Name: Vishwas R Parakka Class: 3 BCOM A Reg.

No: 21SJCCC073

MDA CIA - 2
1) Explain the concept of "stationarity" in time series analysis. Why is stationarity
important for modeling time series data?

Solution: A time series is said to be stationary if its statistical properties do not change over
time. In other words, the mean, variance, covariance, and autocorrelation of a stationary time
series remain constant over time.

Stationarity is important for modeling time series data because many statistical models and
forecasting methods assume that the data is stationary. If the data is not stationary, it may be
necessary to transform it before modeling or forecasting.

Examples of stationary time series:

● The daily temperature in a particular city
● The monthly sales of a product
● The annual number of visitors to a national park

Examples of non-stationary time series:

● The stock price of a company
● The population of a country
● The unemployment rate

2) Define and differentiate between "seasonal" and "cyclical" variations in time

series data. Provide an example of each.

Solution: Seasonal variations are regular fluctuations in a time series that occur over a fixed
period of time, such as a day, week, month, or year. For example, the daily demand for ice
cream is typically higher in the summer than in the winter.

Cyclical variations are irregular fluctuations in a time series that occur over a longer period
of time, typically several years. For example, the business cycle is a cyclical variation in the
overall economic activity.

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Name: Vishwas R Parakka Class: 3 BCOM A Reg. No: 21SJCCC073

Examples of seasonal variations:

● The daily demand for ice cream
● The monthly sales of Christmas trees
● The quarterly sales of swimsuits

Examples of cyclical variations:

● The business cycle
● The housing market cycle
● The stock market cycle

3) What are the main components of a time series, as described in the

decomposition model? Explain each component with examples.

Solution: The decomposition model is a statistical method for breaking down a time series
into its component parts. The three main components of a time series are:

● Trend: The long-term trend of the time series.

● Seasonality: The regular fluctuations in the time series that occur over a fixed period
of time.
● Irregularities: The random fluctuations in the time series that cannot be explained by
the trend or seasonality.

Examples of trend, seasonal, and irregular components:

● Trend: The long-term trend of the global population is increasing.
● Seasonality: The monthly sales of ice cream are highest in the summer and lowest in
the winter.
● Irregularities: A sudden drop in the stock market price of a company due to bad news.

4) Discuss the differences between "autoregressive" and "moving average"

components in ARMA models. How do these components contribute to modeling
time series data?

Solution: Autoregressive and moving average components in ARMA models:

● Autoregressive (AR) models assume that the current value of a time series is
dependent on its past values.
● Moving average (MA) models assume that the current value of a time series is
dependent on its past errors.

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Name: Vishwas R Parakka Class: 3 BCOM A Reg. No: 21SJCCC073

ARMA models are combined models that incorporate both AR and MA components. These
models are useful for modeling time series data that exhibits both trend and autocorrelation.

Examples of ARMA models:

● AR(1): The current value of the time series is dependent on its previous value only.
● MA(1): The current value of the time series is dependent on its previous error only.
● ARMA(1,1): The current value of the time series is dependent on its previous value
and its previous error.

5) Describe the purpose and significance of the ACF (Autocorrelation Function)

and PACF (Partial Autocorrelation Function) plots in time series analysis. How
are these plots useful in model selection?

Solution: The autocorrelation function (ACF) plot shows the correlation of a time series with
its lagged values. The partial autocorrelation function (PACF) plot shows the correlation of a
time series with its lagged values, after controlling for the effects of the previous lags.

The ACF and PACF plots are useful for model selection in time series analysis. They can be
used to identify the order of the AR and MA components in an ARMA model.

Example:
Suppose we have a time series of monthly sales data for a company. We can plot the ACF
and PACF of the data to identify the order of the AR and MA components in an ARMA
model.

If the ACF plot shows a significant correlation for the first lag and the PACF plot shows a
significant correlation for the first lag only, then an ARIMA(1,0,0) model may be a good fit
for the data.

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