DATA BRIO ACADEMY

TIME SERIES
ANALYSIS
What is a Time Series?

Databrio
2/18/2016

When we have a chronologically ordered collection (set) of data points, we

refer to the data set as time series. So, a time series is a sequence of
observations taken sequentially in time series data can have both univariate
and multivariate quantitative data collected over time.

For example, let us say that we have the attrition rate data of a company for
the past 12 months. The senior manager wants to know the probable attrition
rate for the 13th and 14th month, so that he can prepare his current
workforce and initiate any recruitment process if necessary. As we have the
data points arranged chronologically, we say that the data is a time series
data. For predicting the probable attrition rate for any future period, we
have to use time series analysis which has been discussed below.

There are two classes of time series process: Stationary and Non-Stationary
So, what is stationarity? Covariance stationarity follows three conditions-

1) Unconditional mean and variance should be constant

E(Yt) = E(Yt+j) =
Var (Yt) = Var(Yt+j)=2

2) Covariance depends on time j that has elapsed between observations, not on

reference period.

Cov(Yt,Yt+j) = Cov(Ys,Ys+j) =
Any time series data which follows the above mentioned conditions are known
as stationary time series. Similarly, if a time series data do not conform to
the above conditions, they are termed as non-stationary time series data. For
a non-stationary time series, the mean, variance and the covariance changes.
There is no long-run mean to which the series returns. Also, the variance is
tie-dependent, for eg., it could go to infinity as the number of observation
goes to infinity.
Unit root tests are used to find out non-stationary time series. One of the
commonly used tests for non-stationarity is the Dickey-Fuller test. Other
tests include Augmented Dickey-Fuller test and KPSS test.

The process flow for time-series analysis is as follows:

At first, using unit root tests find out whether the time series is stationary
or not. If it is stationary, proceed to find out the best ARMA model using
different diagnostic tests. After selecting the best suited model, forecast for
future periods and again use different diagnostic tests to find out how good
the forecast is.
If in case the unit root test like Dickey-Fuller test shows the time series to
be non-stationary, then you have to transform the data into stationary series.
Differencing is widely used to transform the data into stationary series.
Once, the data is transformed into stationary time series, follow the previous
steps to forecast the model.

Stationary Process:

After identification of a stationary time series process, estimation and model

selection is done. Stationary Process can be of three basic types:
1. Autoregressive(AR)-It means that the variable is a function of its own
lagged values upto a maximum lag of p.
2. Moving Average(MA)-It means the variable is a function of the
disturbances upto a maximum lag of q.
3. Combined(ARMA)-It includes both the elements, i.e. have lagged values of
the variable and lagged values of the disturbance.

So, for estimation of time series and model selection, decide whether the time
series is a pure AR/ MA or ARMA process. Then estimate the specifications
like auto-covariance, auto-correlation and partial auto- correlation.
Finally, choose the best model based on the significance of coefficients, white
noise residuals, fit vs parsimony and ability to forecast.

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