# Decomposition of Additive Time Series

A time series is made up of several elements, namely the observed, trend, seasonal and random elements.

Decomposition is the method by which we extract each element from an observed time series.

What do we mean by each of these?

# Elements of a Time Series

• Observed: This is the time series “as is”, i.e. the actual data points that we observe across the original time series.
• Trend: A trend describes the overall direction of a time series. e.g. for this time series, we see that the general trend is upwards over time. Therefore, the trend shows a long-term increase. A trend also represents the portion of a time series that has variations of low frequency.
• Seasonal: The seasonal portion of the time series represents particular time periods where there is a significant deviation in the data. This deviation is usually directly related to the particular time period where the shift occurs. For instance, if one is analysing sales and figures spike up over Christmas time, this is due to a seasonal shift.
• Random: The random element of a time series is one where fluctuations are not very predictable, and are not being influenced by the elements outlined above. Therefore, this component of the time series remains unexplained and is not particularly useful for forecasting purposes.

Using decomposition, it is possible to split the time series into its elements. For instance, suppose that we observe particular peaks and valleys in data at certain intervals. Is this seasonality-induced or simply random? Decomposition allows us to figure this out.

# Decomposition Example

Let’s take a hypothetical 10-year time series dataset with an annual growth of 9 percent and volatility of 15 percent. The dataset is generated by means of Brownian Motion.

1. Firstly, we stack our data in R into periods of 12 months:

```pricetimeseries <- ts(price, frequency=12, start=c(2005,1))

> pricetimeseries
Jan       Feb       Mar       Apr       May       Jun       Jul       Aug       Sep       Oct       Nov       Dec
2005  500.0000  541.2439  526.5013  551.0514  540.5827  514.3329  491.9740  489.4631  488.9738  492.3253  516.7793  521.8121
2006  504.9705  528.3009  568.7668  552.2308  532.3383  532.0111  591.2718  554.6121  555.9807  593.6032  563.9333  577.1098
2007  593.6958  561.9326  591.1153  665.2396  636.7973  613.3456  636.6896  701.8802  754.5975  728.0549  714.7095  694.6709
2008  707.9059  690.9421  722.0142  789.3634  792.3824  802.7935  772.6972  804.9252  857.8302  966.1737  992.8240  990.5000
2009  976.0028  983.2667  972.8880  984.1440 1029.3636 1070.9459 1146.2044 1178.8113 1220.5092 1274.6487 1273.9045 1379.8261
2010 1468.4127 1487.9828 1439.7403 1428.1181 1401.1307 1403.2463 1383.9310 1446.6171 1395.8787 1380.4445 1397.4217 1544.6010
2011 1584.6387 1773.4895 1602.3330 1526.4886 1545.9674 1595.9804 1684.5142 1773.6467 1682.4303 1735.6806 1794.3587 1921.4301
2012 2029.2455 1882.5611 2030.4814 2073.4115 1961.4187 2213.5897 2102.9015 2277.0280 2285.9271 2160.1356 2124.1639 1951.9991
2013 1931.7909 1881.9828 1894.6552 2041.6443 2135.3248 2442.6593 2592.6303 2664.4166 2634.0081 2890.3535 2992.4778 2983.7225
2014 2904.0352 3039.0263 3096.3050 3294.4045 3262.4493 3437.1290 3275.2508 3300.6543 3391.6936 3527.3727 3521.3571 3617.1176
2015 3455.2405 ```

2. We decompose our data in order to estimate the observed, trend, seasonal and random portions of our model:

```library("TTR")

pricetimeseriescomponents <- decompose(pricetimeseries)
pricetimeseriescomponents

