Minister of Finance

Overview
Introduction

Components of time series

Smoothing techniques
Trend analysis
Analysis

Measuring seasonal effect

Time-series forecasting with regression

Forecasting

Application

Recall Regression Model

X: independent variable
Y: dependent variable
Time-series:
- Definition: Variable measured over
time in sequential order
- Independent variable: Time

Example:

Purpose of timeseries analysis

Detect patterns
to forecast the
future value of
the time-series

Applications in
management and
economics
Forecast
interest rates,
U/E rate
Predict the
demand for
products

Long-term
trend

Cyclical
effect

(T)

(C)

Seasonal
effect

Random
variation

(S)

(R)

+ Long-term trend: Smooth pattern with

duration > 1 year

+ Cyclical effect: wavelike pattern about a

long-term trend, duration > 1 year, usually
irregular
Cycles are sequences of points

Volume

above & below the trend line

Time
9

+ Seasonal effect: like cycles but short

repetitive periods, duration < 1 year (days,
weeks, months)
Sales peak in Dec.

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+ Random variation: irregular changes that we

want to remove to detect other components

Volume

Random
variation that
does not repeat

Time

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Purpose: Remove random fluctuation

to detect seasonal pattern

2 types:

Moving average (MA)

Exponential smoothing

12

Example of
Moving
average:

Period
t

yt

3-period
MA

4-period
MA

4-period centred
MA

12

18

15.33

16

19.33

17.5

18.13

24

19.00

18.75

18.50

17

19.00

18.25

19.38

16

19.33

20.5

20.13

25

20.67

19.75

21

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Linear model:

Techniques

yt = 0 + 1t +
Polinomial
model

Trend analysis

Purpose

Isolate the
long-term trend

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Measuring seasonal effect

Values of St x Rt

Quarter

Year
Calculate

2005

1
2
MAt : Mulplicative
model:
-

1.0254

0.9572

1.0281

1.0318

0.9548

1.0316

1.0212

0.9592

1.0134

1.0481

2006

2007

MAt = T0.9869
t x Ct

2008
2009

1.0012

T x0.9304
Ct x St -x Rt

Yt

0.9900t

Average (Si)

0.9925

Seasonal Index
t (Si)

0.9928

MA

4 Total

1.0239

yt = Tt x Ct x St x Rt
0.9918

0.9504

1.0242

T
0.9507
t x Ct1.0246

1.0316

3.9987

1.0319

4.0000

Calculate average of St x Rt
St
St is adjusted SIt , so that
average SIt= 1

Forecast of trend & seasonality:

Ft = [ 0 + 1t ] SIt

where:
Ft = forecast for period t
SIt = seasonal index for period t

16

Using the following data

about CPI of Viet Nam
from 2005 to 2008 for
forecasting CPI in 2010:

Year
2005

2006
2008

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

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CPI
101.1
102.5
100.1
100.6
100.5
100.4
100.4
100.4
100.8
100.4
100.4
100.8

99.3

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18

Reasons:

CPI is measured over time (monthly)

3 components exist

Technique: Time-series forecasting with

regression

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CPI peaks in
Feb

Random
variation in 2008

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Trend analysis
Using Excel, the trend line is:

yt = 100.551 + 0.016 t

y = 100.551 + 0.016 t

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Measuring seasonal effect

Calculate MAt : Mulplicative model:

yt = Tt x Ct x St x Rt
MAt = Tt x Ct

Yt

MAt

Tt x Ct x St x Rt

Tt x Ct

Calculate average of St x Rt
St
St is adjusted SIt , so that
average SIt= 1
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 Seasonal

index

Month

SI t

1.0055

1.017

0.997

Month

SI t

0.9998 1.0055 1.0005

10

11

12

0.9975 0.9975 0.9945 0.9928 0.9935 0.9988

Apply

the formula: Ft = [ 0 + 1t ] SIt

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Forecast CPI in 2008

Forecast CPI of 2008 did not match actual CPI due to

unexpected events (recession)
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Forecast CPI in 2010

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y = 100.551 + 0.016 t

Forecasted
CPI

- Long term trend: slight increase in CPI

- Seasonal effect: peak in Feb.
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