What Is a Time Series?
A time series is a sequence of numerical data points in successive order. In investing, a time series tracks the movement of the chosen data points, such as a security’s price, over a specified period of time with data points recorded at regular intervals. There is no minimum or maximum amount of time that must be included, allowing the data to be gathered in a way that provides the information being sought by the investor or analyst examining the activity.
[Important: Time series analysis can be useful to see how a given asset, security, or economic variable changes over time.]
Understanding Time Series
A time series can be taken on any variable that changes over time. In investing, it is common to use a time series to track the price of a security over time. This can be tracked over the short term, such as the price of a security on the hour over the course of a business day, or the long term, such as the price of a security at close on the last day of every month over the course of five years.
Time Series Analysis
Time series analysis can be useful to see how a given asset, security, or economic variable changes over time. It can also be used to examine how the changes associated with the chosen data point compare to shifts in other variables over the same time period.
For example, suppose you wanted to analyze a time series of daily closing stock prices for a given stock over a period of one year. You would obtain a list of all the closing prices for the stock from each day for the past year and list them in chronological order. This would be a one-year daily closing price time series for the stock.
Delving a bit deeper, you might be interested to know whether the stock's time series shows any seasonality to determine if it goes through peaks and troughs at regular times each year. Analysis in this area would require taking the observed prices and correlating them to a chosen season. This can include traditional calendar seasons, such as summer and winter, or retail seasons, such as holiday seasons.
Alternatively, you can record a stock's share price changes as it relates to an economic variable, such as the unemployment rate. By correlating the data points with information relating to the selected economic variable, you can observe patterns in situations exhibiting dependency between the data points and the chosen variable.
Time Series Forecasting
Time series forecasting uses information regarding historical values and associated patterns to predict future activity. Most often, this relates to trend analysis, cyclical fluctuation analysis, and issues of seasonality. As with all forecasting methods, success is not guaranteed.