TIME SERIES

A time series can be defined as a collection of observations of well-defined data items that are
obtained at regular periods over time (usually, daily, weekly, monthly, quarterly, or yearly). For
example, total sales in a super market each month of the year would comprise a time series. This
is because the sales is well defined, and consistently measured at equally spaced intervals. Data
collected irregularly or only once are not time series.

Time series data occur naturally in many application areas. In economics and finance for
example, monthly data for unemployment, consumer price index, GDP, daily exchange rate, a
share price, monthly profits etc. are compiled. Environment experts also collect data on daily
rainfall, wind speed, temperature, etc.

There are two types of time series data:

1. Continuous, where we have an observation at every instant of time, e.g. water content of
dam at a particular period. We denote this using observation X at time t, X(t).
2. Discrete, where we have an observation at (usually regularly) spaced intervals. We
denote this as Xt.

A time series obtained through repeated measurements over time can be decomposed into four
components: (1) Seasonal variations (systematic, calendar related movements) that repeat over a
specific period such as a day, week, month, season, etc., (2) Trend variations (long term
direction) that move up or down in a reasonably predictable pattern, (3) Cyclical variations that
correspond with business or economic 'boom-bust' cycles or follow their own peculiar cycles,
and (4) Random or irregular variations (unsystematic, short term fluctuations)that do not fall
under any of the above three classifications.
Time series analyst assume that those factors which have influenced patterns of economic
activity in the past and present will continue to do so in more or less the same manner in the
future. Their goals therefore are to isolate these influencing factors for predictive (or forecasting)
purposes as well as for managerial planning and control.
Illustrations
i. A series with overall long-term tendency or impression (of upward or downward
movement) is known as trend.

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ii. Cyclical component: this depicts the up and down swings or movements through the
series. Cyclical movements vary in length- usually lasting from 2 to 10 years and also
differ in intensity and amplitude.

iii. Irregular component: Any observed data which do not follow the smoothly fitted
trend curve modified by (aforementioned) cyclical movements are indicative of the
irregular or random factors of influence.

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 iv. Seasonal component: when data are recorded monthly rather than annually, an
additional component factor known as seasonal component has an effect on the time
series.

FACTORS INFLUENCING TIME SERIES DATA

component Classification Definition Reason for Duration

component influence
Trend (T) systematic Overall or persistent Due to Several
Long term upward or changes in years
Downward pattern of Technology,
Movements. population,
Wealth,
values, etc.
Cyclical(C) systematic Repeating up and down swings or Due to Usually
movements interactions of 2-10
through four phases: from peak numerous years
(prosperity) to contraction (recession) combinations with
to trough (depression) to expansion of factors differing
(recovery growth). influencing intensity
the economy. for a
complete
cycle.
Seasonal systematic Fairly regular periodic fluctuations Due to Within
(S) which occur within each 12-month whether 12
periods year after year. conditions, months

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 social (for
customs, monthly
religious data)
customs, etc.
Irregular Unsystematic The erratic or “residual” fluctuations Due to Short
(I) in a time series which exists after random duration
taking into account the systematic variation in and non
effects, trend, cyclical & seasonal. data due to repeating
unforeseen
events such as
strikes,
hurricanes,
floods,
political
assassinations,
etc.
Note that: Yi = Ti × Ci × Ii (data collected annually) and Yi = Ti × Ci × Ii × Si (data collected
monthly). Any observed value is the product of these influencing factors.
Note also that trend and cycle components are most times considered together by researchers.