Introduction to Time Series

The statistical data is recorded with its time of occurrence is called a time series. The yearly
output of wheat recorded for the last twenty five years, the weekly average price of eggs
recorded for the last 52 weeks, the monthly average sales of a firm recorded for the last 48
months or the quarterly average profits recorded for the last 40 quarter etc., are example of time
series data. It may be observed that this data undergoes changes with the passage of time. A
number of factors can be isolated with contribute to the changes occurring overtime in such
series.

In the field of economics and business, for example, income, imports exports, production,
consumption, prices these data are depend on time. And all of these data are pretentious by
seasonal changes as well as regular cyclical changes over the time period. To evaluate the
changes in business and economics, the analysis of time series plays an important role in this
regard. It is necessary to associated time with time series because time is one basic variable in
time series analysis.

Components of Time Series

The factors that are responsible to bring about changes in a time series, also called the
components of time series, are as follows:

1. Secular Trend (or General Trend)

2. Seasonal Movements
3. Cyclical Movements
4. Irregular Fluctuations
Secular Trend:
The secular trend is the main component of a time series which results from long term effect of
socio-economic and political factors. This trend may show the growth or decline in a time series
over a long period. This is the type of tendency which continues to persist for a very long period.
Prices, export and imports data, for example, reflect obviously increasing tendencies over time.

Seasonal Trend:
These are short term movements occurring in a data due to seasonal factors. The short term is
generally considered as a period in which changes occur in a time series with variations in
weather or festivities. For example, it is commonly observed that the consumption of ice-cream
during summer us generally high and hence sales of an ice-cream dealer would be higher in some
months of the year while relatively lower during winter months. Employment, output, export etc.
are subjected to change due to variation in weather. Similarly sales of garments, umbrella,
greeting cards and fire-work are subjected to large variation during festivals like Valentines
Day, Eid, Christmas, New Year etc. These types of variation in a time series are isolated only
when the series is provided biannually, quarterly or monthly.
 Cyclic Movements:
These are long term oscillation occurring in a time series. These oscillations are mostly observed
in economics data and the periods of such oscillations are generally extended from five to twelve
years or more. These oscillations are associated to the well known business cycles. These cyclic
movements can be studied provided a long series of measurements, free from irregular
fluctuations is available.

Irregular Fluctuations:
These are sudden changes occurring in a time series which are unlikely to be repeated, it is that
component of a time series which cannot be explained by trend, seasonal or cyclic movements .It
is because of this fact these variations some-times called residual or random component. These
variations though accidental in nature, can cause a continual change in the trend, seasonal and
cyclical oscillations during the forthcoming period. Floods, fires, earthquakes, revolutions,
epidemics and strikes etc,. are the root cause of such irregularities.

Analysis of Time Series

The object of the time series analysis is to identify the magnitude and direction of trend, to
estimate the effect of seasonal and cyclical variations and to estimate the size of the residual
component. This implies the decomposition of a time series into its several components. Two
lines of approach are usually adopted in analyzing a given time series, namely,
(i) The additive model
(ii) The multiplicative model

Thus, if we denote the time series by YY, the secular trend by TT, the seasonal or short term
periodic movements by SS, the long term cyclical movements by CC and the irregular or
residual component by RR, then the additive model can be described as
Y=T+S+C+RY=T+S+C+R
While, the multiplicative model can be describe as

Y=TSCRY=TSCR
The additive model is generally used when the time series is spread over a short time span or
where the rate of growth or decline in the trend is small. The multiplicative model, which is more
in use than the additive model, is generally used whenever the time span of the series is large or
the rate of growth or decline is would be

YT=S+C+RYT=S+C+R
or
YT=SCRYT=SCR
Similarly, a de-trended, de-seasonalized series may be obtained as
 YTS=C+RYTS=C+R
or
YTS=CRYTS=CR
It is not always necessary that the time series may include all four types of variations, rather one
or more of these components might be missing altogether. For example, using annual data the
seasonal component may be ignored, while in a time series of short span, having monthly or
quarterly observations, the cyclical component may be ignored.