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Time Series
Models
Quantitative Forecasting
Methods
Quantitative
Forecasting
Trend
Time Series Components
Trend Cyclical
Time Series Components
Trend Cyclical
Seasonal
Time Series Components
Trend Cyclical
Seasonal Irregular
Trend Component
• Persistent, overall upward or downward
pattern
• Due to population, technology etc.
• Several years duration
Response
Time
Cyclical Component
• Repeating up & down movements
• Due to interactions of factors influencing
economy
• Usually 2-10 years duration
Cycle
Response
Time
Seasonal Component
• Regular pattern of up & down fluctuations
• Due to weather, customs etc.
• Occurs within one year
Summer
Response
© 1984-1994 T/Maker Co.
Mo., Qtr.
Seasonal Component
• Upward or Downward Swings
• Regular Patterns
• Observed Within One Year
Sales
events
– Union strike
– War
• Short duration &
nonrepeating
Random or Irregular
Component
• Erratic, Nonsystematic, Random,
‘Residual’ Fluctuations
• Due to Random Variations of
– Nature
– Accidents
Trend?
Time Series Forecasting
Time
Series
Smoothing No
Methods Trend?
Time Series Forecasting
Time
Series
Moving Exponential
Average Smoothing
Time Series Forecasting
Time
Series
Moving Exponential
Average Smoothing
Auto-
Linear Quadratic Exponential Regressive
Time Series Analysis
Plotting Time Series Data
Intra-Campus Bus Passengers
(X 1000)
12
10
Number of Passengers
6
Month/Year
Moving Exponential
Average Smoothing
Auto-
Linear Quadratic Exponential Regressive
Moving Average Method
• Series of arithmetic means
• Used only for smoothing
– Provides overall impression of data over time
Moving Average Method
• Series of arithmetic means
• Used only for smoothing
– Provides overall impression of data over time
Moving Exponential
Average Smoothing
Auto-
Linear Quadratic Exponential Regressive
Exponential Smoothing
Method
• Form of weighted moving average
– Weights decline exponentially
– Most recent data weighted most
• Requires smoothing constant (W)
– Ranges from 0 to 1
– Subjectively chosen
• Involves little record keeping of past data
Exponential Smoothing
[An Example]
You’re organizing a Kwanza meeting. You
want to forecast attendance for 1998 using
exponential smoothing
( = .20). Past attendance (00) is:
1995 4
1996 6
1997 5
1998 3
1999 7 © 1995 Corel Corp.
Exponential Smoothing
Ei = W·Yi + (1 - W)·Ei-1
Smoothed Value, Ei Forecast
Time Yi ^
(W = .2) Yi + 1
1995 4 4.0 NA
1996 6 (.2)(6) + (1-.2)(4.0) = 4.4 4.0
1997 5 (.2)(5) + (1-.2)(4.4) = 4.5 4.4
1998 3 (.2)(3) + (1-.2)(4.5) = 4.2 4.5
1999 7 (.2)(7) + (1-.2)(4.2) = 4.8 4.2
2000 NA NA 4.8
Exponential Smoothing
[Graph]
Attendance
Actual
8
6
4
2
0
93 96 97 98 99
Year
Forecast Effect of
Smoothing Coefficient (W)
^
Yi+1 = W·Yi + W·(1-W)·Yi-1 + W·(1-W)2·Yi-2 +...
Weight
2 Periods 3 Periods
W is... Prior Period Ago Ago
2
W W(1-W) W(1-W)
0.10 10% 9% 8.1%
0.90 90% 9% 0.9%
Linear Time-Series
Forecasting Model
Time Series Forecasting
Time
Series
Moving Exponential
Average Smoothing
Auto-
Linear Quadratic Exponential Regressive
Linear Time-Series
Forecasting Model
• Used for forecasting trend
• Relationship between response variable Y &
time X is a linear function
• Coded X values used often
– Year X: 1995 1996 1997 1998 1999
– Coded year: 0 1 2 3 4
– Sales Y: 78.7 63.5 89.7 93.2 92.1
Linear Time-Series Model
Yi b0 b1X 1i
Y b1 > 0
b1 < 0
Time, X1
Linear Time-Series Model
[An Example]
You’re a marketing analyst for Hasbro Toys. Using
coded years, you find Yi = .6 + .7X^i.
1995 1
1996 1
1997 2
1998 2
1999 4
Forecast 2000 sales.
Linear Time-Series [Example]
Year Coded Year Sales (Units)
1995 0 1
1996 1 1
1997 2 2
1998 3 2
1999 4 4
2000 5 ?
^
2000 forecast sales: Yi = .6 + .7·(5) = 4.1
The equation would be different if ‘Year’ used.