\$x
Jan       Feb       Mar       Apr       May       Jun       Jul       Aug       Sep       Oct       Nov       Dec
2005  500.0000  541.2439  526.5013  551.0514  540.5827  514.3329  491.9740  489.4631  488.9738  492.3253  516.7793  521.8121
2006  504.9705  528.3009  568.7668  552.2308  532.3383  532.0111  591.2718  554.6121  555.9807  593.6032  563.9333  577.1098
2007  593.6958  561.9326  591.1153  665.2396  636.7973  613.3456  636.6896  701.8802  754.5975  728.0549  714.7095  694.6709
2008  707.9059  690.9421  722.0142  789.3634  792.3824  802.7935  772.6972  804.9252  857.8302  966.1737  992.8240  990.5000
2009  976.0028  983.2667  972.8880  984.1440 1029.3636 1070.9459 1146.2044 1178.8113 1220.5092 1274.6487 1273.9045 1379.8261
2010 1468.4127 1487.9828 1439.7403 1428.1181 1401.1307 1403.2463 1383.9310 1446.6171 1395.8787 1380.4445 1397.4217 1544.6010
2011 1584.6387 1773.4895 1602.3330 1526.4886 1545.9674 1595.9804 1684.5142 1773.6467 1682.4303 1735.6806 1794.3587 1921.4301
2012 2029.2455 1882.5611 2030.4814 2073.4115 1961.4187 2213.5897 2102.9015 2277.0280 2285.9271 2160.1356 2124.1639 1951.9991
2013 1931.7909 1881.9828 1894.6552 2041.6443 2135.3248 2442.6593 2592.6303 2664.4166 2634.0081 2890.3535 2992.4778 2983.7225
2014 2904.0352 3039.0263 3096.3050 3294.4045 3262.4493 3437.1290 3275.2508 3300.6543 3391.6936 3527.3727 3521.3571 3617.1176
2015 3455.2405

\$seasonal
Jan        Feb        Mar        Apr        May        Jun        Jul        Aug        Sep        Oct        Nov        Dec
2005  -2.509453 -14.100128 -30.685117  -9.647518 -44.039006  18.223937  -3.397367  33.479217   8.322089  22.089082  13.359657   8.904607
2006  -2.509453 -14.100128 -30.685117  -9.647518 -44.039006  18.223937  -3.397367  33.479217   8.322089  22.089082  13.359657   8.904607
2007  -2.509453 -14.100128 -30.685117  -9.647518 -44.039006  18.223937  -3.397367  33.479217   8.322089  22.089082  13.359657   8.904607
2008  -2.509453 -14.100128 -30.685117  -9.647518 -44.039006  18.223937  -3.397367  33.479217   8.322089  22.089082  13.359657   8.904607
2009  -2.509453 -14.100128 -30.685117  -9.647518 -44.039006  18.223937  -3.397367  33.479217   8.322089  22.089082  13.359657   8.904607
2010  -2.509453 -14.100128 -30.685117  -9.647518 -44.039006  18.223937  -3.397367  33.479217   8.322089  22.089082  13.359657   8.904607
2011  -2.509453 -14.100128 -30.685117  -9.647518 -44.039006  18.223937  -3.397367  33.479217   8.322089  22.089082  13.359657   8.904607
2012  -2.509453 -14.100128 -30.685117  -9.647518 -44.039006  18.223937  -3.397367  33.479217   8.322089  22.089082  13.359657   8.904607
2013  -2.509453 -14.100128 -30.685117  -9.647518 -44.039006  18.223937  -3.397367  33.479217   8.322089  22.089082  13.359657   8.904607
2014  -2.509453 -14.100128 -30.685117  -9.647518 -44.039006  18.223937  -3.397367  33.479217   8.322089  22.089082  13.359657   8.904607
2015  -2.509453

