Time Series Analysis & Business

Forecasting
 Basic Concept
Time Series Data: A series of observation, recorded after
successive intervals of time is called time series. When data are
collected or arranges on the basis of time period then these
data are known as time series data. For example: month ended
stock index data from January, 2000 to December, 2009.
Cross Section Data: When data are collected from different
items for a specific period then these data are known as cross
section data. For example: yearly stock price data of 30
commercial banks for the year 2012.
Pooled Data: The combination of cross section data and time
series data is called pooled data. For example: : yearly stock
price data of 30 commercial banks during the period from 2005
to 2012.
 Objectives of Time Series Analysis
The main objectives of time series analysis is to measure the
following things:
1. To find out the trend and tendencies of time series over time.
2. To measure the trend value.
3. To ascertain the rate of growth and the rate of acceleration.
4. To estimate future condition or to forecast on the basis of past
and present conditions.
5. To measure the influence of a particular components of time
series.
6. To eliminate each of the components of the time series for
assessing the influence of other components.
 Components of Time Series
Trend: Changes in time series that have occurred
as a result of general tendency of the data to
increase or decrease is known as trend. In other
words, trend means long term persistent
movement in the level of any phenomenon over a
period of time.
Seasonal Variation: Seasonal variation is a change
that have taken place during a period of 12
months as a result of change in climate, weather
condition, festival, or any other special
circumstances.
 Components of Time Series cont..
Cyclical Variation: Cyclical variation implies rise and
fall of a time series over periods longer than 1 year
due to typical business cycle that consists of period
of prosperity followed by period of recession,
depression and then recovery. Cycle variation have
different causes and are less predictable.
Irregular Change: Irregular change is that change
that have taken place as a result of such forces that
could not be predicted like flood, earthquake,
famines. Etc.
 Time Series Decomposition Model
The analysis of time series consists of two major
steps:
1. Identifying the various forces (influences) or
factors which produce the variations in the time
series; and
2. Isolating, analyzing and measuring the effect of
these factors separately and independently, by
holding other things constant.
 Time Series Decomposition Model
cont..
• The purpose of decomposition models is to break a
time series into its components: Trend (T), Cyclical
(C), Seasonality (S), and Irregularity (I).
• Decomposition of time series provides a basis for
forecasting. There are many models by which a
time series can be analyzed; two models commonly
used for decomposition of a time series.
 Multiplicative Model
• This is a most widely used model which assumes that
forecast (Y) is the product of the four components at a
particular time period. That is, the effect of four
components on the time series is interdependent.
Y=T x C x S × I→ Multiplicative model

