Time-series analysis- calculating the seasonality and trend

Time-series analysis involves looking at what has happened in the recent past to help predict
what will happen in the near future

1. A Time series is a set of observations, each one being recorded at a specific time
(Annual GDP of a country, Sales figure, etc)
2. A discrete time series is one in which the set of time points at which observations are
made is a discrete set. (All above including irregularly spaced data)
3. Continuous time series are obtained when observations are made continuously over
some time intervals. It is a theoretical Concept. (Roughly, ECG graph).
4. A discrete valued time series is one which takes discrete values. (No of accidents, No
of transaction etc.)

A ‘time-series’ is a sequence of results over a period of time. Let’s say that the monthly sales
made by a business over a period are:
Month Sales (the time- A time series will consist of distinct
series) patterns and if we can identify these it
1 70 makes it far easier to predict what might
2 80 happen in the future. The two main
3 150 patterns you need to understand are:
4 130 1.      Seasonal variations
5 140 2.      Trends
6 210  
 
With time-series analysis we need to calculate both the seasonal variation and the
trend.
Seasonal variation
A Seasonal Variation (SV) is a regularly repeating pattern over a fixed number of months. If
you look at our time-series you might notice that sales rise consistently from month 1 to
month 3, and then similarly from month 4 to month 6. There appears to be a SV repeating
over a three month period, where sales get higher each month for three months. We could
expect this pattern to repeat in the future, so sales are likely to rise from month 7 to month 9.
Trend
A Trend (T) is a long-term movement in a consistent direction. Trends can be hard to spot
because of the confusing impact of the SV. The easiest way to spot the Trend is to look at the
months that hold the same position in each set of three period patterns. For example, month 1
is the first month in the pattern, as is month 4. The sales in month 4 are higher than in month
1.
Identifying the trend
To identify the T, we need to smooth out the impact of the SV. We do this by calculating
what are known as ‘three-period moving averages’. This involves averaging the sales for
three months at a time and then ’moving’ down to the next three months.
Month Sales (the time- Three-period moving You can see that compared to the
series) average original time-series, the three-period
1 70 moving average figures show a
2 80    300/3 = 100 much more consistent increase; in
3 150    360/3 = 120 fact it is increasing by 20 each
4 130    420/3 = 140 month. We would expect this trend
5 140    480/3 = 160 to continue in the future. (Notice
6 210 that you can’t work out figures for
the first or last month).
 
 
Identifying the seasonal variation
Now that we know the trend we can identify the specific impact of the SV. We do this by
comparing the time-series to the trend, to see whether it is above or below what we would
expect. In month 2, the time series of 80 is 20 below the trend giving a SV of -20. In month 3,
150 is 30 above the trend giving a SV of +30.
Month Sales (the time- Three-period moving Seasonal variation
series) average (the trend)
1 70
2 80 100 -20
3 150 120 +30
4 130 140 -10
5 140 160 -20
6 210
 
Predicting the future
We can now use our knowledge of T and SV to make a prediction of what sales will be in
month 7.
Extrapolating T – We would expect T to continue to rise by 20 each month (remember it is a
long-term movement in a consistent direction). This means that T in month 6 would rise to
180, and then in month 7 it will rise to 200. This doesn’t mean that we expect to sell 200 in
month 7, as the seasonal variations mean that any given month will be above or below T.
Incorporating SV– Given our repeating three-period SV, month 7 will be the first month of a
new pattern of three months. This means that month 7’s SV can be expected to be the same as
month 1 (for which we have no figure) and month 4 where we have -10. This tells us that the
result in month 7 can be expected to be 10 below trend.
Our prediction for month 7 will therefore be 200 – 10 = 190! Bear in mind that this is still
ultimately an estimate and sales in month 7 are highly unlikely to be exactly 190.