\$trend
Jan       Feb       Mar       Apr       May       Jun       Jul       Aug       Sep       Oct       Nov       Dec
2005        NA        NA        NA        NA        NA        NA  514.7937  514.4616  515.6833  517.4935  517.1992  517.5922
2006  522.4662  529.3182  534.8247  541.8366  548.0212  552.2900  558.2910  563.3892  565.7217  571.3616  580.4228  588.1642
2007  593.4455  601.4741  615.8859  629.7638  641.6483  652.8290  662.4862  672.6203  683.4498  694.0758  705.7303  720.1067
2008  733.6673  743.6278  752.2227  766.4457  787.9554  811.8698  835.3667  858.7176  881.3508  899.9198  917.9098  938.9571
2009  965.6929  996.8343 1027.5245 1055.4893 1080.0541 1107.9877 1144.7267 1186.2736 1226.7556 1264.7067 1298.6959 1328.0321
2010 1351.7832 1372.8470 1391.3127 1403.0279 1412.5826 1424.5948 1436.3032 1453.0420 1471.7128 1482.5863 1492.7199 1506.7854
2011 1527.3403 1553.4908 1579.0567 1605.7978 1637.1384 1669.3786 1703.6051 1726.6751 1749.0592 1789.6872 1829.7861 1872.8303
2012 1915.9968 1954.4039 2000.5238 2043.3551 2074.7826 2089.7982 2087.0113 2082.9266 2077.2431 2070.2600 2076.1825 2092.9732
2013 2122.9231 2159.4696 2190.1142 2235.0433 2301.6488 2380.8170 2464.3157 2553.0360 2651.3149 2753.5820 2852.7439 2941.1436
2014 3011.0224 3065.9748 3124.0549 3182.1676 3230.7467 3279.1748 3328.5332        NA        NA        NA        NA        NA
2015        NA

\$random
Jan          Feb          Mar          Apr          May          Jun          Jul          Aug          Sep          Oct          Nov
2005           NA           NA           NA           NA           NA           NA  -19.4223348  -58.4776817  -35.0316644  -47.2573529  -13.7795456
2006  -14.9862776   13.0828396   64.6272826   20.0417748   28.3561046  -38.5028903   36.3781936  -42.2563457  -18.0631390    0.1525175  -29.8491296
2007    2.7597374  -25.4413011    5.9145072   45.1233383   39.1879973  -57.7073699  -22.3992308   -4.2193575   62.8256115   11.8900900   -4.3804144
2008  -23.2519989  -38.5856602    0.4765708   32.5651923   48.4659205  -27.3002184  -59.2720868  -87.2715770  -31.8427716   44.1648885   61.5544873
2009   12.8193068    0.5325453  -23.9513855  -61.6977621   -6.6514911  -55.2656870    4.8751444  -40.9415341  -14.5684656  -12.1471391  -38.1510732
2010  119.1389086  129.2358641   79.1127758   34.7377275   32.5871362  -39.5724485  -48.9748086  -39.9041017  -84.1562050 -124.2308824 -108.6579257
2011   59.8078778  234.0988021   53.9614619  -69.6617112  -47.1319471  -91.6221767  -15.6935569   13.4923715  -74.9510234  -76.0957148  -48.7870755
2012  115.7581424  -57.7426351   60.6427592   39.7038825  -69.3249794  105.5675353   19.2875814  160.6221901  200.3619256   67.7865257   34.6217240
2013 -188.6226873 -263.3867536 -264.7738742 -183.7515092 -122.2849823   43.6183421  131.7120193   77.9013658  -25.6289384  114.6823972  126.3742824
2014 -104.4776796  -12.8483715    2.9352320  121.8843968   75.7415710  139.7302430  -49.8849986           NA           NA           NA           NA
2015           NA
Dec
2005   -4.6847673
2006  -19.9589725
2007  -34.3404013
2008   42.6382806
2009   42.8893841
2010   28.9110049
2011   39.6951704
2012 -149.8786775
2013   33.6743083
2014           NA
2015

\$figure
[1]  -2.509453 -14.100128 -30.685117  -9.647518 -44.039006  18.223937  -3.397367  33.479217   8.322089  22.089082  13.359657   8.904607

\$type

attr(,"class")
[1] "decomposed.ts"

plot(pricetimeseriescomponents)```

# Observations

• Trend: The graph in our decomposition series shows an upward trend, and we can see that we have the short-term peaks and valleys smoothed out. For instance, moving averages are an example of a trend, where short-term fluctuations are “averaged out” over a period of time.
• Seasonal: From looking at the data, we see that there are particularly large bottoms and tops in May and August. This implies that we are observing a particularly sharp seasonal trend around those months.
• Random: As mentioned, the random element of the data is that which is free of any trend or seasonality. Therefore, the values we observe under the random heading are just that – random. They cannot particularly be used for forecasting purposes.