METHODS OF TIME SERIES

TIME SERIES
Time series is set of data collected and arranged in
accordance of time. According to Croxton and
Cowdon,”A Time series consists of data arranged
chronologically.” Such data may be series of temperature
of patients, series showing number of suicides in different
months of year etc. The analysis of time series means
separating out different components which influences
values of series. The variations in the time series can be
divided into two parts: long term variations and short
term variations.Long term variations can be divided into
two parts: Trend or Secular Trend and Cyclical variations.
Short term variations can be divided into two parts:
Seasonal variations and Irregular Variations.

METHODS FOR TIME SERIES ANALYSIS

In business forecasting, it is important to analyze the
characteristic movements of variations in the given time
series. The following methods serve as a tool for this
analysis:

1. Methods for Measurement of Secular Trend

i. Freehand curve Method (Graphical
Method)

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 ii. Method of selected points
iii.Method of semi-averages
iv.Method of moving averages
v. Method of Least Squares

2. Methods for Measurement of Seasonal

Variations
i. Method of Simple Average
ii. Ratio to Trend Method
iii.Ratio to Moving Average Method
iv.Method of Link Relatives

3. Methods for Measurement for Cyclical

Variations

4. Methods for Measurement for Irregular

Variations

METHODS FOR MEASUREMENT OF SECULAR

TREND
The following are the principal methods of measuring
trend from given time series:
1. GRAPHICAL OR FREE HAND CURVE METHOD

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This is the simple method of studying trend. In this
method the given time series data are plotted on graph
paper by taking time on X-axis and the other variable on
Y-axis. The graph obtained will be irregular as it would
include short-run oscillations. We may observe the up and
down movement of the curve and if a smooth freehand
curve is drawn passing approximately to all points of a
curve previously drawn, it would eliminate the short-run
oscillations (seasonal, cyclical and irregular variations)
and show the long-period general tendency of the data.
This is exactly what is meant by Trend. However, It is
very difficult to draw a freehand smooth curve and
different persons are likely to draw different curves from
the same data. The following points must be kept in mind
in drawing a freehand smooth curve:
1. That the curve is smooth.
2. That the numbers of points above the line or
curve are equal to the points below it.
3. That the sum of vertical deviations of the points
above the smoothed line is equal to the sum of
the vertical deviations of the points below the
line. In this way the positive deviations will
cancel the negative deviations. These deviations
are the effects of seasonal cyclical and irregular
variations and by this process they are
eliminated.
4. The sum of the squares of the vertical deviations
from the trend line curve is minimum. (This is
one of the characteristics of the trend line fitted
by the method of lest squares )
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The trend values can be read for various time periods by
locating them on the trend line against each time period.
The following example will illustrate the fitting of a
freehand curve to set of time series values:

Example:
The table below shows the data of sale of nine
years:-
Year 1 1 1 1 1 1 1 1 1
990 991 992 993 994 995 996 997 998
Sales in 65 95 115 63 120 100 150 135 172
(lakh
units)

If we draw a graph taking year on x-axis and sales on y-

axis, it will be irregular as shown below. Now drawing a
freehand curve passing approximately through all this
points will represent trend line (shown below by black
line).

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MERITS:

1. It is simple method of estimating trend which

requires no mathematical calculations.
2. It is a flexible method as compared to rigid
mathematical trends and, therefore, a better
representative of the trend of the data.
3. This method can be used even if trend is not
linear.
4. If the observations are relatively stable, the
trend can easily be approximated by this
method.
5. Being a non mathematical method, it can be
applied even by a common man.

DEMERITS:

1. It is subjective method. The values of trend,

obtained by different statisticians would be
different and hence, not reliable.

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 2. Predictions made on the basis of this method are
of little value.
2. METHOD OF SELECTED POINTS
In this method, two points considered to be the most
representative or normal, are joined by straight line to get
secular trend. This, again, is a subjective method since
different persons may have different opinions regarding
the representative points. Further, only linear trend can
be determined by this method.

