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Time Series and Index

The document discusses time series analysis and index numbers. It begins by defining a time series as a set of observations ordered over time, such as unemployment rates. It describes plotting and decomposing time series into trend, seasonal, and irregular components using additive and multiplicative models. The document then discusses using regression, moving averages, and other methods to estimate the trend. Finally, it defines index numbers as indicators of change over time for variables or baskets of goods. It discusses simple and aggregate indices, and weighted indices like Laspeyres and Paasche that account for consumption patterns.

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DraganMilenković
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58 views27 pages

Time Series and Index

The document discusses time series analysis and index numbers. It begins by defining a time series as a set of observations ordered over time, such as unemployment rates. It describes plotting and decomposing time series into trend, seasonal, and irregular components using additive and multiplicative models. The document then discusses using regression, moving averages, and other methods to estimate the trend. Finally, it defines index numbers as indicators of change over time for variables or baskets of goods. It discusses simple and aggregate indices, and weighted indices like Laspeyres and Paasche that account for consumption patterns.

Uploaded by

DraganMilenković
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Statistics

Class 8: Time Series and Index


Numbers
Statistics

Motivation

Thus far, we have studied the characteristics of a sample of data.


However, in many situations, these characteristics can change over
time:

Unemployment, inflation, the price of beer, consumption of


ice-creams

We want to study the changes in the value of a variable over time.

Recommended reading:
• For Spanish readers, the chapter on Laspeyres and Paasche in
Dados y Datos is quite nice.
Statistics

Index

1. Time series:
Plots
Components and Decomposition

2. Index numbers:
Simple indices
Simple aggregate indices
Weighted aggregate indices: Laspeyres, Paasche, Edgeworth, Fisher
The Retail Price Index
Statistics

Period Yt
Time Series
mar-57 4996
jun-57 5342
¿What is a time series?
sep-57 5401
dic-57 5698
It is a set of measures, ordered according to a time
mar-58 5120
index, of a variable of interest.
jun-58 5409
sep-58 5511
Here we show a snippet of a time series of consumer
dic-58 5789
expenditure in the UK.
mar-59 5224
jun-59 5628
sep-59 5690
dic-59 6029
mar-60 5463
jun-60 5863
sep-60 5916
dic-60 6221
mar-61 5661
jun-61 6016
Statistics

The time series graph

What are the characteristics of this series?


Statistics

Characteristics of a time series

Trend effect: the tendency of a time series to increase or decrease


over time.

• We consume more beer now than 20 years ago.


• Since the introduction of the points system, the number of fatal
accidents has gone down.

Seasonal effects: fluctuations that occur regularly (each week, month


or season for example).

• Beer drinking goes up in summer or at weekends.


• There are more traffic accidents on Friday afternoons or on
“puentes, operación salida, …”
Statistics

Time series decomposition

We typically want to estimate the seasonal and trend components


individually.

Two models are commonly used:

Additive model: yt = Tt + St + It

Multiplicative model: yt = Tt St It

• Tt is the trend component


• St is the seasonal component
• It is the irregular or error component

How do we decide if a series is additive or multiplicative?


Statistics

Choosing the time series model

In a multiplicative model, for a time


series with an increasing trend, the
seasonal variation increases over
time.

In an additive model, we would


expect seasonal variation to be
more constant.

Which model do you think would best represent


this data?
Statistics

Estimating the trend: regression

It looks like a line would go well


through this series:

We could assume a regression


model:
Tt = α + βt
Statistics

Estimating the trend

Most time series don’t increase


so regularly:

To remove the seasonal effects


and leave the trend, we could
use a moving average.

Weekly series of President Obama’s approval


rating.
Statistics

Estimating the trend: moving averages

Our data are quarterly.

We might expect the same


quarters to behave the same
way (e.g. higher in summer,
lower in winter).

At time t, take an average of 4


consecutive time periods:

Tt = ¼ (yt-2+ yt-1+ yt+ yt+1)

(This doesn’t quite work as it is should We can see that the seasonal variation has
be centred at t-½. The practical shows been removed.
how to get round this.)
Statistics

Detrending the series

Under a multiplicative model:

yt = Tt St It

so

St It = yt /Tt

We are left with the seasonal variation and


the error.
Statistics

Estimating the seasonal component

To estimate the seasonal


component, we could simply
asume this is the same in every
season (all winters the same,
all summers the same, …).

