Time series

Decomposition
Decomposition Basics

• The well used nottem data set (Average Monthly

Temperatures at Nottingham, 1920-1939)
Decomposition Basics

• We decompose any time series in three

parts

• Seasonal component
• Trend
• Random Fluctuations.

• Use stl() function in R

nottem_stl = stl(nottem, s.window="periodic")
Decomposition Basics

Decompose AirPassanger dataset

Decomposition: Seasonality

• Seasonal Effect • Seasonal adjustment

• A systematic and calendar related effect. • The process of estimating and removing
• Higher sales during festive season. systematic and calendar related
(Lunar calendar in India) influences.
• Higher water consumption during summer. • Time series needs to be seasonally
adjusted.
• As seasonal effect may hide true
• Complex seasonal effect underlying movement.
• Weekly sales for last week of the month or
first week of the month.
• Depends on month has four weeks or five.
• Number of trading day effect.
• Number of working day varies for every
month year to year, that in turn effect
productivity, level of activity.
Decomposition: Seasonality

• Seasonality arises from systematic, periodic and calendar related influences:

• Natural conditions.
• Higher water consumption during summer.
• Higher production of milk during winter.

• Business and Administrative procedures.

• Higher traveling during summer, synced to school term.
• Higher sales on first weekend of the month, synced to monthly salary.

• Social and Cultural Behaviour.

• Gold purchase on Dhanteras.
• Muhurat Trading on Diwali.

• Calendar related effect.

• Trading day effect, number of working days in a month changes year to year. E.g. 4 weekends in June
2020, where as 5 weekends in June 2019.
• Moving Holiday effects. More prominent in India as most Holidays are linked to lunar calendar.
Decomposition: Trend

• Long term movement in a time series.

• Without calendar related influences.

• Without random movement.

• Change in average/ mean level.

Decomposition: Residual

• The irregular component.

• What remains after removing seasonal and trend component.

• It results from short term fluctuations, which are neither systematic nor predictable.

• In a time series any component can be dominating.

Decomposition: Models

Additive Models Multiplicative models

• Implicit assumption is that these three components • Implicit assumption is that these three components
are combined in additive fashion. are combined in multiplicative fashion.

• We can transform multiplicative to additive form

Decomposition: Models

Additive Models Multiplicative models

• Implicit assumption is that these three components • Implicit assumption is that these three components
are combined in additive fashion. are combined in multiplicative fashion.

• We can transform multiplicative to additive form

Decomposition: Models

Identification of Multiplicative Models

• If we are more interested in percentage change rather than absolute change.
• Return on stock
• GDP growth
• If amplitude of both seasonal and irregular component increases as trend
increases.
• AirPassanger
• If underlying level of series change, leads to change in magnitude of seasonal
fluctuations.