You are on page 1of 13

Table of Contents

Time Series Analysis (TSA) ............................................................................................................................ 1 Components of TSA: ..................................................................................................................................... 1 Trend Component: .................................................................................................................................... 2 Cyclical Component: ................................................................................................................................. 2 Seasonal Component: ............................................................................................................................... 2 Irregular Component: ............................................................................................................................... 3 Decomposition: ............................................................................................................................................. 3 Trend: ............................................................................................................................................................ 3 Trend Curves: ................................................................................................................................................ 4 Seasonal Variation: ....................................................................................................................................... 4 Ratio-to-Moving Average: ............................................................................................................................. 5 Car Registrations ....................................................................................................................................... 5 Seasonally Adjusted Data:............................................................................................................................. 5 Cyclical Variation: .......................................................................................................................................... 6 Economic Indicators:..................................................................................................................................... 7 Cyclical Cautions: .......................................................................................................................................... 7 Long Term Forecasts: .................................................................................................................................... 8 Cyclical and Irregular Effects: ........................................................................................................................ 8 Outboard Sales Example: .............................................................................................................................. 8 Seasonal Forecasting: ................................................................................................................................... 9 Case Study: .................................................................................................................................................... 9 Implementing the Model: ........................................................................................................................... 10 Using optimal values for and that minimizes the MSE: ........................................................................ 10 Forecasting with Holts Model: ................................................................................................................... 10 SWOT ANALYSIS: ......................................................................................................................................... 11 STRENGHT: .............................................................................................................................................. 11 WEAKNESS: ............................................................................................................................................. 11 OPPORTUNITY: ........................................................................................................................................ 11 THREAT:................................................................................................................................................... 11 Conclusion: .................................................................................................................................................. 12 Recommendation:....................................................................................................................................... 12

1|Page

Time Series Analysis (TSA)


The Art of Forecasting

Time series are analyzed to discover past patterns of variability that can be used to forecast future values. A time-series is a set of observations on a quantitative variable collected over time. Examples Dow Jones Industrial Averages Historical data on sales, inventory, customer counts, interest rates, costs, etc. Businesses are often very interested in forecasting time series variables. Often, independent variables are not available to build a regression model of a time series variable. In time series analysis, we analyze the past behavior of a variable in order to predict its future behavior Decomposition - identify components that influence the series. Trend Cyclical Seasonal Irregular

Components of TSA:
Cycle
An up-and-down repetitive movement in demand. repeats itself over a long period of time

Seasonal Variation
An up-and-down repetitive movement within a trend occurring periodically. Often weather related but could be daily or weekly occurrence

Random Variations

2|Page

Erratic movements that are not predictable because they do not follow a pattern

Trend

Seasonal

TS Data
Irregular

Cyclical

Trend Component:

Indicates the very long-term behavior of the time series Typically as a straight line or an exponential curve This is useful in seeing the overall picture

Cyclical Component:
A non-seasonal component which varies in a recognizable period Peak Contraction Trough Expansion Due to interactions of economic factors The cyclic variation is especially difficult to forecast beyond the immediate future more of a local phenomenon

Time

Seasonal Component:
Regular pattern of up and down fluctuations within a fixed time

3|Page

Time
Due to weather, customs etc. Periods of fluctuations more regular, hence more profitable for forecasting

Irregular Component:
Random, unsystematic, residual fluctuations Due to random variation or unforeseen events Short duration and non-repeating A forecast, even in the best situation, can be no closer (on average) than the typical size of the irregular variation

Decomposition:
Additive model: Yt = T + S + I Multiplicative model: Yt = TSI
An annual series is a product of trend and cyclical fluctuations: Y = TC This is a multiplicative model where trend is in original units and the cyclical is an index. Series that is measured in less than a year (monthly and quarterly data): Y = TSCI

Trend:
Basic forces in trend: population change, price change, technological change, productivity change, product life cycles Two basic purposes: project the trend and to eliminate it from the original data. Trend analysis: independent variable (X) is time

4|Page Method most widely used to describe straight line trends is least squares method. Computes the line that best fits a group of points mathematically. Assumes that the correct trend curve is selected and that the curve that fits the past is indicative of the future.

Trend Curves:
Life cycle curves: introduction, growth, maturity, decline. Linear models assume that a variable is increasing by a constant amount each period. Life cycle curves assume increases at an increasing rate.

Exponential curves fit data that is growing at a constant rate instead of a constant amount.

Growth curves (Gompertz) represent industries and products that grow at a declining rate. Project management life cycles. Refer to articles on forecasting product life cycles

Seasonal Variation:
Trend is determined directly from all available data. Seasonal component is determined by eliminating all the other components. Trend is represented by one equation. A separate seasonal value has to be calculated each period, usually in the form of an index number. An index number is a percentage that represents changes over time. Most common calculation is ratio-to-moving average for the multiplicative decomposition model. Seasonal index represents the extent of seasonal influence for a particular segment of the year. The calculation involves a comparison of the expected values of that period to the overall average. A seasonal index of 100 for a particular month indicates that the expected value of that month is 1/12 of the total for the annual period.

5|Page A seasonal index of 125 indicates that the expected value for that month s 25% greater than 1/12 of the annual total A seasonal index of 80 indicates that the expected value for that month is 20% less than 1/12 of the total activity for the year. Monthly index indicates the expected ups and downs in monthly (quarterly) activity with effects due to trend, cyclical, and irregular components REMOVED.

