Time Series

Time series
It is an arrangement of data in chronological order (in

accordance with time of its occurrence)
A time series may be defined as a collection of readings

belonging to different time periods of some economic variable
or composite of variables
Where y is value of phenomenon under consideration at time t.
1 Dr Madhusudhan Zalki
Components of time series
1. Secular trend
2. Cyclical variation
3. Seasonal variation
Short term fluctuations
4. Irregular variation
Mathematical model
Additive model
Y=T+S+C+I
Multiplicative model
Mixed Model
Trend: trend is also called as secular trend or long
term trend, basic tendency of a series to grow or
decline over a period of time.
The concept of trend does not include short term

oscillations but rather study movement over a long
period of time.
Time Series
Secular Trend:
The value of the variable tends to increase or
decrease over a long period of time.
Measurement of trend
1. Graphic method
2. Method of semi-averages
3. Method of curve fitting (method of least squares)
4. Method of moving averages
Method of semi-averages
years 1993 1994 1995 1996 1997 1998
Sales (‘000) 20 24 22 30 28 32
Semi- 22 30
average
Least square method: linear trend
y  a  bx

b
xy  n x y
b 2
 x  nx 2 a
a  y  nx
t  AM (t )
x if n is odd
interval
t  AM (t )
x if n is even
1 / 2 interval
a
 y
n
b
 xy
x 0
x 2
Fit a linear trend for the following data.
year Production
1990 18
1992 21
1994 23
1996 27
1998 16
Exponential Trend
Method of moving average
This is simple and flexible method of measuring trend. It
consists in obtaining series of moving averages of
successive overlapping groups and sections of time
series.
The average process smoothens out fluctuations in the
given data.
The moving average of period m overlapping the values
starting from 1st ,2nd and 3rd …..are given by the
following formula
For the time series
The MA of time period m is
t y 3year MA
t1 y1 _
t2 y2 ma1=(y1+y2+y3)/3
t3 y3 ma2=(y2+y3+y4)/3
t4 y4 ma3=(y3+y4+y5)/3
t5 y5 Ma3=(y4+y5+y6)/3
t6 y6 Ma4=(y5+y6+y7)/3
t7 y7 _
Cyclical Fluctuations
Cyclical Variation
Percent of trend
y y  yest
 100 100
yest
yest
Seasonal Variation
Stationary time series
 Stationary time series is one whose properties
do not depend on the time at which the series is
observed.
Thus, time series with trends, or with seasonality,
are not stationary
the trend and seasonality will affect the value of
the time series at different times. On the other
hand, a white noise series is stationary
it does not matter when you observe it, it should
look much the same at any point in time.
{Xt} is a strictly stationary time series
if (X1,...,Xn)’ (X1+h,...,Xn+h)’ for all all integers
h and n ≥ 1. (Here is used to indicate that the
two random vectors have the same joint
distribution function.)
Properties
Properties of a Strictly Stationary Time Series {Xt}:
a) The random variables Xt are identically
distributed.
b). (Xt, Xt+h)’ (X1, X1+h)’ for all integers t and h.
c. {Xt} is weakly stationary if E(X2t ) < ∞ for all t.
d. Weak stationarity does not imply strict
stationarity.
e. An iid sequence is strictly stationary.
differencing
One way to make a non-stationary time series
stationary
Compute the differences between consecutive
observations. This is known as differencing.
Random walk model
The differenced series is the change between
consecutive observations in the original series,
and can be written as
y′t=yt−yt−1.
The differenced series will have only T−1 values,
since it is not possible to calculate a difference y′1
for the first observation.
When the differenced series is white noise, the
model for the original series can be written as
yt−yt−1=εt, where εt denotes white noise.
Rearranging this leads to the “random walk” model
yt=yt−1+εt.
Autocovarince function(AVCF)
we introduced the concept of stationarity
and defined the autocovariance function
(ACVF) of a stationary time series {Xt} as
γ (h) = Cov(Xt+h, Xt), h= 0, ±1, ±2,...
Autocorrelation function
The autocorrelation function (ACF) reveals how
the correlation between any two values of the
signal changes as their separation changes. It is
a time domain measure of the stochastic process
memory, and does not reveal any information
about the frequency content of the process.
Generally, for an error signal, et, the ACF is
defined as,
For a stationary stochastic process of variance
σ2, the previous expression for the ACF reduces
to
which is time-independent. A white noise process

