Time Series Components and Decomposition Methods

1.The 4 main components of A Time Series Data (how you describe a time series?)
- Trend: Reflect the long-run growth or declines in the time series.
o (upward/ downward? Shape: linear/quadratic/cubic polynomial)
- Cycle: Rise and falls not in a regularly repeating pattern, no fixed period.
o (may be not obvious or significant? )
- Seasonal: Rise and falls in a regularly repeating pattern. Its fixed period is denoted by M
o (Seasonal period is xx, the magnitude changes along with time (the fluctuation variation)? To decide additive or multiplicative.)
- Irregular fluctuations: follows no visualizable pattern, need statistical models to capture. May be ‘unusual events’ or random variations
o (Where are the huge, unusual fluctuation? Possible causes?)

2. Basic Models Comparation (different in forecast weight and special cases)

- Naïve model
o 𝑌̂𝑡+ℎ = 𝑌𝑡 or seasonal Naïve: 𝑌̂𝑡+ℎ = 𝑌𝑡+ℎ−𝑀
o Use the most recent value for forecasting, this is the benchmark to which all forecast models should be compared.
o Fixed time (always stand at time t to forecast t+1, t+2…)𝑌̂𝑡+1 = 𝑌𝑡 , 𝑌̂𝑡+2 = 𝑌𝑡
o Expanding window (t→t+1, t+1→t+2) 𝑌̂𝑡+1 = 𝑌𝑡 , 𝑌̂𝑡+2 = 𝑌𝑡+1

- Overall average
1 1
o 𝑌̂𝑡+ℎ = 𝑇 ∑𝑇𝑡=1 𝑌𝑡 = 𝑇 (𝑌𝑡 + 𝑌𝑡−1 + ⋯ + 𝑌1)

- Drift model
ℎ 𝑌𝑡 −𝑌1
o 𝑌̂𝑡+ℎ = 𝑌𝑡 + 𝑇−1 ∑𝑇𝑡=2(𝑌𝑡 − 𝑌𝑡−1 ) = 𝑌𝑡 + ℎ( 𝑇−1 )
o The amount of change over time, called drift, the average change seen in the data. This is an improved version of Naïve
forecasting.
o This is equivalent to drawing a line between the first and last observation, and use the line to forecast for time after T.

- Exponential Weighted Moving Average (EWMA): SES in the weighted average form
o 𝑌̂𝑡+1|1:𝑡 = 𝛼𝑌𝑡 + 𝛼(1 − 𝛼)𝑌𝑡−1 + 𝛼(1 − 𝛼)2 𝑌𝑡−2 + ⋯ + 𝛼(1 − 𝛼)𝑡−1 𝑌1
o = 𝛼𝑌𝑡 + (1 − 𝛼)𝑌̂𝑡|1:𝑡−1
o between Naïve and overall average 𝛼=1 naïve,

Model 𝒀𝟏 𝒀𝟐 𝒀𝒕−𝟏 𝒀𝒕
Naïve 0 0 0 1
Overall avg 1 1 1 1
𝑇 𝑇 𝑇 𝑇
Drift ℎ ℎ ℎ ℎ
𝑇−1 𝑇−1 𝑇−1 𝑇−1
SES 𝛼(1 − 𝛼)𝑡−1 𝛼(1 − 𝛼)𝑡−2 𝛼(1 − 𝛼) 𝛼

3. Decomposition model process (additive and multiplicative)