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Time Series Analysis (TSA) ............................................................................................................................ 1 Components of TSA: ..................................................................................................................................... 1 Trend Component: .................................................................................................................................... 2 Cyclical Component: ................................................................................................................................. 2 Seasonal Component: ............................................................................................................................... 2 Irregular Component: ............................................................................................................................... 3 Decomposition: ............................................................................................................................................. 3 Trend: ............................................................................................................................................................ 3 Trend Curves: ................................................................................................................................................ 4 Seasonal Variation: ....................................................................................................................................... 4 Ratio-to-Moving Average: ............................................................................................................................. 5 Car Registrations ....................................................................................................................................... 5 Seasonally Adjusted Data:............................................................................................................................. 5 Cyclical Variation: .......................................................................................................................................... 6 Economic Indicators:..................................................................................................................................... 7 Cyclical Cautions: .......................................................................................................................................... 7 Long Term Forecasts: .................................................................................................................................... 8 Cyclical and Irregular Effects: ........................................................................................................................ 8 Outboard Sales Example: .............................................................................................................................. 8 Seasonal Forecasting: ................................................................................................................................... 9 Case Study: .................................................................................................................................................... 9 Implementing the Model: ........................................................................................................................... 10 Using optimal values for and that minimizes the MSE: ........................................................................ 10 Forecasting with Holts Model: ................................................................................................................... 10 SWOT ANALYSIS: ......................................................................................................................................... 11 STRENGHT: .............................................................................................................................................. 11 WEAKNESS: ............................................................................................................................................. 11 OPPORTUNITY: ........................................................................................................................................ 11 THREAT:................................................................................................................................................... 11 Conclusion: .................................................................................................................................................. 12 Recommendation:....................................................................................................................................... 12
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Time series are analyzed to discover past patterns of variability that can be used to forecast future values. A time-series is a set of observations on a quantitative variable collected over time. Examples Dow Jones Industrial Averages Historical data on sales, inventory, customer counts, interest rates, costs, etc. Businesses are often very interested in forecasting time series variables. Often, independent variables are not available to build a regression model of a time series variable. In time series analysis, we analyze the past behavior of a variable in order to predict its future behavior Decomposition - identify components that influence the series. Trend Cyclical Seasonal Irregular
Components of TSA:
Cycle
An up-and-down repetitive movement in demand. repeats itself over a long period of time
Seasonal Variation
An up-and-down repetitive movement within a trend occurring periodically. Often weather related but could be daily or weekly occurrence
Random Variations
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Erratic movements that are not predictable because they do not follow a pattern
Trend
Seasonal
TS Data
Irregular
Cyclical
Trend Component:
Indicates the very long-term behavior of the time series Typically as a straight line or an exponential curve This is useful in seeing the overall picture
Cyclical Component:
A non-seasonal component which varies in a recognizable period Peak Contraction Trough Expansion Due to interactions of economic factors The cyclic variation is especially difficult to forecast beyond the immediate future more of a local phenomenon
Time
Seasonal Component:
Regular pattern of up and down fluctuations within a fixed time
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Time
Due to weather, customs etc. Periods of fluctuations more regular, hence more profitable for forecasting
Irregular Component:
Random, unsystematic, residual fluctuations Due to random variation or unforeseen events Short duration and non-repeating A forecast, even in the best situation, can be no closer (on average) than the typical size of the irregular variation
Decomposition:
Additive model: Yt = T + S + I Multiplicative model: Yt = TSI
An annual series is a product of trend and cyclical fluctuations: Y = TC This is a multiplicative model where trend is in original units and the cyclical is an index. Series that is measured in less than a year (monthly and quarterly data): Y = TSCI
Trend:
Basic forces in trend: population change, price change, technological change, productivity change, product life cycles Two basic purposes: project the trend and to eliminate it from the original data. Trend analysis: independent variable (X) is time
4|Page Method most widely used to describe straight line trends is least squares method. Computes the line that best fits a group of points mathematically. Assumes that the correct trend curve is selected and that the curve that fits the past is indicative of the future.
Trend Curves:
Life cycle curves: introduction, growth, maturity, decline. Linear models assume that a variable is increasing by a constant amount each period. Life cycle curves assume increases at an increasing rate.
Exponential curves fit data that is growing at a constant rate instead of a constant amount.
