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Basic concepts

Time Series - Basic concepts

In this post, let us explore the basic concepts about time series. We will also learn about resampling techniques, how to check for stationarity and ways to convert non stationary series into stationary series.

What is time series

In time series, data are recorded over time. Time interval may be daily, monthly, yearly etc.

How to import time series data

Refer the post Importing Time Series data into Python.

Handling missing values

Handling missing values post provides information on handling missing values. Depending upon the case, generally it is advisable to fill the missing values with previous value or next value or using interpolation techniques or moving averages or using time series models.

Resampling:

A) Downsampling

In simple terms, it is like aggregating. For example: converting daily data to monthly data, or quarterly data to yearly data etc.

In the following example, I have converted daily data to weekly data.

Original data

In resample option, use rule='W' for weekly frequency. Other commonly used rules are B (Business day), M (Monthly), A or Y (year end frequency). For more rules, you can refer this document.

In the below picture, not how changing the label='left' changes the week in resampled data3. We can aggregate the data using measures such as 'sum', 'mean' etc.

B) Upsampling

Here we increase the frequency in time series data. It is the exact opposite of downsampling. For example resampling the data from weekly to daily data, or converting yearly data to quarterly data. But increasing frequency leads to empty values. Empty values can be handled in the similar way as we handle missing values in time series data.In the following upsampling example, let us convert non continuous data to ‘business day’ frequency and fill the empty values with bfill method.

Original data

Upsampled data with 'bfill' method to handle empty values

Visualizing time series data

To plot:
plt.plot(data)

Stationarity

There are two types of stationarity:
  • Strict stationarity : all time series properties are time invariant.
  • Weak (Wide-sense stationarity): mean, variance and autocorrelation are time invariant.
In simple terms, a time series whose mean and variance do not change over time, is said to be stationary (more about stationarity)

Why we need the series to be stationary

If we want to predict future, then if we fit a good model on stationary data, it will accurately predict the future as its statistical properties do no change over time.

How to test the stationarity

  • Plots- Visualization will give a broad idea about trend, variation in the time series
  • Augmented Dickey–Fuller test
Null Hypothesis: Series has unit root (that means series is non-stationary)
Alternate Hypothesis: Series is stationary.

When the p-value is greater than level of significance(1%, 5% or 10%), then we can conclude that series is non stationary (to remember it easily, we can think of NS-NS, meaning when p-value is not significant, series is non stationary).
 
Using the Augmented Dickey-Fuller unit root test in statsmodels, we can test the stationarity of any time series data. 
adfuller(data[‘seriesname’]) provides the results of ADF test for the series ‘seriesname’.

Augmented Dickey–Fuller test

For this test, I have used the code from this blogpost and slightly modified it.

  • Kwiatkowski-Phillips-Schmidt-Shin Test

In this test, unlike the ADF test, null hypothesis is series is stationary around a level or trend. Let us see how to run:

a) Null hypothesis that time series is level stationary

b) Null hypothesis that time series is trend stationary

Additionally use regression =’ct’ option to test trend stationarity.

KPSS test with Null hypothesis-trend stationarity

Phillips–Perron test can also be used to test stationarity.

How to convert non stationary series to stationary series

Commonly followed strategies are:

  • Log transformation

Log transformation are commonly used in time series data. It is useful when the values are positive and exponentially growing.

  • Differencing

First order differencing is generally sufficient to convert most of the time series data to stationary series.

  • Seasonal differencing

In the following example, let us see how to difference the series (D), then perform seasonal differencing (d).

Now perform seasonal differencing (since this is the monthly data, 12 will be the order of seasonal differencing).

We can use any combinations of these transformations to transform the time series depending upon the situation.

White Noise

White noise is a series whose values are uncorrelated with zero mean and finite variance. We want the error terms of our model to be a white noise process. It is a stationary series.

Random walk

If an observation is dependent only on its previous value(as shown below), then that series is said to follow random walk.

Yt =Yt-1+Et
which is,
Yt -Yt-1 = Et (which means differenced series is white noise)

Another type of random walk model: random walk with drift (α).

Yt = α+Yt-1+Et
Yt -Yt-1 = α+Et (which means differenced series is equal to white noise + α)

One thing to note that while random walk series is non-stationary, not all non-stationary series follow random walk (more on this).

Summary

In this post, we have explored

  • what is time series data
  • resampling (downsampling and upsampling)
  • stationarity-concept and tests
  • differencing
  • white noise
  • random walk model
If you have any questions or suggestions, feel free to share. I will happy to interact.

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