Residual method to find cyclical variation, Financial Management

Residual Method

We know that a time series consisting of annual data for longer periods is depicted by trend lines. This facilitates us to isolate the component of secular trend variation from the series and examine it for cyclical, seasonal and irregular components. In this part, we will look at "Residual Method", by which one can isolate the cyclical variation component. Further, this method can be bifurcated into two measures: Percent of Trend and Relative Cyclical Residual measures. Both these measures are expressed in terms of percentage. We look at each of them.

Percent of Trend Measure

When the ratio of actual values (Y) and the corresponding estimated values (  1855_beta of a share2.png  ) is multiplied by 100, we are expressing the cyclical variation component as a percent of trend. Mathematically, we express it as

         ((Y/  1855_beta of a share2.png  ) x 100)

When percent of trends are calculated and plotted on a graph, we can observe the variations from the trend line. Let us look at an example, which explains this method.

Relative Cyclical Residual Measure

In this measure, we take the ratio of the difference between the Y and the corresponding . .  1855_beta of a share2.png values (that is, Y - 1855_beta of a share2.png ), and the  1855_beta of a share2.png values. To express these values in terms of percentage we multiply them by 100. In other words, the percentage deviation from the trend is found for all the values in the series. Mathematically, this is expressed as:

1637_relative cyclic residual1.png

In the above example, the values of Relative Cyclical Residual are obtained when 100 is subtracted from the values given in column (7). The respective values are shown in column (8). The plot of Relative Cyclical Residual is shown below. A value of -5.81 indicates that the number of cartons of cereal sold by the Departmental Store has shown a decrease of 5.81% from its previous level.

Figure : Relative Cyclical Residual

2119_relative cyclic residual.png

Posted Date: 9/17/2012 3:34:07 AM | Location : United States







Related Discussions:- Residual method to find cyclical variation, Assignment Help, Ask Question on Residual method to find cyclical variation, Get Answer, Expert's Help, Residual method to find cyclical variation Discussions

Write discussion on Residual method to find cyclical variation
Your posts are moderated
Related Questions
Q. Graphic Presentation of Organisation of Finance Function? Graphic Presentation of Organisation of Finance Function: - The following chart describes the organization of the f

Q. Benefits of Interest rate swaps? Interest rate swaps may provide several benefits to companies including: - The ability to get finance at a cheaper cost than would be p

Calculate Current cash debt coverage ratio: Financial statements for Delta Company are presented below:   Delta Company Balance Sheet December 31, 2012

Q. Briefly explain What is TREM Card? 1. As per National and international regulations, the drivers of vehicles carrying hazardous goods should have the documentation outlining

Would there be positive interest rates on bonds in a world with absolutely no risk no default risk, maturity risk, and so on? Why would a, borrower be willing to pay and a lender d

Q. Explain the three kind’s non-financial incentives? Non-Financial incentives: Incentives which cannot be offered in terms of money are known as non-¬financial incentives. Ind

Q.  A sum of $2,500 is deposited in a bank account that pays 5.25% interest compounded weekly. How long will it take for the deposit to double?  How long will it take you to accrue

Outsourcing Outsourcing is referring to purchase of parts from outside suppliers. Outsourcing is the external acquisition of services or components used in the production of go

Towson Enterprises has recognized two mutually exclusive (can’t do both) projects.  The relevant cash flows and timing of those cash flows are shown in the following table.  Suppos

Unity of Command Unity of command is the principle in which each subordinate should be responsible to only one manager.