Ratio-to-Moving Average:
Centered moving average is used for comparison of values at different points in time. Moving average values are placed at the period in which they are calculated. For example, for a moving average length of 3, the first numeric moving average value is placed at period 3, the next at period 4, and so on. When you center the moving averages, they are placed at the center of the range rather than the end of it. This is done to position the moving average values at their central positions in time. See new car registrations for example

Car Registrations
For monthly data use a 12-month centered moving average, quarterly data uses a 4-month CMA. This removes seasonal effects leaving only long-term trend, cyclical, and irregular components. CMA smoothest short-run fluctuations. Median is less sensitive to outliers

Seasonally Adjusted Data:


Allows reliable comparison of values at different points in time Easier to understand the relationships among economic/business variables once seasonal effects are removed Helpful for short-term forecasts Simplify data for easy interpretation without significant loss of information Deseasonalized - original values are divided by their corresponding seasonal index. TCI = Y/S

6|Page

Cyclical Variation:
Residual Method - cyclical component of time series data is identified by eliminating or averaging out trend effects. If the data is an annual series, trend components are removed. If the data are monthly/quarterly, trend and seasonal effects are removed. Multiplied by 100 for percentage

1960 1961 1962 : : 1990 1991 1992

Registrations (Millions) 6.577 5.855 6.939 : : 9.16 9.234 8.054

X 1 2 3 : : 31 32 33

Y-hat Cyclical 8.0568 81.633 8.1255 72.057 8.1942 84.682 : : : : 10.1177 90.534 10.1863 90.651 10.255 78.537

Cyclical index shows the position of each Y value relative to the trend line. New registrations were about 18% below what was expected from the trend line

7|Page

Plot the cyclical index over time The trend line is the 100% base line. Once plotted, it is very easy to see the cyclical patterns. Does the series cycle? If so, how extreme is the cycle? Does the series follow the general economy/business cycle? (Do peaks occur when the economy is strong and bottom out when the economy is weak? Business indicator - business related time series that are used to help assess the general state of the economy.

Economic Indicators:
Certain statistical time series may be useful as direct indicators of cyclical expansions and contractions in business activity. National Bureau of Economic Research has 22 business indicators: Leading - anticipate turning points up or down Coincident - indicate economys current performance Lagging - lag behind the general upswing/downswing of the economy.

Cyclical Cautions:
Difficult to identify cyclical turning points near the time they occur - because the series also contains short term irregular components No uniformity occurs in the length of time by which a given leading indicator precedes cyclical turns in the economy. For example, leading indicators may signal a recession or recovery some time in the future, but they provide less help in establishing the timing of the turn. False signals - a turning point does not materialize. Should be used together with other data - but analysts should beware of limitations.

8|Page

Long Term Forecasts:


Most important aspect is to predict the direction! If the trend is the dynamic value, the model can be used to forecast long term. This is determined if the trend equation does a good job at fitting past data. If the cyclical is the most important, the model should only be used to forecast one period ahead. The equation estimates T and we use subjective data to estimate the cyclical effect for Y-hat = T x C 7.988 + .0687(34) = 10.324 (this is the value for T) Based on coincident and leading indicators, estimate an upswing. C is estimated to be 83. Forecast for period 34 = 10.324*.83 = 8.569

Cyclical and Irregular Effects:


CI = Y/TS I = CI/C The irregular component measures the variability of the time series after the other components have been removed. Outboard Sales Example: (key the data on Page 04) Use a combination of Minitab and Excel for the data analysis.

Outboard Sales Example:


T column is based on time series regression. Calculate the fitted values for each period SCI column is Y/T S column is from Minitab output - seasonal index per period TCI column is Y/S CI column is Y/TS C column is a 3 month moving average of CI. This is the cyclical index for every quarter I column is CI/C Need to use Excel to calculate CI, C, and I

9|Page

Seasonal Forecasting:
Forecast for trend with the equation Use the adjusted seasonal index for the appropriate month/quarter Estimate the cyclical component using indicators - remember the important aspect is to get the direction correct Commonly use 1 to indicate the irregular component since irregular effects are usually random noise

Case Study:

Mas Group. Is a manufacturer of personal air crafts (also known as jet).


The company has enjoyed a fairly steady growth in sales of its products. The officers of the company are preparing sales and manufacturing plans for the coming year. Forecasts are needed of the level of sales that the company expects to achieve each quarter.

10 | P a g e

Implementing the Model:

Using optimal values for and that minimizes the MSE:

Forecasting with Holts Model:


Forecasts for time periods 21 through 24 at time period 20:

11 | P a g e

SWOT ANALYSIS:
STRENGHT:
Time periods are of equal length No missing values

WEAKNESS:
Difficult to forecast demand because... There are no causal variables The components (trend, seasonality, cycles, and random variation) cannot always be easily or accurately identified

OPPORTUNITY:
Determination of a transfer function of a system Design of simple feed-forward and feedback control schemes

THREAT:
There is no systematic approach for the identification and selection of an appropriate model, and therefore, the identification process is mainly trial-and-error There is difficulty in verifying the validity of the model o Most traditional methods were developed from intuitive and practical considerations rather than from a statistical foundation

12 | P a g e

Conclusion:
Described what forecasting is Explained time series & its components Smoothed a data series Moving average Exponential smoothing

Forecasted using trend models

Recommendation:
Select several forecasting methods Forecast the past Evaluate forecasts Select best method Forecast the future Monitor continuously forecast accuracy

You might also like