No.

of persons unemployed in Australia: Feb 1978 to August 1995

1200000

1000000

800000

600000

400000

200000

0
1 11 21 31 41 51 61 71 81 91 101 111 121 131 141 151 161 171 181 191 201 211

Months

1
Time series decomposition

2
Main purpose of decomposition

• To explore and identify the characteristics

of a time series as a prelude to forecasting

3
 Components of time series

1. Trend -long term underlying movement (T)

2. Cyclical –movements from boom to slump (C)
3. Seasonal (S)
4. Irregular or random (E)

Note trend and cycle are usually grouped together

as trend-cycle
We will simply refer to this as the trend (T) from
now on
4
 No. of persons unemployed in Australia: Feb 1978 to August 1995

1200000

1000000
Trend
800000
Seasonal
Cyclical
600000

400000

200000 Irregular or random

0
1 11 21 31 41 51 61 71 81 91 101 111 121 131 141 151 161 171 181 191 201 211

Months

5
 Sales (units)
20

0
20
40
60
80
100
120
140
160
17
Q
1
Q
2
Q
3

20 Q4
18
Q
1
Q
2
Q
3
Q
20 4
19
Q
1
Q
2
Q
3
Time series example

20 Q4
20
Q
1
Q
2
Q
3
Q
4
6
 1. Identifying the trend

* Moving averages are used here

7
 Moving averages

Centred
Year Qtr 4QMA Average
Sales

2017 1 56

2 88
66
3 100 67
68
4 20 70
72
2018 1 64 76
8
 Sales and centred averages

160

140

120
Seles (units)

100

80

60

40

20

0
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17

quarters

9
 A formula for the centred average

Y1 = the first sales observation in our series

Y2 = the second observation, and so on then

Our first moving average = (Y1 + Y2 + Y3 + Y4)/4

Our second moving average

= (Y2 + Y3 + Y4 +Y5)/4
So our first centred average
= (Y1 + 2Y2 + 2Y3 +2Y4 + Y5)/8

= 0.125 Y1 + 0.25Y2+ 0.25Y3 + 0.25Y4 + 0.125Y5

10
Identifying the seasonal pattern

11
 Two main types of seasonal pattern

(a) Additive pattern (b) Multiplicative pattern

600 800
700
500
600

Sales (units)
Sales (unit)

400 500
300 400
300
200
200
100 100
0 0
1 3 5 7 9 11 13 15 17 19 1 3 5 7 9 11 13 15 17 19

Quarters Quarters

12
 Additive Model

Y=T+S+E

Where: Y = actual observation

13
Individual Seasonal deviation = distance of sales from the
trend line

Sales for Q2 are 20

220 units above trend line
200

180
160
Trend
140
Sales
120

100
80
60
1 2 3 4

14
 Calculating seasonal deviations

Centred Seasonal
Year Qtr 4QMA Average deviation
Sales

2017 1 56

2 88
66
3 100 67 +33
68
4 20

2018 1 64
15
Usually we are interested in the average seasonal
deviation for a given season over a no. of years

On average, sales in Q2
400
are 24 units above the
350 trend line

300

250
200

150
100

50
0
1 2 3 4 5 6 7 8 9 10 11 12

16
 Adjusted seasonal
2017 2018 2019
Means deviations

Q1 -12 -7 --- -9.0

Q2 22 21 --- 22.0
Q3 ---- 45 39.5
Q4 ---- -56 -52.5

Sum

Adjustment +2.0 = 0.5

4

17
 Adjusted seasonal
2017 2018 2019
Means deviations

Q1 -12 -7 -9.5 -9.0

Q2 22 21 21.5 22.0
Q3 33 45 39 39.5
Q4 -50 -56 -53 -52.5

Sum = -2

Adjustment +2.0 = 0.5

4

18
 Deseasonalising data using the additive
model
Deseasonalised observation

 = original observation
– appropriate average seasonal deviation

E.g. Deseasonalised observation for Q4 of 2019

= 60 - (-52.5) = 112.5 units

 
19
Note that since Y = T + S + E

The deseasonalised observation = Y-S

= T+E

i.e. the deseasonalised observation consists of the

effects of trend and the irregular factors.

20
Crude forecasting using the additive model

i) extrapolate the trend

-possibly using judgment
 
ii) add the appropriate average seasonal
deviation

21
 Sales and centred averages

160

140

120 Trend Forecast

for 2020 Q2
Seles (units)

100

80
= 114 units
60

40

20

0
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17

quarters

Actual forecasts = 114 + adjusted average seasonal deviation for

2020 Q2 = 114 +22 = 136 units

22
 Measuring how well the additive model
fits the time series
Signal at a point in time
= centred average
+ average seasonal deviation

For 2017 Q3: Signal = 67 +39.5 = 106.5

Actual sales = 100 so error = -6.5

so squared error = 42.25
23
 Average
Centred seasonal Estimated
Year Qtr Average deviation Signal Sqd error
Sales

