Application of Time Series Analysis in Financial Economics

NOV 2, 2019
Research paper
APPLICATION OF TIME
SERIES ANALYSIS
IN FINANCIAL
ECONOMICS
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TIME SERIES ANALYSIS
Time series analysis is widely applied to forecast the pattern/trends in the financial
1
and market data.
A time series is actually a sequence of data points recorded at regular intervals of

2
time (yearly, quarterly, monthly, daily).
The main objective of a time series analysis is to develop a suitable model to

3 describe the pattern or trend in data with more accuracy.
The performance of the time series models can be interpreted based on its error
4 terms such as AIC, BIC, Mean Squared Error, etc. and it can be emphasized for
forecasting.
The principle interest for every time series analysis is to split the original series into
5
independent components.
TYPES OF TIME SERIES
Time series includes two types:
Univariate Involves single variable.
Multi Involves two or more

variate variables.
Typically, time series are further splited into three main components:
Trend
Seasonality
Cycle
EXAMPLES OF TIME SERIES
Monthly or daily
precipitation of a
region.
01 Daily stock prices

04 02 (opening, closing) over a
Annual unemployment
period of years/days.
rate over a period of
03
10 years.
Monthly bike sales

over a period of 3
years.
FORECASTING TIME
SERIES DATA
Forecasting a time series data predicts the future outcomes based on the immediate past. Forecasting can
be done for closing/opening rate of a stock in daily basis, quarterly revenues of a company, etc.
Decomposition of time series is much easy to forecast the individual regular

patterns produced than from the actual series.
Models to forecast time series data are:

Autoregressive Integration Moving Average (ARIMA)
Simple Moving Average (SMA)
Exponential Smoothing (SES)
Neural Network (NN)
Linear Regression Models
Logistic Regression
Support Vector Machine
•Naive Bayes
•Hidden Markov
•VAR
•Gaussian Processes
Contd....
Some of the complex models or techniques to forecast
a time series data are:
Neural Networks
Autoregression (NNAR)
1
Generalized Autoregressive
Conditional 4 2 RNN (Recurrent Neural
Network)
Heteroskedasticity (GARCH)
3
Bayesian-based
models
TIME SERIES FORECAST
MODELS
APPLICATIONS OF TIME
SERIES FORECASTING
Time series models usually used to forecast the stock’s performance, interest rate,
weather, etc. In this post, we will look at few situations where time series can be useful
to forecast the future outcome.
APPLICATION - 1
Daily values of the data with time factor available between 2010 and 2016 from Yahoo Finance repository.
Forecasting is done for SERIES A values based on the most recent trend (lags) of SERIES A
volumes and SERIES B values and volumes and market sentiment using ARIMA model.
STEP: 1
Entire time line for 4 related time series (SERIES A values and volumes, SERIES B values
and volumes) are extracted. Other dataset from Kaggle to forecast the market sentiment are
also used. The data involves top daily news headlines between 2008 and 2016.
STEP: 2
Checking whether the time series is approximately stationary and normalized. For this
situation, RNN forecasting is used to predict the outcomes variable of interest that results in
the inference of the future time evolution of the SERIES A values based on its past trends
(including volumes) as well as the past trend of another SERIES B, and market sentiment.
RESULTS
The mean absolute error (MAE) is used to In a traditional regression data, dependent or response
understand the trend in this graph and it is 10, 24, variable is influenced by a set of independent variables.
14, 15 for each sample respectively. The figure- 1 The degree of dependence on previous outcomes
shows a comparison of 10-day forecast. varies for each case, and can be explained by (ACF)
Auto Correlation Factor as given in below figure- 2.
Figure- 2: ACF and PACF Plots of

Figure- 1: Comparison of 10- day forecast. SERIES A value and volume.
CONCLUSION
• Looking at the ACF and PACF plots, one can choose proper values of the parameters in
the model. The results from ARIMA model will look like:
• Especially, from the results SERIES B values significantly influences the forecasting made
for SERIES A.
• The market sentiment (s) does too but to a lower extent, and volumes are relatively
insignificant for forecasting the SERIES A values with ARIMA.
APPLICATION - 2
Stock market data from 2016 from Kaggle and analyse the pattern of the data.
• The data involves stocks of top companies such as Facebook, Apple,

Amazon, etc.
• Here is the trend of daily closing price of stocks for the month of January.
RESULT
The following graph depicts the trend of price change for a month of January. This is often
referred as “momentum” in financial research.
CONCLUSION
Time series in financial economics are highly

important to analyse the trend or pattern of the
variable of interest using an appropriate model.
The above example clearly depicts the trend in
price of the stock and this trend may be helpful
in predicting the future stock values using
suitable models as mentioned earlier.
APPLICATION - 3
Trend of the sales and tractor demand in XYZ manufacturing company
• The company is interested in understanding the impact of marketing efforts

towards sales.
• In such situation, finding the pattern of the sales and demand can be viewed
using a well-known ARIMA model and predict the sales/demand for the
upcoming years.
• In addition, the impact of the marketing effort can be studied using exogenous
variables under ARIMA model.
SUMMARY
There are various applications apart from these three in our day-to-day life.
However, many financial organisation relies on time series forecasting to build
their marketing strategy to meet the customer’s needs. Thus, a more proper
model should be selected to analyse the pattern of financial data.
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NOV 2, 2019

A time series is actually a sequence of data points recorded at regular intervals of

The main objective of a time series analysis is to develop a suitable model to

Univariate Involves single variable.

Multi Involves two or more

01 Daily stock prices

Monthly bike sales

Decomposition of time series is much easy to forecast the individual regular

Models to forecast time series data are:

Figure- 2: ACF and PACF Plots of

• The data involves stocks of top companies such as Facebook, Apple,

Time series in financial economics are highly

Trend of the sales and tractor demand in XYZ manufacturing company

• The company is interested in understanding the impact of marketing efforts

EMAIL ADDRESS GET IN

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