Time Series

Decomposition
DECOMPOSITION
What?
 One approach to the analysis of time
series data involves an attempt to
identify the component factors that
influence each of the periodic values
in a series
 Time series decomposition models can
be used to identify such underlying
components by breaking the series
into its component parts and then
reassembling the parts to construct a
forecast.
tHe coMponent parts
 The components are; long term trend, seasonal
fluctuations, cyclical movement, & irregular fluctuations
 Trend (T): is the long term component that underlies
the growth (or decline) in a time series.
 Cyclical (C): is a series of irregular wavelike fluctuations
or cycles of more than one year’s duration due to
changing economic conditions. It’s a residual variations
fluctuating around trend.
 Seasonal (S): are typically found in data classified
quarterly, monthly, or weekly. Seasonal variation refers
to a pattern of change that recurs regularly over time.
The movement is completed within the duration of a
year and repeats itself year after year.
 Irregular (I): is composed of fluctuations that are
caused by unpredictable or nonperiodic events
Model

 If the data are weekly, monthly,

quarterly…
Y = TSCI
 If the data are annualy…
Y = TCI
Index number
(for seasonal & cyclical variation)

 Are percentages that show changes

over time.
 Example for seasonal index,
- Index 100, indicates that the expected value
for that month is 1/12 of the total for the
annual period centered at that month.
- Index 125, indicates that the expected value
for that month is 25% greater than 1/12 of
the annual total.
- Index 80, indicates that the expected value
for that month is 20% less than 1/12 of the
annual total.
The consideration 2 judge
(Business) Cyclical index
 3 indicators
- Leading indicators, those that provide advance warning
of probable change in economic activity. Example;
construction construct, new order for durable goods,
formation of new business enterprises

- Coincident indicators, those that reflect the current the

current performance of the economy. Example: GNP,
Personal income, employment, industrial production.

- Lagging indicators, those that confirm changes

previously signaled. Example: long term unemployment,
labor cost per unit output, expenditures on new plant
and equipment.