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
To compute the total returns we need the investment horizon, reinvestment rate and the price of the bond at the end of the investment horizon. Steps involved in computi

Harley Davidson purchases components from three suppliers. Components purchased from Supplier A are priced at $ 5 each and used at the rate of 240,000 units per year. Components pu

Interest Rates The payment borrowers make for the use of the funds that they borrow and the payment that lenders demand for the use of the funds they lend (termed interest ) w

What is an LBO?  What are the risks for the equity investors and what are the potential rewards? A term leveraged buyout is a purchase of a publicly owned corporation through a s

Modern / Discounting Cash Flow Techniques : These methods generally are of more use to businesses in their investment decisions. They take into account the time value of money and

What is the difference between the Euronote market, the Euro-medium-term-note market, and the Eurocommercial paper market? Answer:  Euronotes are short-term notes guarantees by

Typically, there exist two types of bids in the treasury auction process. They are: Competitive bid and non-competitive bid. A non-competitiv

Examine the Examples of political risk within countries Outbreak of national war, unrest, civil war or riot. Nationalisation of industriesfor example confiscation of as

Enron did not manages its trade account receivable in significant manner that made huge financial loss for the organizations. Hence, the management faced biggest fraud due to the f

Q. Describes the Concept of Time value of Money? 'Time value of money' signifies that the value of a unit of money is different in different time periods. The worth of a sum of