3. METHOD OF SEMI-AVERAGES
Under this method, as the name itself suggests semi-
averages are calculated to find out the trend values. By
semi-averages is meant the averages of the two halves of
a series. In this method, thus, the given series is divided
into two equal parts (halves) and the arithmetic mean of
the values of each part (half) is calculated. The computed
means are termed as semi-averages. Each semi-average
is paired with the centre of time period of its part. The
two pairs are then plotted on a graph paper and the
points are joined by a straight line to get the trend. It
should be noted that if the data is for even number of
years, it can be easily divided into two halves. But if it is
for odd number of years, we leave the middle year of the
time series and two halves constitute the periods on each
side of the middle year.

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MERITS:

1. It is simple method of measuring trend.

2. It is an objective method because anyone applying
this to a given data would get identical trend value.
DEMERITS:

1. This method can give only linear trend of the data

irrespective of whether it exists or not.
2. This is only a crude method of measuring trend, since
we do not know whether the effects of other
components are completely eliminated or not.

4. METHOD OF MOVING AVERAGE

This method is based on the principle that the total
effect of periodic variations at different points of time in
its cycle gets completely neutralized, i.e. ∑St = 0 in one
year and ∑Ct = 0 in the periods of cyclical variations.
In the method of moving average, successive
arithmetic averages are computed from overlapping
groups of successive values of a time series. Each group
includes all the observations in a given time interval,
termed as the period of moving average. The next
group is obtained by replacing the oldest value by the
next value in the series. The averages of such groups are
known as the moving averages. The moving averages of
a group are always shown at the centre of its period.
The process of computing moving averages
smoothens out the fluctuations in the time series data. It

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can be shown that if the trend is linear and the oscillatory
variations are regular, the moving average with the
period equal to the period of oscillatory variations would
get minimized because the average of a number of
observations must lie between the smallest and the
largest observation. It should be noted that the larger is
the period of moving average the more would be the
reduction in the effect of random components but the
more information is lost at the two ends of data.i.e. it
reduces the curvature of curvi-linear trends.
When the trend is non linear, the moving averages
would give biased rather than the actual trend values.
Suppose that the successive observations are taken
at equal intervals of time, say, yearly are Y1, Y2, Y3 , . . .
Moving Average when the period is Odd
Now by a three-yearly moving averages, we shall
obtain average of first three consecutive years (beginning
with the second year) and place it against time t=2; then
the average of the next three consecutive years
(beginning with the second year) and place it against
time t=3, and so on. This is illustrated below:
T Observati Moving Moving
ime ons Total Average
(t) Yt (3 Years)
1 Y1
2 Y2 Y1 + Y2 + ⅓ (Y1 + Y2 +
Y3 Y3)
3 Y3 Y2 + Y3 + ⅓ (Y2 + Y3 +

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 Y4 Y4)
4 Y4 Y3 + Y 4 + ⅓ (Y3 + Y4 +
Y5 Y5)
5 Y5

It should be noted that for odd period moving

average, it is not possible to get the moving averages for
the first and the last periods.

Moving Average when the period is Even

For an even order moving average, two averaging

processes are necessary in order to centre the moving
average against periods rather than between periods. For
example , for a four –yearly moving average we shall first
obtain the average Y1=1/4(Y1 + Y2 + Y3 + Y4 ) of the first
four years and place it in between t =2 and t=3 then the
average Y2 = 1/4( Y2 + Y3 + Y4 + Y5) of the next four
years is and place it in between t=3 and t=4 , and finally
obtain the average ½(Y1 + Y2) of the two averages and
place it against time t=3. Thus the moving average is
brought against time or period rather than between
periods. The same procedure is repeated for further
results. This is tabulated below:
T Observations Moving Average Centered
ime Yt for Value

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 (t) 4-period
1 Y1

2 Y2
¼(Y1 + Y2 + Y3 + Y4
→ ) = A1
3 Y3 ½(A1 + A2 )
→
¼(Y2 + Y3 + Y4 + Y5)
→ = A2
4 Y4

It should be noted that when the period of moving

average is even, the computed average will correspond to
the middle of the two middle most periods.

MERITS:

1. This method is easy to understand and easy to use

because there are no mathematical complexities
involved.
2. It is an objective method in the sense that anybody
working on a problem with the method will get the
same trend values. It is in this respect better than
the free hand curve method.
3. It is a flexible method in the sense that if a few more
observations are added, the entire calculations are
not changed. This not with the case of semi-average
method.
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 4. When the period of oscillatory movements is equal to
the period of moving average, these movements are
completely eliminated.
5. By the indirect use of this method, it is also possible
to isolate seasonal, cyclical and random components.