Growth curves (Gompertz) represent industries and products that grow at a declining rate. Project management life cycles. Refer to articles on forecasting product life cycles
Seasonal Variation:
Trend is determined directly from all available data. Seasonal component is determined by eliminating all the other components. Trend is represented by one equation. A separate seasonal value has to be calculated each period, usually in the form of an index number. An index number is a percentage that represents changes over time. Most common calculation is ratio-to-moving average for the multiplicative decomposition model. Seasonal index represents the extent of seasonal influence for a particular segment of the year. The calculation involves a comparison of the expected values of that period to the overall average. A seasonal index of 100 for a particular month indicates that the expected value of that month is 1/12 of the total for the annual period.
5|Page A seasonal index of 125 indicates that the expected value for that month s 25% greater than 1/12 of the annual total A seasonal index of 80 indicates that the expected value for that month is 20% less than 1/12 of the total activity for the year. Monthly index indicates the expected ups and downs in monthly (quarterly) activity with effects due to trend, cyclical, and irregular components REMOVED.
Ratio-to-Moving Average:
Centered moving average is used for comparison of values at different points in time. Moving average values are placed at the period in which they are calculated. For example, for a moving average length of 3, the first numeric moving average value is placed at period 3, the next at period 4, and so on. When you center the moving averages, they are placed at the center of the range rather than the end of it. This is done to position the moving average values at their central positions in time. See new car registrations for example
Car Registrations
For monthly data use a 12-month centered moving average, quarterly data uses a 4-month CMA. This removes seasonal effects leaving only long-term trend, cyclical, and irregular components. CMA smoothest short-run fluctuations. Median is less sensitive to outliers
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Cyclical Variation:
Residual Method - cyclical component of time series data is identified by eliminating or averaging out trend effects. If the data is an annual series, trend components are removed. If the data are monthly/quarterly, trend and seasonal effects are removed. Multiplied by 100 for percentage
X 1 2 3 : : 31 32 33
Y-hat Cyclical 8.0568 81.633 8.1255 72.057 8.1942 84.682 : : : : 10.1177 90.534 10.1863 90.651 10.255 78.537
Cyclical index shows the position of each Y value relative to the trend line. New registrations were about 18% below what was expected from the trend line
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Plot the cyclical index over time The trend line is the 100% base line. Once plotted, it is very easy to see the cyclical patterns. Does the series cycle? If so, how extreme is the cycle? Does the series follow the general economy/business cycle? (Do peaks occur when the economy is strong and bottom out when the economy is weak? Business indicator - business related time series that are used to help assess the general state of the economy.
Economic Indicators:
Certain statistical time series may be useful as direct indicators of cyclical expansions and contractions in business activity. National Bureau of Economic Research has 22 business indicators: Leading - anticipate turning points up or down Coincident - indicate economys current performance Lagging - lag behind the general upswing/downswing of the economy.
Cyclical Cautions:
Difficult to identify cyclical turning points near the time they occur - because the series also contains short term irregular components No uniformity occurs in the length of time by which a given leading indicator precedes cyclical turns in the economy. For example, leading indicators may signal a recession or recovery some time in the future, but they provide less help in establishing the timing of the turn. False signals - a turning point does not materialize. Should be used together with other data - but analysts should beware of limitations.
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Seasonal Forecasting:
Forecast for trend with the equation Use the adjusted seasonal index for the appropriate month/quarter Estimate the cyclical component using indicators - remember the important aspect is to get the direction correct Commonly use 1 to indicate the irregular component since irregular effects are usually random noise
Case Study:
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SWOT ANALYSIS:
STRENGHT:
Time periods are of equal length No missing values
WEAKNESS:
Difficult to forecast demand because... There are no causal variables The components (trend, seasonality, cycles, and random variation) cannot always be easily or accurately identified
OPPORTUNITY:
Determination of a transfer function of a system Design of simple feed-forward and feedback control schemes
THREAT:
There is no systematic approach for the identification and selection of an appropriate model, and therefore, the identification process is mainly trial-and-error There is difficulty in verifying the validity of the model o Most traditional methods were developed from intuitive and practical considerations rather than from a statistical foundation
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Conclusion:
Described what forecasting is Explained time series & its components Smoothed a data series Moving average Exponential smoothing
Recommendation:
Select several forecasting methods Forecast the past Evaluate forecasts Select best method Forecast the future Monitor continuously forecast accuracy