has an autocorrelation function of zero at all lags
except a value of unity at lag zero, to indicate that
the process is completely uncorrelated
Test for stationarity
Augmented Dickey-Fuller Test
H0: The time series is non-stationary. In other words, it

has some time-dependent structure and does not have
constant variance over time.
HA: The time series is stationary.
If the p-value from the test is less than some
significance level (e.g. α = .05), then we can reject the
null hypothesis and conclude that the time series is
stationary.
If p<=0.05 Ho rejected
If > 0.05 Ho accepted
# dickey fuller test
library(tseries)
data=c(3,4,4,5,6,7,6,6,7,8,9,10,12)
plot(data,type='l')
adf.test(data)
Augmented Dickey-Fuller Test

data: data
Dickey-Fuller = -0.77229, Lag order =2, p-value = 0.9523
alternative hypothesis: stationary
Properties of the Sample Mean and
Autocorrelation Function
A stationary process {Xt} is characterized, at least
from a second-order point of view, by its mean µ and
its auto covariance function γ (·).
The estimation of µ, γ (·), and the autocorrelation
function ρ(·)= γ (·)/γ (0) from observations X1,...,Xn
therefore plays a crucial role in problems of
inference and in particular in the problem of
constructing an appropriate model for the data. In
this section we examine some of the properties of
the sample estimates and of µ and ρ(·),
respectively.
Estimation of µ
is unbiased estimate of since
The mean squared error of is

)
Now if the RHS of equation A converges to 0
If
To make inferences about µ using the sample mean , it is
necessary to know the distribution or an approximation
to the distribution of . If the time series is Gaussian
For many time series, in particular for linear and ARMA

models, is approximately normal with mean µ and
variance
for large n.
An approximate 95% Confidence interval for mean µ
is
Where
Of course is not known it is estimated.
Estimation of and
The sample auto covariance and auto correlation

function are given by
and
Both estimates of and are biased, However for

large n
the estimates are unbiased.
The sample k dimensional covariance matrix is
If is nonnagative definite
For systematic inference concerning ρ(h), we need the
sampling distribution of the estimator . Although the
distribution of is intractable for samples from even the
simplest time series models, it can usually be well
approximated by a normal distribution for large sample
sizes. For linear models and in particular for ARMA
models
is approximately distributed for large n as N (ρk, n−1W ),

i.e.,
≈ N( ρ, n−1 W)
where ρ = (ρ(1), . . . , ρ(k)) , and W is the covariance
matrix whose (i, j ) element is given by Bartlett’s formula
wij =
MA(q) process
The MA(q) Process: {Xt} is a moving-average
process of order q if
Xt = Zt + θ1Zt−1 +···+ θqZt−q ,
where
{Zt} ∼ WN(0, σ2)
and θ1,...,θq are constants.
Linear Process
The time series {Xt} is a linear process if it has the
representation
for all t, where {Zt} ∼ WN( 0, σ2)

and {ψj } is a sequence of constants with < ∞
ARMA process
The time series {Xt} is an ARMA(1, 1) process if it is

stationary and satisfies (for every t)
Xt − φXt−1 = Zt + θZt−1,
where {Zt} ∼ WN( 0, σ2)
and φ + θ ≠ 0

Time Series

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Time Series

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Time series

It is an arrangement of data in chronological order (in

A time series may be defined as a collection of readings

Where y is value of phenomenon under consideration at time t.

The concept of trend does not include short term

Rearranging this leads to the “random walk” model

which is time-independent. A white noise process

H0: The time series is non-stationary. In other words, it

Augmented Dickey-Fuller Test

The mean squared error of is

For many time series, in particular for linear and ARMA

Of course is not known it is estimated.

The sample auto covariance and auto correlation

Both estimates of and are biased, However for

is approximately distributed for large n as N (ρk, n−1W ),

and θ1,...,θq are constants.

for all t, where {Zt} ∼ WN( 0, σ2)

The time series {Xt} is an ARMA(1, 1) process if it is

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