DEMERITS:

1. It is not possible to calculate trend values for all the

items of the series. Some information is always lost
at its ends.
2. This method can determine accurate values of trend
only if the oscillatory and the random fluctuations are
uniform in terms of period and amplitude and the
trend is, at least, approximately linear. However,
these conditions are rarely met in practice. When the
trend is not linear, the moving averages will not give
correct values of the trend.
3. The trend values obtained by moving averages may
not follow any mathematical pattern i.e. fails in
setting up a functional relationship between the
values of X(time) and Y(values) and thus, cannot be
used for forecasting which perhaps is the main task
of any time series analysis.
4. The selection of period of moving average is a
difficult task and a great deal of care is needed to
determine it.
5. Like arithmetic mean, the moving averages are too
much affected by extreme values.

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5. METHOD OF LEAST SQUARES

This is one of the most popular methods of fitting a

mathematical trend. The fitted trend is termed as the
best in the sense that the sum of squares of deviations of
observations, from it, is minimized. This method of Least
squares may be used either to fit linear trend or a non-
linear trend (Parabolic and Exponential trend).

FITTIG OF LINEAR TREND

Given the data (Yt, t) for n periods, where t denotes time

period such as year, month, day, etc. We have to the
values of the two constants, ‘a’ and ‘b’ of the linear trend
equation:
Yt = a + bt
Where the value of ‘a’ is merely the Y-intercept or the
height of the line above origin. That is, when X=0, Y= a.
The other constant ‘b’ represents the slope of the trend
line. When b is positive, the slope is upwards, and when b
is negative, the slope is downward.
This line is termed as the line of best fit because it is so
fitted that the total distance of deviations of the given
data from the line is minimum. The total of deviations is
calculated by squaring the difference in trend value and
actual value of variable. Thus, the term “Least Squares” is
attached to this method.

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using least square method, the normal equation for
obtaining the values of a and b are :
∑ Yt = na + b∑t
∑tYt =a∑t + b∑t2

Let X = t – A, such that ∑X = 0, where A denotes the year

of origin.
The above equations can also be written as
∑Y = na + b∑X
∑XY =a∑X + b ∑X2

Since ∑x = 0 i.e. deviation from actual mean is zero

We can write

a =∑Y/n
b =∑ XY /∑X2

FITTING OF PARABOLIC TREND

The mathematical form of a parabolic trend is given

by:
Yt =a + bt+ct2
Here a, b and c are constants to be determined from the
given data.

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 Using the method of least squares, the normal
equations for the simultaneous solution of a, b and c are:
∑ Y = na + b∑t +c∑t2
∑tY =a∑t + b∑t2 + c∑t3
∑t2Y =a∑t2 + b∑t3 + c∑t4

By selecting a suitable year of origin, i.e. define X = t –

origin such that ∑X = 0, the computation work can be
considerably simplified. Also note that if ∑X = 0, then ∑X3
will also be equal to zero. Thus, the above equations can
be rewritten as:
∑ Y = na +c∑X2 ……….(1)
∑XY = b∑X2 ……….(2)
∑X2Y = a∑X2 + c∑X4……….(3)

From equation (2), we get

b =∑XY/∑X2

From equation (1), we get

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 a = ∑ Y - c∑X2
/n

And from equation (3), we get

c = n∑X2Y – (∑X2) ( ∑ Y) /n∑X4

– (∑X2)2
or
c = ∑X2Y - a∑X2 /∑X4

This are the three equations to find the value of constants

a, b and c.

FITTING OF EXPONENTIAL TREND

The general form of an exponential trend is:

Y = a.bt
Where ‘a’ and ‘b’ are constants to be determined from
the observed data.
Taking logarithms of both side, we gave log Y = log a +
log b.
This is linear equation in log Y and t can be fitted in a
similar way as done in case of linear trend. Let A=log a
and B =log b, then the above equation can be written as:
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 log Y = A + Bt
The normal equations based on the principle of least
squares are:
∑log Y = n A + B ∑t
And ∑t log Y = n ∑t + B ∑t2
By selecting a suitable origin, i.e. defining X = t – origin
such that ∑X = 0, the computation work can be
simplified. The values of A and B are given by:

