Time-Series and Forecasting

Prepared by

Vikas Agarwal (1902)

Jagruti Barodia(1904)

Prashant Brahmane(1908)
Forecasting is the art and science of predicting
the future.

Forecasting is an essential tool in any decision

making process.

The quality of the forecast management can

make is strongly related to the information that
can be extracted from the past data.

The long term general direction of data is

referred to as Trend.
Time series
Variations in time series

 Secular trend
 Cyclical fluctuation
 Seasonal variation
 Irregular variation
Secular Trend
Reasons for studying trend

 Describe a historical pattern

 Project past patterns in to future
 To eliminate the trend component form
the series
 Types of trend
Linear

 Least square method:

Equation for estimating = Ŷ = a + bX

a straight line

Where,

a = Y- bX b = ∑xy- nXY
∑x2 – nX2
 Coding:

 Slope of the trend line b=∑xy

for the coded time values= ∑x2

 Intercept of the trend line= a=Y

for coded time values
Curvilinear

 second degree trend:

General form for

fitted second- degree = Ŷ= a + bx +cx2
trend

Where,
Ŷ= estimate of the dependent variable.
a, b, c =numerical constant.
x = coded values of time variable.
 Seasonal variation
It is defined as a repetitive and
predictable movement around the trend
line in a one year or less.

E.g.Rise in the sales of woolen clothes

especially in winter season.
 Reasons to study
We can establish the pattern of the past changes.

It is useful to project the past patterns in future.

Once we have established the seasonal pattern that

exists then we can eliminate its effects from the time
series.
Seasonalised index =
{avg. seasonal index X new seasonal index}
100
 Cyclical Variation
Itis that component of time series that tends to
oscillate above and below the secular trend line for
periods longer than 1 year.

The Cyclical Variation can be identified by using

the Residual Method.
 Residual method

When we look at a time series consisting of annual

data, only the secular-trend, cyclical, and irregular
components are considered.

Here we will assume that cyclical component

explains most of the variation left unexplained by
the trend component.
Now, we use a time-series annual data, we can find
the fraction of the trend by dividing the actual
value(Y) by the corresponding trend value(Ŷ) for
each value in the time-series.
It is then multiplied by 100 to give us the measure
of cyclical variation as a

percent of trend = Y× 100

Ŷ
The Relative Cyclical Residual is another measure
of cyclical variation.

In this method the percentage deviation is found for

each value. The equation below is used to determine
it:

Relative Cyclical Residual = Y– Ŷ × 100

Ŷ
Irregular variation
 Sucha type of variation occurs in a random
manner and is completely unpredictable.
Eg. Market closed for a labor day holiday.

Irregular variation is very important but it is

not explainable mathematically.

Because of its unpredictably we don’t

attempt to explain it mathematically.
Thank You