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
Project Plan for my new business venture is attached) 1.     Your task is to take a look at every of the operational areas of the intended business, and verify  what financial i

1.  Find out the present value of Rs. 10,000 to be required after 4 years if the interest rate is 6%. 2.  A Firm can invest Rs. 10,000 in a project with a life of three years.

What makes the APV capital budgeting framework helpful for analyzing foreign capital expenditures? The APV framework is a value- additivity method. As international projects fr

For this assessment, you are required to choose one workplace hazard or risk to safety in the financial services industry that interests you. Prepare a report on the area you have

We have seen the valuation of bonds with embedded option using binomial model. This method can be used when cash flows do not depend on how interest rates evolve.

Add or Drop Analysis Lakespring Retirement Village is home to senior citizens who are fairly independent but need assistance with basic health care and occasional meals. Jill Thomp

Q. Define Implicit cost and explicit costs? Implicit cost and explicit costs: the implicit cost is the rate of return associated with the best invests opportunity for the firm

how do we compute for benefits can derrive out of using lockbox system?

The purchase price is expected to be in the region of £30m - £40m now (year 0 ?? 2003) and further cash flow effects might include: ?? Annual cash inflows from New You ?? in a rang

You are currently employed by DPT Holdings Ltd (DPT) one of the world's largest MNEs based in the United Kingdom. DPT is looking to enter into a new phase of global expansion activ