A =∑log Y / n

And

B =∑X log Y /
∑X2

Thus, the fitted trend equation can be written as:

log Y = A + BX or
Y = Antilog [A +BX]
= Antilog [log a + X log b]
= Antilog [log a.bx]
= a.bx

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MERITS:

1. Given the mathematical form of the trend to be

fitted, the least squares method is an objective
method.
2. Unlike the moving average method, it is possible to
compute trend values for all the periods and predict
the value for a period lying outside the observed
data.
3. The results of the method of least squares are most
satisfactory because the fitted trend satisfies the two
most important properties, i.e. (1) ∑(Y0 - Yt ) = 0 and
(2) ∑(Y0 - Yt )2 is minimum. Here Y0 denotes the
observed values and Yt denotes the calculated trend
value.
The first property implies that the position of fitted
trend equation is such that the sum of deviations of
observations above and below this equal to zero. The
second property implies that the sums of squares of
deviations of observations, about the trend equations, are
minimum.

DEMERITS:

1. As compared with the moving average method, it is

cumbersome method.
2. It is not flexible like the moving average method. If
some observations are added, then the entire
calculations are to be done once again.

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 3. It can predict or estimate values only in the
immediate future or the past.
4. The computation of trend values, on the basis of this
method, doesn’t take into account the other
components of a time series and hence not reliable.
5. Since the choice of a particular trend is arbitrary, the
method is not, strictly, objective.
6. This method cannot be used to fit growth curves, the
pattern followed by the most of the economic and
business time series.

MEASUREMENT OF SEASONAL VARIATIONS

The measurement of seasonal variations is done by
isolating them from other components of a time series.
There are four methods commonly used for the
measurement of seasonal variations. These methods are:
1. Method of Simple Average
2. Ratio to Trend Method
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 3. Ratio to Moving Average Method
4. Method of link Relatives

1. METHOD OF SIMPLE AVERAGE

This is the easiest and the simplest method of
studying seasonal variations. This method is used when
the time series variable consists of only the seasonal and
random components. The effect of taking average of data
corresponding to the same period (say first quarter of
each year) is to eliminate the effect of random
component and thus, the resulting averages consist of
only seasonal component. These averages are then
converted into seasonal indices. It involves the following
steps:
If figures are given on a monthly basis:
1. Average the raw data monthly year wise.
2. Find the sum of all the figures relating to a month. It
means add all values of January for all the years.
Repeat the process for all the months.
3. Find the average of monthly figures i.e., divide the
monthly total by the number of years. For example if
the data for 5 years (on monthly basis is available)
there will be five figures for January. These have to
be totaled and divided by five to get the average
figures for January. Get such figures for all months.
They may be X1, X2, X3........... X12.
4. Obtain the average of monthly averages by dividing
the sum of averages by 12 or

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X1+X2+X3+...+X1212=X

5. Taking the average of monthly average as 100 find

out the percentages of monthly averages. For the
average of January (X1) this percentage would be:
average of januaryaverage of monthly averages×100

Or
X1X×100

If instead of the averages the monthly totals are

taken into the account the result would be the same.
MERITS AND DEMERITS

This is a simplest method of measuring seasonal

variations. However this method is based on the
unrealistic assumption that the trend and cyclical
variations are absent from the data.

2. RATIO TO TREND METHOD

This method is used when then cyclical variations are
absent from the data, i.e. the time series variable Y
consists of trend, seasonal and random components.
Using symbols, we can write Y = T. S .R
Various steps in the computation of seasonal indices are:
1. Obtain the trend values for each month or quarter,
etc, by the method of least squares.
2. Divide the original values by the corresponding trend
values. This would eliminate trend values from the
data.

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 3. To get figures in percentages, the quotients are
multiplied by 100.
Thus, we have three equations:

Y/ T ×100
T. S. R / T ×100
S. R ×100

MERITS AND DEMERITS

It is an objective method of measuring seasonal

variations. However, it is very complicated and doesn’t
work if cyclical variations are present.

3.RATIO TO MOVING AVERAGE METHOD

The ratio to moving average is the most commonly
used method of measuring seasonal variations. This
method assumes the presence of all the four components
of a time series. Various steps in the computation of
seasonal indices are as follows:
1. Compute the moving averages with period equal
to the period of seasonal variations. This would
eliminate the seasonal components and
minimize the effect of random component. The
resulting moving averages would consist of
trend, cyclical and random components.

