Statistical

Methods I
IPM – Term I, September 2022

Dr. Landis Conrad Felix Michel

1.1 Time-Series Component Factors
Time Series
- a sample of numerical data collected over time at regular intervals, as the basis
for the estimation.
- examples: include national economic indicators such as a monthly consumer price index or
the quarterly gross domestic product (GDP).

IPM – Term I, September 2022 - Dr. Landis Conrad Felix Michel

Patters - Time Trends
• A trend, an overall long-term upward or downward movement, that exists in a time series, is one
possible pattern, or component of a time series
• Time-series plots can suggest whether a trend component exists in the time series. The methods
we will use to analyse the time series models depend on if a trend component exists.

IPM – Term I, September 2022 - Dr. Landis Conrad Felix Michel

Patterns - Cyclical Component
• up-and-down movement in the time series of medium duration, typically from two to ten years in
length.

• An example of a Cyclical Component with four cycles of varying durations. These cycles often
correlate with "business cycles" that are associated with certain types of economic activities.

IPM – Term I, September 2022 - Dr. Landis Conrad Felix Michel

Patterns - Irregular Component
• One-time changes to a time series that cannot be explained by the time trend or cyclical
component.

• An irregularity may signal an inflection point in which a significant business or economic change
has occurred.

IPM – Term I, September 2022 - Dr. Landis Conrad Felix Michel

Patterns - Seasonal Component
• Seasonal components are usually identified in higher frequency time series, that is quarterly,
monthly or daily.

• time series data values show the pattern of being very high during the summer months and very
low during the winter months.

IPM – Term I, September 2022 - Dr. Landis Conrad Felix Michel

Patterns
• Multiple Components can be identified to a time series.

• Example : Monthly sales of houses in the United States, June 1987 through June 2019 (red plots represent
March sales).

• The irregular downward

component centered on 2008
reflects the collapse of the U.S.
housing market that led to the
"Great Depression" of 2007-2009.
Several monthly upward spikes can
be seen, including one that occurs
every March (red points).

IPM – Term I, September 2022 - Dr. Landis Conrad Felix Michel

Empirical Examples:
• Identify the
components in the
following time
series :

IPM – Term I, September 2022 - Dr. Landis Conrad Felix Michel

1. The monthly housing sales (top left) show strong seasonality within each year, as
well as some strong cyclic behaviour with a period of about 6–10 years. There is no
apparent trend in the data over this period.

2. The US treasury bill contracts (top right) show results from the Chicago market for
100 consecutive trading days in 1981. Here there is no seasonality, but an obvious
downward trend. Possibly, if we had a much longer series, we would see that this
downward trend is actually part of a long cycle, but when viewed over only 100 days it
appears to be a trend.

3. The Australian quarterly electricity production (bottom left) shows a strong

increasing trend, with strong seasonality. There is no evidence of any cyclic behaviour
here.

4. The daily change in the Google closing stock price (bottom right) has no trend,
seasonality or cyclic behaviour. There are random fluctuations which do not appear to
be very predictable, and no strong patterns that would help with developing a
forecasting model.
IPM – Term I, September 2022 - Dr. Landis Conrad Felix Michel
Empirical Exercise:
• Using Microsoft Office Excel:

1. Load file: session7.xlsx

2. Plot series1, series2 and series3 (stored in Worksheets: series_1, series_2 and
series_3 respectively) and identify all possible patterns.

IPM – Term I, September 2022 - Dr. Landis Conrad Felix Michel

1.2 Smoothing Time Series
• Smoothing a time series means transforming the time series to show small-scale fluctuations.
• Can help determine if a time series contains a trend because the smoothing minimizes the
effects of the other time-series components.

• A slight downward trend in movie

attendance (Table 16.1) for the time
period plotted. However, the
variation that exists from one time
period to another can sometimes
obscure a long-term trend, which can
make an existing trend hard to
identify.

IPM – Term I, September 2022 - Dr. Landis Conrad Felix Michel

Smoothing: Moving Averages
• The moving averages method calculates means for sequences of consecutive time-series values for a
time duration L. At each point in time, T, the moving average is defined as the mean of the most
recent L data-points, that is the average over periods T-L+1 to period T.

• The sequences each differ by one time-series value, as the moving average method "moves" through
the time-series. For example, for a three-year moving average (L=3) for an annual time series of 11
years, the first calculated mean would be the mean of the time-series values for years 1 through 3, the
second calculated mean would be the mean for years 2 through 4, and the ninth calculated mean
would be the mean for years 9 through 11.

• Examples: Five Year Moving Average (L=5)

IPM – Term I, September 2022 - Dr. Landis Conrad Felix Michel

IPM – Term I, September 2022 - Dr. Landis Conrad Felix Michel
• Smoothing minimizes the “noise” of a volatile time series and can help in identifying longer-
term trends.

IPM – Term I, September 2022 - Dr. Landis Conrad Felix Michel

• Use of moving averages helps in identifying time trends.

• No actual Trend is identified in periods 2005 to 2018.

IPM – Term I, September 2022 - Dr. Landis Conrad Felix Michel

Exponential Smoothing
• Exponential smoothing consists of a series of exponentially weighted moving averages. The weights
assigned to the values change so that the most recent (the last) value receives the highest weight, the
previous value receives the second-highest weight, and so on, with the first value receiving the lowest
weight. Therefore, the more recent a time-series value is, the more influence the value has on the
smoothing function.

IPM – Term I, September 2022 - Dr. Landis Conrad Felix Michel

IPM – Term I, September 2022 - Dr. Landis Conrad Felix Michel
IPM – Term I, September 2022 - Dr. Landis Conrad Felix Michel
Forecasting
• Choosing the weight or smoothing coefficient, W, that one assigns to the time series is both critical to
the smoothing and somewhat subjective.
• One should select a small value for W, close to zero, if the goal is to smooth a series by eliminating
unwanted cyclical and irregular variations in order to see the overall long-term tendency of the series.
• One should select a large value for W, close to 0.5, if the goal is forecasting future short-term
directions.

• Exponential smoothing is a weighted average of all previous time periods. Therefore, when
using exponential smoothing for forecasting, one uses the smoothed value in the current time
period as the forecast of the value in the following period.

IPM – Term I, September 2022 - Dr. Landis Conrad Felix Michel

Forecasting

IPM – Term I, September 2022 - Dr. Landis Conrad Felix Michel

Examples:

IPM – Term I, September 2022 - Dr. Landis Conrad Felix Michel

IPM – Term I, September 2022 - Dr. Landis Conrad Felix Michel
b.
IPM – Term I, September 2022 - Dr. Landis Conrad Felix Michel
IPM – Term I, September 2022 - Dr. Landis Conrad Felix Michel
IPM – Term I, September 2022 - Dr. Landis Conrad Felix Michel
References – Additional Readings
• Chapter 16, “Statistics for Managers, Using Microsoft Excel”, 8th Edition, David M. Levine,
David Stephan, Kathryn A. Szabat.

•.