Chapter 3 Time series decomposition

Time series data can exhibit a variety of patterns, and it is often helpful to split a time series into several components, each representing an underlying pattern category.

In Section 2.3 we discussed three types of time series patterns: trend, seasonality and cycles. When we decompose a time series into components, we usually combine the trend and cycle into a single trend-cycle component (often just called the trend for simplicity). Thus we think of a time series as comprising three components: a trend-cycle component, a seasonal component, and a remainder component (containing anything else in the time series).

In this chapter, we consider the most common methods for extracting these components from a time series. Often this is done to help improve understanding of the time series, but it can also be used to improve forecast accuracy.

When decomposing a time series, it is sometimes helpful to first transform or adjust the series in order to make the decomposition (and later analysis) as simple as possible. So we will begin by discussing transformations and adjustments.