Question
If a time series exhibits a cyclical pattern that does
not follow a fixed period (e.g., economic cycles), which of the following decomposition methods would be most appropriate?Solution
STL (Seasonal-Trend decomposition using LOESS) is a robust method for decomposing time series data, particularly when the seasonality is not fixed or follows irregular cycles, such as economic cycles. Unlike traditional methods like classical decomposition, which assume a fixed seasonal period, STL uses locally weighted regression (LOESS) to estimate the seasonal and trend components, making it flexible and capable of handling non-constant seasonal patterns. STL can handle both long-term trends and irregular, cyclical components, making it an ideal choice for data with variable seasonality or unpredictable cycles. Why Other Options Are Incorrect: • A: Classical decomposition assumes fixed seasonality and may not be effective for cyclical patterns that do not follow a regular period. • B: X-11 decomposition is a variation of classical decomposition and is also designed for regular seasonality, making it unsuitable for irregular cycles. • D: While Seasonal-Trend decomposition using LOESS (STL) is robust, it is the best option for irregular seasonality, making this method the most appropriate. • E: ARIMA decomposition is designed for models involving autoregressive, differencing, and moving averages but does not explicitly handle irregular seasonal or cyclical patterns.
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