We can estimate the effect of


being in summer as the
average of all summers.
Statistics

The irregular component

After removing the seasonal


effect, we are left with the
irregular component.

This should look “random” or


stationary.

A stationary time series is a


series without obvious trend or
seasonal components.
Statistics

Index Numbers

An index number is an indicator designed to describe the changes in a


variable over time, that is its evolution over a given time period.

• the evolution in the quantity of a determined product or service or of a


group of products or services (e.g. quantities produced or consumed).
• the changes in the price of a product or service or a group of such.
• the changes in the value of a product or service or a basket of such.
Statistics

Simple indices

Trump’s approval rating has


varied considerably since he
became President.

How much more or less


popular is he now compared
to when he started?
Statistics

Simple indices

Date % Approving Index


45
23/01/2017 100.00% x 100%
45 45
30/01/2017 43 95.56%
06/02/2017 41 91.11%
13/02/2017 40 88.89%
We can calculate Trump’s
20/02/2017 42 93.33% 43
approval relative to 27/02/2017 43 95.56% x 100%
45
23/01/2017. 06/03/2017 42 93.33%
13/03/2017 40 88.89%
20/03/2017 39 86.67%
27/03/2017 38 84.44%
03/04/2017 40 88.89%
10/04/2017 40 88.89%
Trump’s approval is only 17/04/2017 41 91.11%
93.33% of what it was when 24/04/2017 41 91.11% 42
he became President. 01/05/2017 42 93.33% x 100%
45
Statistics

Simple indices

Only once has Trump been


as popular as when he
became President!
Statistics

Aggregate indices

In many occasions, we are not interested in comparing the prices


(quantities or values) of individual goods, but in comparing these for
groups of products.

Article Prices Simple indices

Year 2017 2018 2017 2018


Milk 10 12 100 120
Cheese 15 20 100 133,3
Butter 80 80 100 100
Statistics

Simple aggregate indices

The most basic index is simply the arithmetic mean of all the indices

I2018 = (120+133,3+100)/3 = 117,76

Alternatives are geometric or harmonic means or aggregate indices.

What is the problem with this type of index?


Statistics

They don’t take the consumption of each product into account.

Article Prices Units consumed

Year 2017 2018 2017 2018


Milk 10 12 50 40
Cheese 15 20 20 10
Butter 80 80 1 1
Statistics

Weighted aggregate indices I: Laspeyres index

We suppose that the consumption in year t is the same as that in the


base year.

old quantities * new prices


old quantities * old prices
Statistics

Weighted aggregate indices II: Paasche’s index

We suppose that consumption in the base year is the same as in year t.

new quantities * new prices


new quantities * old prices
Statistics

Weighted indices III: Fisher and Edgeworth

Fisher’s index is the geometric mean of


Laspeyres and Paasche

The Edgeworth index uses


the sum of the quantities
consumed in the base year
and in year t as the weight.
Statistics

The Retail or Consumer Price index (RPI)

Describes the evolution of prices of consumption over time.

Every 10 years, a survey (EPF) is taken to analyze the spending habits


of a large number of families. The consumption of various products
which form the typical shopping basket is considered.

In the following years a Laspeyres index based on the consumption in


the EPF year is calculated.

In the majority of the developed world, the RPI increases over time.
Statistics

Example

The diagram shows a monthly time


series of airline passengers for a
particular company in the 1950’s. The
characteristics of this series are.

a) It is stationary.
b) It shows a seasonal effect but no
trend.
c) It shows seasonal and trend effects.
d) It shows a trend but no seasonality.
Statistics

Example

The table shows the prices and quantities of burgers and milkshake bought,
on average, per day in a Madrid bar in the years 2005 to 2007. Taking the
base year as 2005:

a) The Laspeyres index for 2005 is 150%.


b) The Laspeyres index for 2006 is 150%.
c) The Laspeyres index for 2007 is 150%.
d) None of the above.

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