Explanation:
Seasonality in a time series is a regular pattern of changes that repeats over S time periods, where S defines the number of time periods until the pattern repeats again. For quarterly data, S = 4 time periods per year.
To model seasonality in a model that incorporates an intercept, there must be S − 1 dummy variables. With quarterly data, we would include 3 (i.e., S − 1) seasonal dummy variables.
Section: Quantitative Analysis
Chapter: Non-Stationary Time Series
Learning Objective: Explain how to use regression analysis to model seasonality
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Q.78 Julian Nagelsmann works as a market analyst in Air Fresher Inc., a company specializing in the manufacture of room heaters. While modeling the company's sales, he's noticed a quarterly seasonal pattern. Given that his model includes an intercept term, how many dummy variables will he require in order to model the seasonality component?
A
4
B
3
C
2
D
1