2017 1 56

2 88

3 100 67 39.5 106.5 42.25

4 20 70 -52.5 17.5 6.25

2018 1 64 76 -9 67 9

24
Year Quarter Sales 4QMA Centred Individu Sq.
(units) average Seasonal Signal error
deviation
2017 1 56

2 88
66
3 100 67 33 106.5 42.25
68
4 20 70 -50 17.5 6.25
72
2018 1 64 76 -12 67 9
80
2 104 82 22 104 0
84
3 132 87 45 126.5 30.25
90
4 36 92 -56 39.5 12.25
94
2019 1 88 95 -7 86 4
96
2 120 99 21 121 1
102
3 140

4 60 MSE

Adjusted
seasonal
deviations
2017 2018 2019 Mean
Q1 -12 -7 -9.5 -9
Q2 22 21 21.5 22
Q3 33 45 39 39.5
Q4 -56 -53 -52.5
25
-50
 Measuring the fit of the additive model

For the additive model…

Mean squared error (MSE) = 13.13

26
 Check on your understanding so far

For the incomplete analysis (based on the additive

model) on the handout:

1. By now you would have filled in the cells

marked with *
2. Interpret your results
3. Plot the centred averages on a graph
4. Make a crude sales forecast for 2012 Q2

27
 Multiplicative Model

Y=TxSxE

Where: Y = actual observation

28
Individual Seasonal index = Actual sales
Trend
Sales in Q2 are 1.2 x
250
the underlying Level

200

150
Trend
Sales
100

Sales in Q1 are
50
only 0.5 x the
underlying Level
0
1 2 3 4

29
 Calculating seasonal indices

Centred Seasonal
Year Qtr 4QMA Average index
Sales

2017 1 56

2 88
66
3 100 67 1.49
68
4 20 70 0.29
72
2018 1 64 76 0.84
30
 We may often be interested in the average
seasonal index for a given season over a number
of years

500 On average, sales in Q3 are

450 1.5 x the underlying Level
400
350
300
250
200
150
100
50
0
1 2 3 4 5 6 7 8 9 10 11 12

31
 Adjusted seasonal
2017 2018 2019
Means indices

Q1 0.84 0.93 0.89 0.89

Q2 1.27 1.21 1.24 1.25
Q3 1.49 1.52 1.51 1.52
Q4 0.29 0.39 0.34 0.34

Sum 3.97

Adjustment = 4 = 1.01
3.97

32
 Deseasonalising data using the
multiplicative model
Deseasonalised observation

= original observation
appropriate average seasonal index

Eg. Deseasonalised observation for Q4 of 2019

= 60 / 0.34 = 176.5 units

33
 Crude forecasting using the
multiplicative model
1. Extrapolate the trend
-possibly using judgment
 
2. Multiply by the appropriate average
seasonal index

34
 Trend F
= 114 u

Actual forecast = 114 x adjusted average seasonal index for Q2

= 114 x 1.25 = 142.5 units

35
 Measuring how well the multiplicative
model fits the time series
Signal at a point in time
= centred average
x average seasonal index

For 2017 Q3: Signal = 67 x 1.52 = 101.84

Actual sales = 100 so error = -1.84

so squared error = 3.39
36
 Average
Centred seasonal Estimated
Year Qtr Average index Signal Sqd error
Sales

2017 1 56

2 88

3 100 67 1.52 101.84 3.39

4 20 70 0.34 23.8 14.44

2018 1 64 76 0.89 67.64 13.25

37
Year Quarter Sales 4QMA Centred Indiv. Estimated Squared
(units) average Seasonal Signal error
index
2017 1 56

2 88
66
3 100 67 1.49 101.84 3.39
68
4 20 70 0,29 23.8 14.44
72
2018 1 64 76 0.84 67.64 13.25
80
2 104 82 1.27 102.5 2.25
84
3 132 87 1.52 132.24 0.06
90
4 36 92 0.39 31.28 22.28
94
2019 1 88 95 0.93 84.55 11.90
96
2 120 99 1.21 123.75 14.06
102
3 140 38
 3 100 67 1.49 101.84 3.39
68
4 20 70 0,29 23.8 14.44
72
2018 1 64 76 0.84 67.64 13.25
80
2 104 82 1.27 102. 2.25
84 5
3 132 87 1.52 132.24 0.06
90
4 36 92 0.39 31.28 22.28
94
2019 1 88 95 0.93 84.55 11.90
96
2 120 99 1.21 123.75 14.06
102
3 140

4 60 MSE

Adjusted
seasonal
2017 2018 2019 Mean index
Q1 0.84 0.93 0.89 0.89
Q2 1.27 1.21 1.24 1.25
Q3 1.49 1.52 1.57 1.52
Q4 0.29 0.39 0.34 0.34

Sum 3.97

Adjustment = 4/3.97 =1.01

39
Measuring the fit of the multiplicative model

For the multiplicative model…

Mean squared error (MSE) = 10.20

Recall that the MSE for the additive model = 13.13

So the seasonal pattern appears to be multiplicative

40