• The multiplicative model is appropriate in situations

where the effect of S, C, and I is measured in relative
sense and is not in absolute sense.
 Additive Model
• In this model, it is assumed that the effect of
various components can be estimated by adding
the various components of a time-series. It is
stated as:
Y=T + C + S + I → Additive model
• Here S, C, and I are absolute quantities and can
have positive or negative values. It is assumed
that these four components are independent of
each other. However, in real-life time series
data this assumption does not hold good.
 Measurement of Secular Trend
The principal methods of measuring trend fall into following
categories:
1. Free Hand Curve methods
2. Method of Averages
3. Method of least squares
The time series methods are concerned with taking some
observed historical pattern for some variable and projecting
this pattern into the future using a mathematical formula. A
few time series methods such as freehand curves and moving
averages simply describe the given data values, while other
methods such as semi-average and least squares help to
identify a trend equation to describe the given data values.
 1. Free Hand Curve methods
A freehand curve drawn smoothly through the data values is often an easy
and, perhaps, adequate representation of the data. The forecast can be
obtained simply by extending the trend line. A trend line fitted by the
freehand method should conform to the following conditions:
(i) The trend line should be smooth- a straight line or mix of long gradual
curves.
(ii) The sum of the vertical deviations of the observations above the trend
line should equal the sum of the vertical deviations of the observations
below the trend line.
(iii) The sum of squares of the vertical deviations of the observations from
the trend line should be as small as possible.
(iv) The trend line should bisect the cycles so that area above the trend line
should be equal to the area below the trend line, not only for the entire
series but as much as possible for each full cycle.
 Sales Turnover
Year (in lakh tk.)
2000 10
2001 15
2002 20
2003 16
2004 12
2005 21
2006 18
2007 25
 Limitations of free hand method
i. This method is highly subjective because the
trend line depends on personal judgment and
therefore what happens to be good-fit for
one individual may not be so for another.
ii. The trend line drawn can not have much
value if it is used as a basis for predictions.
iii. It is very time consuming to construct a free
hand trend if a careful and conscientious job
is to be done.
 2. Method of Average
The objective of smoothing methods is to smoothen
out the random variations due to irregular
components of the time series and thereby provide
with a overall impression of the pattern of
movement in the data over time. There are
basically three different forms of smoothing
methods:
i. Moving average
ii. Weighted moving average
iii. Semi Average method
 Moving Average Method
If we are observing the movement of some variable values over
a period of time and trying to project this movement into the
future, then it is essential to smooth out first the irregular
pattern in the historical values of the variable, and later use this
as a basis for a future projection.
Moving average method is one of several methods used
frequently to obtain smoothed values on the time series. A
moving average is an artificially constructed time series in
which the value of a given time period is replaced by the mean
of that value and the values for some number of preceding and
succeeding time period. This method is non-linear in the sense
that it doesn’t in a straight line.
 Problem: Moving Average Method
Using three yearly moving average, determine the
trend and short-term error.
Year Production (in Year Production (in
‘000 tones) ‘000 tones)
1987 21 1992 22
1988 22 1993 25
1989 23 1994 26
1990 25 1995 27
1991 24 1996 26
 Solution
Year Production (in 3- Year 3- Yearly Moving Forecast Error
‘000 tones) Moving Total Average (Trend (Y- )
(Y) values of )
1987 21
1988 22 66 22 0
1989 23 70 23.33 -0.33
1990 25 72 24 1
1991 24 71 23.67 0.33
1992 22 71 23.67 -1.67
1993 25 73 24.33 0.67
1994 26 78 26 0
1995 27 79 26.33 0.67
1996 26
 Problem: Estimating the trend equation
The profit figure of a particular company for the last 9
years is given below:
Year 2000 2001 2002 2003 2004 2005 2006 2007 2008
Profit 25 30 20 15 18 25 32 30 40
(in lakh taka)

i. Calculate the trend equation of profit based on the

above data.
ii. Forecast the profit volume for the year 2012.
iii. Calculate the rate of growth and rate of acceleration
of the profit .
 General Equation of Trend: Y= a+ bt
In order to get the values of a and b the following
two equation need to be solved.
Year Profit (Y) Time (t) t2 Yt
2000 25 1 1 25
2001 30 2 4 60
2002 20 3 9 60
2003 15 4 16 60
2004 18 5 25 90
2005 25 6 36 150
2006 32 7 49 224
2007 30 8 64 240
2008 40 9 81 360
Total 235 45 285 1269
Substituting the values, we get:
325= 9a+ 45b
1269= 45a + 285b
Solving the above two equation, we get
b= 1.57
a= 18.26
Substituting the values of a and b in the general
trend equation we get Y= 18.26 + 1.57t
 Requirement: i
The trend equation of profit during the period
between 2000 and 2008 is Y= 18.26 + 1.57t. This
trend equation indicates that, the profit of the
concerned company increases approximately
1.57 lakh taka per year and the average profit
level is 18.26 lakh taka.
 Requirement: ii
• Based on the estimated trend equation of profit,
the profit expected in the year 2012 will be:

• Therefore, the expected profit for the year 2012

is estimated as Tk. 38.67 lakh.
 Requirement: iii
The rate of growth of the profit can be estimated
by using and substituting values in the following
formula:
Rate of growth
 Requirement: iv
The rate of acceleration of the profit can be
estimated by using and substituting values in the
following formula:
Rate of Acceleration
 Exercise for Practice
The following table lists the annual dividends per share as given in
the annual report of Basundhara Group.
Year Dividend per Year Dividend per
share (Tk.) share (Tk.)
2011 1.62 2016 2.1
2012 1.7 2017 2.1
2013 1.75 2018 2.2
2014 1.85 2019 2.3
2015 2.00 2020 2.32
Requirements:
1.Estimate the trend equation of dividend per share during the period
between 2001 and 2010.
2.Calculate the expected dividend per share in the year 2025.
3.Calculate the rate of growth and rate of acceleration.
4.Explain each of the result in the above calculation.