Decomposition of Time Series

Decomposition is the breaking down of a time

series (Y) into Trend (T), Seasonal component
(S) and Irregular component (I) so that

Yt = Tt St It

Estimates of the trend and seasonal

component are multiplied together to produce
a forecast of the original series

Yt Tt St
Slide 1

Trend
Represents long-term movement

Estimated using linear regression, independent

variable is the time t

Slide 2

Trend : Linear

Tt = b0 bt
1
Suitable when there is no obvious curvature in
the time series plot

Slide 3

Trend : Quadratic
2

Tt = b0 bt
1 b2t

Suitable when the time series plot displays obvious

curvature

Slide 4

Trend : Exponential
t

Tt = b0b1 (b0 , b1 0)
Useful when time series plot
a. rises at increasing rate

b. drops at decreasing rate

Slide 5

Seasonal Component
The seasonal component is represented by a
collection of seasonal indices (SI)
SI are usually extracted by the average-all-data
(AAD) method

Slide 6

SI : One Year Quarterly Data

Slide 7

SI : Two Years Quarterly Data

Slide 8

SI : Two Years Monthly Data

Slide 9

SI : Interpretation
A seasonal index of 1.00 for a particular period means
that the average of that period is equal to the annual
mean
A seasonal index of 1.25 means that the average of that
period is 25% higher than the annual mean
A seasonal index of 0.70 indicates that the average of
that period is 30% lower than the annual mean

Slide 10

Deseasonalized Data
Deseasonalizing (Y/S) means removing the
seasonal component from the data
After deseasonalizing, only (T I) remains
Also known as seasonally adjusted data

Slide 11

Sales Data : Before & After Adjusted

t

Year

Sales

Sales/Average

SI

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

1
2
3
4
1
2
3
4
1
2
3
4

232.7
309.2
310.7
293
205.1
234.4
285.4
258.7
193.2
263.7
292.5
315.2

0.8743
1.1618
1.1674
1.1009
0.7706
0.8807
1.0723
0.9720
0.7259
0.9908
1.0990
1.1843

0.7903
1.0111
1.1129
1.0857

SeasonallyAdj.
Sales
294.5
305.8
279.2
269.9
259.5
231.8
256.4
238.3
244.5
260.8
262.8
290.3

Average 266.15
Slide 12

Forecasting Future Values

Fit a trend model to deseasonalized data
Use the trend model to forecast the trend value
for a given time period
Multiply the forecast trend value by the seasonal
index of that period to get the overall forecast

Slide 13

Forecasts for Next Year

Estimated trend value for Q1 :
282.675 2.542 13 = 249.629
SI for Q1 = 0.7903
Forecast for Q1 the following year :
249.629 0.7903 = 197.282
Similarly, forecast for
Q2 = (282.675 2.542 14) 1.0111 = 249.830
Q3 = (282.675 2.542 15) 1.1129 = 272.154
Q4 = (282.675 2.542 16) 1.0857 = 262.743
Slide 14