95
Ratio to Trend Method
The steps to determine seasonal indices by this method are as described
below
1. Determine the trend values by the method of least squares
2. Divide the original data month by month by the corresponding trend
values and express them as percentage
3. Average the different values for a moth
4. Adjust all these averages to a total of 1200
5. If the data is distributed in quarters instead of months adjust the
respective averages to a total of 400
We can understand it by an example
Find seasonal variations by the ratio-to trend method from the data given
below;
Sales
Year 1 2 3 4
2004 30 40 36 34
2005 34 52 50 44
2006 40 58 54 48
2007 54 76 68 64
2008 80 92 86 82
Table 6.94

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We now find the total of all Y and substitute years by 1,2,3,4, and so on

Year ( X ) Yearly sales total Avg sales ( Y ) XY X2

1 140 35 35 1
2 180 45 90 4
3 200 50 150 9
4 262 65.5 262 16
5 340 85 425 25
Total 15 1122 280.5 962 55

Table 6.95

By the method of least squares we have the following equations

280.5=5 a +15b b
962 =15 a a +55 b

Solving them simultaneously we get a = 19.95 and b = 12.05

Thus the trend equation is Y  19.95  12.05 X where X changes yearly

by 12 and quarterly by 12/4 = 3. It is assumed that the trend values for a
year are the value reinstating the middle of the year that is half of the 2nd &
3rd quarter. Consider the year 2004; the value 32 when X =1 will be against
the time in the middle of 2nd and 3rd quarter. Since the difference between
the trend values of two quarters is 3; the trend values of 2nd quarter = 32-
(3/2). Other values can be derived by subtracting and adding 3 to the
derived values. Following table show these trend values. Similarly add 12 to
get the next value for the following year.

Year I II III IV
2004 27.5 30.5 33.5 36.5
Difference of 3
2005 39.5 42.5 45.5 48.5
2006 51.5 54.5 57.5 60.5
2007 63.5 66.5 69.5 72.5
2008 75.5 78.5 81.5 84.5
Difference of 12
Table 6.96

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Now the observed values have to be expressed as a percentage of the

computed trend values given in table
Like 30/27.5 * 100 for the first case

Year I II III IV
2004 109.1 131.2 107.5 93.2
2005 86.1 122.4 109.9 90.7
2006 77.7 106.4 93.9 79.3
2007 85.0 114.3 97.8 88.3
2008 106.0 117.2 105.5 97.0
average 92.77 118.28 102.92 89.71
adjusted seasonal index 92.1 117.4 102.1 89.0
Table 6.9.7

The total of averages is 403.08 which are more than 400. Therefore each
average is multiplied by 400/403.08 for computing seasonal index.

6.7 Summary
Time series analysis is a quantitative method of forecasting where
predictions are made based on past historical data. The trend or the pattern
of changes about the historical data are studied and future projections are
also made on the basis assuming that the trend of the past would lead to the
future . However all these prediction would be true only if other factors which
would affect the projected data remains constant . These projections can be
taken as only a guideline for decisions and cannot be taken as the exact
value as they are only an estimation .

6.8 Glossary
 Forecasting: It is defined as a prediction or estimation about the future
data .
 Trend: A smooth regular and long term movement of time series
exhibiting the basis tendency to grow decline or stagnate over a period
of time.
 Index Number: An index number is a statistical device designed to
measure relative level of a group of related variables over a period of
time and space

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 Quarter: It consists of 3 months like Jan to Mar, Apr to June, Jul to Sept
& Oct to Dec
 Quantitative: refers to a type of information based in quantities or else
quantifiable data which can be expressed in figures having objective
properties as opposed to qualitative information which deals with
apparent qualities possessing subjective properties).

6.9 Terminal Questions

1. What do you understand by time series? Discuss the importance of time
series analysis?
2. What are the different types of variation in time series? Briefly describe
each with an example.
3. Fit a trend line by the method of 3 yearly moving average

Year Sales in units

2000 100
2001 300
2002 350
2003 750
2004 800
2005 1000
2006 1100

4. Given below is the data of production of a certain company in lakhs of

units. Compute the linear trend by the method of least squares method.
Year 1970 1971 1972 1973 1974 1975 1976 1977
production 19 15 19 14 20 26 29 31

5. Determine seasonal trend for each quarter

Sales
quarter 2005 2006 2007
I 115 125 149
II 170 189 209
III 108 149 189
IV 105 119 145

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6. The following are the figures of sales of compact disks for the last seven
years. Determine the trend line by the free hand method.

Year Sales in Thousands

2004 500
2005 489
2006 423
2007 300
2008 250
2009 115
2010 65

7. Fit a trend line for the following data using the method of semi-average
1991 300
1992 275
1993 450
1994 653
1995 751
1996 774
1997 869
1998 899
1999 975
2000 1025

6.10 Answers
Self Assessment Questions
1. Time series
2. Quantitative , historical data
3. False
4. False
5. False
6. False
7. False
8. True
9. Irregular Fluctuations

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10. Seasonal Variations

11. False
12. True
13. False
Terminal Questions
1. Refer Section 1.1 and 1.2; The observations in numerical form obtained
at regular interval of time is known as time series .Time series is
important for forecasting which will help us to make a rational decision.
2. Refer Section 1.1 and 1.2: The different types of variation are secular
trend, cyclic fluctuations , seasonal variations and irregular variation.
3.
Year Sales in units Three yearly total 3 yearly average

2000 100 - -
2001 300 750 250.00
2002 350 1400 466.67
2003 750 1900 633.33
2004 800 2550 850.00
2005 1000 2900 966.67
2006 1100 - -
4. The normal equations are  Y na  b X and

 XY a X  b X 2

We have 173=8 a +36 b and 869 =36 a +204 b

Solving the equations simultaneously we get a = 8.35 and b =2.95
The equation will be Y = 8.35 +2.95 X ; substitute the values of X as
1, 2 3 …. And get the computed values of Y
5. Solution :
Sales Quarter total Quarter average
quarter 2005 2006 2007
I 115 125 149 389 97.25
Ii 170 189 209 568 142
Iii 108 149 189 446 111.5
Iv 105 119 145 369 92.25

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Quartely Average
Now Seasonal Index   100
General Average

General Average = 97.25+142+111.5+92.25

4
=110.75

Seasonal index for 1st quarter = 97.25 X100 =87.81

110.75

Seasonal index for 2nd quarter = 142 X100 =128.21

110.75

Seasonal index for 3rd quarter = 111.5 X100 =100.67

110.75

Seasonal index for 4th quarter= 92.25 X100 =83.29

110.75
6. The following figure shows the trend line showing sales of compact
disks. We can see the sales are decreasing after each year. It is a
downward trend .Pen drives may be replacing the requirement of
Compact disks which may be the reason for decrease in sales.

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7. Solution :

Year Sales average of 5 years Average

1991 300
1992 275
1993 450 2429 485.8
1994 653
1995 751
1996 774
1997 869
1998 899 4542 908.4
1999 975
2000 1025

References
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Sikkim Manipal University Page No. 121