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 2. The original values, for each quarter ( or month)
are divided by the respective moving average
figures and the ratio is expressed as a
percentage, i.e. SR” = Y / M. A = TCSR / TCR’,
where R’ and R” denote the changed random
components.
3. Finally, the random component R” is eliminated
by the method of simple averages.

MERITS AND DEMERITS

This method assumes that all the four components of

a time series are present and, therefore, widely used for
measuring seasonal variations. However, the seasonal
variations are not completely eliminated if the cycles of
these variations are not of regular nature. Further, some
information is always lost at ends of the time series.

4. LINK RELATIVES METHOD

This method is based on the assumption that the
trend is linear and cyclical variations are of uniform
pattern. The link relatives are percentages of the current
period (quarter or month) as compared with the previous
period. With the computations of the link relatives and
their average, the effect of cyclical and the random
components is minimized. Further, the trend gets
eliminated in the process of adjustment of chain relatives.

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The following steps are involved in the computation of
seasonal indices by this method:
1. Compute the Link Relative (L.R.) of each period by
dividing the figure of that period with the figure of
previous period. For example,
Link relative of 3rd quarter=figure of 3rd quarter /
figure of 2nd quarter ×100.
2. Obtain the average of link relatives of a given quarter
(or month) of various years. A.M. or Md can be used
for this purpose. Theoretically, the later is preferable
because the former gives undue importance to
extreme items.
3. These averages are converted into chained relatives
by assuming the chained relative of the first quarter
(or month) equal to 100. The chained relative (C.R.)
for the current period (quarter or month)
= C.R. of the previous period ×L.R. of the current
period / 100.

4. Compute the C.R. of the first quarter (or month) on

the basis of the last quarter (or month). This is given
by
C.R. of the last quarter (month) × average L.R. of the
first quarter (month) / 100
a. This value, in general, is different from 100 due
to long term trend in the data. The chained
relatives, obtained above, are to be adjusted for
the effect of this trend. The adjustment factor

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 d=14new C.R for 1st quater-100for quaterly data
d=112new C.R for 1st month-100for monthly data

b. On the assumption that the trend is linear d, 2d,

3d, etc, is respectively subtracted from the 2nd,
3rd, 4th, etc quarter (or month).
5. Express the adjusted chained relatives as a
percentage of their average to obtain seasonal
indices.
6. Make sure that the sum of these indices is 400 for
quarterly data and 1200 for monthly data.
MERITS AND DEMERITS

This method is less complicated than the ratio to

moving average and the ratio to trend methods.
However, this method is based upon the assumption of a
linear trend which may not always hold true.

MEASUREMENT OF CYCLICAL VARIATIONS

A satisfactory method for the direct measurement of
cyclical variations is not available. The main reason for
this is that although these variations may be recurrent,
these are seldom found to be of similar pattern having
same period and amplitude of oscillations. Moreover, in
most of the cases these variations are so intermixed with
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random variations that it is very difficult, if not
impossible, to separate them.
The cyclical variations are often obtained, indirectly,
as a residue after the elimination of other components.
Various steps of the method are given as below:
1. Compute the trend values (T) and the seasonal
indices(S) by appropriate methods. Here S is
obtained as a fraction rather than the percentage.
2. Divide Y-values by the product of trend and seasonal
index. This ratio would consist of cyclical and random
component, i.e. C. R = Y / T. S
3. If there are no random variations in the time series,
the cyclical variations are given by the step (2)
above. Otherwise the random variations should be
smoothened out by computing moving averages of C.
R. values with appropriate period. Weighted moving
average with suitable weights may also be used, if
necessary, for this purpose.

MEASUREMENT OF RANDOM VARIATIONS

The random variations are also known as irregular
variations. Because of their nature, it is very difficult to
devise a formula for their direct computation. Like the
cyclical variations, this component can also be obtained
as a residue after eliminating the effects of other
components.

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BIBLIOGRAPHY:
BOOKS AUTHORS
Business statistics R S Bhardwaj
Fundamentals of Statistics D N Elhance
Elements of business V K Puri
statistics
Mathematics and Statistics Ajay Goel &Asha Goel

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