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Time Series Analysis: Understanding Seasonality and Cyclicality
SEASONALITY
- Refers to patterns that repeat over a fixed and known period, typically within a year or less.
- Patterns are often linked to natural or cultural events, such as holidays, weather patterns, or annual business cycles.Examples include higher sales of winter coats in winter and increased swimsuit sales in summer.
- Seasonal patterns exhibit regular, predictable fluctuations with consistent shape and amplitude each year.
- Methods like seasonal decomposition or seasonal ARIMA models are effective in capturing and modeling seasonality.
CYCLICALITY
- Involves patterns that repeat over an unknown or irregular period, often lasting longer than a year.
- Cycles can be influenced by economic or business cycles, technological advancements, or long-term trends.
- Unlike seasonality, cyclicality is less predictable and challenging to model due to varying cycle length and timing.
- Stock market cycles (boom and bust) lasting for years or decades exemplify cyclicality.
- Modeling cyclicality requires advanced techniques like spectral analysis or state space models.
DISTINGUISHING FEATURES:
- Seasonality has predictable patterns occurring over a fixed and known period Cyclicality involves irregular patterns with uncertain cycle length and timing.
- Seasonality can be effectively captured using methods like seasonal decomposition or seasonal ARIMA models. Modeling cyclicality requires accounting for variability and irregularity using spectral analysis or state space models.
ADDITIONAL EXAMPLES:
- Sales of holiday decorations peaking during the festive season showcases seasonality. Long-term fluctuations in housing prices due to economic cycles demonstrate cyclicality.
- Weather patterns influencing agricultural crop yields exhibit seasonal effects. Technological advancements driving market trends showcase cyclicality.
