1.

INTRODUCTION
1.1. Definition
A time series is a sequence of observations that are arranged according to the
time of their outcome.

Many sets of data appear as time series:

 a monthly sequence of the quantity of goods shipped from a factory,
 a weekly series of the number of road accidents,
 the newspapers' business sections report daily stock prices,
 weekly interest rates, meteorology records hourly wind speeds,
 daily maximum and minimum temperatures and annual rainfall.
An inherent feature (characteristics) of a time series is that, typically,
 adjacent observations are dependent
 time dependence ( daily, monthly, …

i.e. The characteristic property of a time series is the fact that the data are not
generated independently and their dispersion varies in time.

- Time Series analysis is concerned with techniques for the analysis of

time dependence.
Monday, May 27, 2024 Time Series Analysis 1
Application area of Time Series
Time series data provide useful information about the physical,
biological, social or economic systems
1. Economic and financial time series:
 Many time series are routinely recorded in economics and
finance. Examples:
 share prices on successive days,
 export totals in successive months,
average incomes in successive months, and
 company profits in successive years and so on

The average Monthly price of a certain crop at a town measured in

successive years from 1993 to 2002 in fiscal year is given in
figure1.1

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Figure 1.1: Plot of Price

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2. Physical time series:
Many types of time series occur in the physical sciences, particularly in meteorology,
marine science and geophysics.
Examples are
 Rainfall on successive days, and
 Air temperature measured in successive hours, days or months.
Geophysics is continuously observing the shaking or trembling of the earth in
order to predict possibly coming earthquakes.

Figure 1.2 the average weekly maximum temperature of a country measured in

10 successive years in five months.
The time plot shows an outlier clearly at observation 141 and it needs adjustment
using outlier adjustments techniques.

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Figure 1.2: The average maximum temperature in successive weeks over 5
months per 10 years.

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3. Marketing time series:
The analysis of time series arising in marketing is an important problem in
commerce.
As an example,

Figure 1.3 shows the sales of an engineering product by a certain company in

successive months over a 7-year period.
It is often important to forecast future sales so as to plan production.
It may also be of interest to examine the relationship between sales and other time
series such as advertising expenditure.

Monday, May 27, 2024 Time Series Analysis 6

4. Demographic time series:
Various time series occur in the study of population change.
Examples include:
 The population of the country measured annually, and
 Monthly birth totals in the country etc.

Demographers want to predict changes in population for as long as ten or twenty

years in the future.

5. Process control data:

In process control, the problem is to detect changes in the performance of a
manufacturing process by measuring a variable, which shows the quality of the
process.

These measurements can be plotted against time as in Figure 1.4

When the measurements stray too far from some target value, appropriate
corrective action should be taken to control the process.

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Figure 1.4: A process control chart.

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6. Binary processes:
A special type of time series arises when observations can take one of only two
values, usually denoted by 0 and 1 (see Figure 1.5).

Time series of this type, called binary processes, occur in many situations,
including the study of communication theory.

For example, the position of a switch, either ‘on’ or ‘off’, could be recorded
as one or zero, respectively.

ON
1

OFF
0

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 Figure 1.5:A realization of a binary process

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Terminologies in Time Series Analysis

A. Univariate time series:

Univariate Time series are those where only one variable is measured over time,
whereas

B. multiple time series:

Multiple time series are those, where more than one variable are measured
simultaneously.
Yt   o   1 X 1t   2 X 1t  

C. Continuous time series:

A time series is said to be continuous when observations are made continuously
in time (at every instant of time).

D. Discrete time series:

A time series is said to be discrete when observations are taken only at specific
times, usually equally spaced.
Monday, May 27, 2024 Time Series Analysis 11
E. Deterministic Time series:
When successive observations are dependent, future values may be predicted from
past observations.

If a time series can be predicted exactly, it is said to be deterministic.

However, most time series are stochastic in that the future is only partly
determined by past values, so that exact predictions are impossible and must be
replaced by the idea that future values have a probability distribution, which is
conditioned by a knowledge of past values.

F. Time Plot :
It is a plot of observations against time. It is most important step in any time
series analysis. This graph should show up important features of the series such as
trend, seasonality, outliers, change in structure etc. the plot is vital, both to
describe the data and to help in formulating a sensible model.

G. Stationary series:
A series whose overall behavior remains the same over time. It fluctuates around
a constant mean

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 Properties of Time Series
- Continuous time series versus discrete time series
- Univariate time series versus multivariate time series
- Stationary time series versus non-stationary

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 1.2. Objectives of Time
Series

Description
Control

Prediction Explanation

Monday, May 27, 2024 Time Series Analysis 14

Description: When presented with a time series, the first step in the analysis is
usually to plot the data and to obtain simple descriptive measures of the main
properties of the series.
Explanation: When observations are taken on two or more variables, it may be
possible to use the variation in one time series to explain the variation in another
series or ascertaining the leading, lagging and feedback relationships among
several series.
A univariate model for a given variable is based only on past values of that
variable, while a multivariate model for a given variable may be based, not only
on past values of that variable, but also on present and past values of other
(predictor) variables.
Prediction: Given an observed time series, one may want to predict the future
values of the series.
Control: Time series are sometimes collected or analyzed so as to improve control
over some physical or economic system.
. Prediction is closely related to control problems in many situations.

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1.3. Significance of time series analysis

- It helps in understanding past behavior in the data.

- It helps to understand “what changes have taken place in the past”
- It helps in planning future operation
- It helps in evaluating current accomplishment
- It facilitates comparison

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1.4. Components of Time Series
Traditional methods of time series analysis are mainly concerned with
decomposing the variation in a series in to

 Trend,
 Seasonal variation,
 Other cyclic changes, and
 Irregular fluctuations.

This approach is not always the best but is particularly valuable when the
variation is dominated by trend and/or seasonality.

1. Trend Component: A trend is evolutionary movement, either upward or

downward, in the value of the variable.
 This type of component is present when a series exhibits steady upward
growth or a downward decline, at least over several successive time periods,
when allowance has been made for the other components.
Cause of Trend Component: Long term population change, Growth
introduction, Technological introduction and Change in economic conditions

Monday, May 27, 2024 Time Series Analysis 17

2. Seasonal Component:
 It is also known as periodicity. This type of component is generally annual in
period and arises for many series, whether weekly, monthly or quarterly
measured, when similar patterns of behavior are observed at particular times of
the year.
Cause of Seasonal Component: Climate change, Holy days, Human habits,
Promotion and announcement
 It describes any regular fluctuations with a period of less than one year.

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3. Cyclic Component:
 Apart from seasonal effects, some time series exhibit variation at a fixed period
due to some other physical cause.
 This includes regular cyclic variation at periods other than one year.
In addition some time series exhibit oscillations, which do not have a fixed
period but which are predictable to some extent.
Causes of cyclical component

- Change in economic environment such as downturn and expansion of economies

- Political interventions in the economy, draughts and famines …

4. Irregular Component:
 The phrase ‘irregular fluctuations’ is often used to describe any variation that is
‘left over’ when other components of the series (trend, seasonal and cyclical) have
been accounted for. As such, they may or may not be random.

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 1.5. Models of Time Series
In a simple model, the original data at any time point (denoted by Yt) may be
expressed as a function f of the components: the seasonality, the trend, cyclical,
the irregularity

That is Yt = f(Tt, St, Ct, It).

1. An additive model:
Yt = Tt+ St+ Ct +It

2. multiplicative model:
Yt = Tt*St *Ct*It,

where Yt = observation for period t,

Tt = trend component for period t,
St = seasonal component for period t,
Ct = cyclical component for period t
It = irregular component for period t

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 A classical approach to decomposition of a time series into patterns are additive
and multiplicative (actually, there are a lot of different decomposition
algorithms).
- The additive model is appropriate if the magnitude (amplitude) of the seasonal
variation does not vary with the level of the series.
- The multiplicative version is more appropriate if the amplitude of the seasonal
fluctuations increases or decreases with the average level of the time series.

Mixed Model:
Yt = Tt +St +Ct*It
Yt = Tt +St *Ct*It
Yt = Tt *St *Ct+It

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 1.6. Editing Time Series Data

Analysts generally like to think they have ‘good’ data, meaning that the data
have been carefully collected with no outliers or missing values.

The process of checking through data is often called cleaning the data, or data
editing.
 It is an essential precursor to attempts at modeling data.
 Data cleaning could include modifying outliers, identifying and correcting
obvious errors and filling in (or imputing) any missing observations.

Missing Value
 plug in the mean for the overall series.
 computing mean of the adjacent observations.
 Missing value replacement in exponential smoothing often applies one-step-
ahead forecasting from the previous observations.

Outliers
 Outliers, or aberrant observations, are often clearly visible in the time plot of
the data.
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 Instead of adjusting or removing outliers, an alternative approach is to use
robust methods, which automatically down weight extreme observations.
 Running median smoothers (also called Odd-span moving medians) are
effective data smoothers when time series data may be contaminated with
unusual values.
 The moving median of span-3 is a very popular and effective data smoother,
where mt = median(Yt-1, Yt, Yt+1).
For example:
consider the sequence of observations:
time 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19

data 15 18 13 12 16 14 16 17 18 15 18 200 19 14 21 24 19 19 25

odd-span-3 15 13 13 14 16 16 17 17 18 18 19 19 19 21 21 19 19

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But to complete the data some analysts will take the original lower and upper
values of the data. Then the edited data will be:

time 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19

data 15 18 13 12 16 14 16 17 18 15 18 200 19 14 21 24 19 19 25

odd-spam 3 15 15 13 13 14 16 16 17 17 18 18 19 19 19 21 21 19 19 25

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