The Linear Trend Model
Year Coded Sales Ŷ i b0 b1 X i 2 .143 .743 X i
94 0 2
8
95 1 5 7
96 2 2 6
97 3 2 5
98 4 7 4
Projected to
99 5 6 3 year 2000
2
Excel Output
C o efficien ts 1
I n te r c e p t 2.14285714
0
X V a ria b le 1 0 .7 4 2 8 5 7 1 4 1993 1994 1995 1996 1997 1998 1999 2000
Time Series Plot
Surgery Data
(Time Sequence Plot)
(X 1000)
20
19
18
Number of Surgeries
17
16
Month/Year
193
191
189
Number of Surgeries
187
185
183
Month/Year
100.5
100.3
Monthly Index
100.1
99.9
99.7
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Month
19.5
19.2
18.9
Number of Surgeries
18.6
18.3
18
Month/Year
Moving Exponential
Average Smoothing
Auto-
Linear Quadratic Exponential Regressive
Quadratic Time-Series
Forecasting Model
• Used for forecasting trend
• Relationship between response variable Y &
time X is a quadratic function
• Coded years used
Quadratic Time-Series
Forecasting Model
• Used for forecasting trend
• Relationship between response variable Y &
time X is a quadratic function
• Coded years used
• Quadratic model
Yi b0 b1X 1i b11X 1i
2
Quadratic Time-Series
Model Relationships
Y b11 > 0 Y b11 > 0
Year, X 1 Year, X 1
Year, X 1 Year, X 1
Quadratic Trend Model
Year Coded Sales Ŷ i b 0 b 1 X i b 2 X i
2
94 0 2
Coefficients
95 1 5 I n te rc e p t 2.85714286
96 2 2 X V a ri a b l e 1 -0 . 3 2 8 5 7 1 4
X V a ri a b l e 2 0.21428571
97 3 2
Excel Output
98 4 7
99 5 6 Ŷ i 2 . 857 0 . 33 X i . 214 X i
2
Exponential Time-Series
Model
Time Series Forecasting
Time
Series
Moving Exponential
Average Smoothing
Exponential Auto-
Linear Quadratic Regressive
Exponential Time-Series
Forecasting Model
• Used for forecasting trend
• Relationship is an exponential function
• Series increases (decreases) at increasing
(decreasing) rate
Exponential Time-Series
Forecasting Model
• Used for forecasting trend
• Relationship is an exponential function
• Series increases (decreases) at increasing
(decreasing) rate
Exponential Time-Series
Model Relationships
Y b1 > 1
0 < b1 < 1
Year, X 1
Exponential Weight
[Example Graph]
Sales
8
Data
6
2 Smoothed
0
94 95 96 97 98 99 Year
Exponential Trend Model
Ŷ i b 0 b 1 or log Ŷ i log b 0 X 1 log b 1
X i
Moving Exponential
Average Smoothing
Auto-
Linear Quadratic Exponential Regressive
Autoregressive Modeling
• Used for forecasting trend
• Like regression model
– Independent variables are lagged response
variables Yi-1, Yi-2, Yi-3 etc.
• Assumes data are correlated with past data
values
– 1st Order: Correlated with prior period
• Estimate with ordinary least squares
Time Series Data Plot
Intra-Campus Bus Passengers
(X 1000)
12
10
Number of Passengers
6
Month/Year
0.5
2 0
-0.5
-1
0 5 10 15 20 25
Lag
Autoregressive Model
[An Example]
The Office Concept Corp. has acquired a number of office
units (in thousands of square feet) over the last 8 years.
Develop the 2nd order Autoregressive models.
Year Units
92 4
93 3
94 2
95 3
96 2
97 2
98 4
99 6
Autoregressive Model
[Example Solution]
•Develop the 2nd order Year Yi Yi-1 Yi-2
table 92 4 --- ---
93 3 4 ---
•Use Excel to run a
94 2 3 4
regression model 95 3 2 3
Excel Output 96 2 3 2
Coefficients 97 2 2 3
I n te rc e p t 3.5 98 4 2 2
X V a ri a b l e 1 0.8125 99 6 4 2
X V a ri a b l e 2 -0 . 9 3 7 5
Y i 3 .5 .8125 Y i 1 .9375 Y i 2
Evaluating Forecasts
Quantitative
Forecasting Steps
• Select several forecasting methods
• ‘Forecast’ the past
• Evaluate forecasts
• Select best method
• Forecast the future
• Monitor continuously forecast accuracy
Forecasting Guidelines
• No pattern or direction in forecast error
– ei = (Actual Yi - Forecast Yi)
– Seen in plots of errors over time
• Smallest forecast error
– Measured by mean absolute deviation
• Simplest model
– Called principle of parsimony
Pattern of Forecast Error
Trend Not Fully
Accounted for Desired Pattern
Error Error
0 0
0 0
T T
Random errors Cyclical effects not accounted for
e e
0 0
T T
Trend not accounted for Seasonal effects not accounted for
Principal of Parsimony
• Suppose two or more models provide good
fit for data
• Select the Simplest Model
– Simplest model types:
• least-squares linear
• least-square quadratic
• 1st order autoregressive
– More complex types:
• 2nd and 3rd order autoregressive
• least-squares exponential
Summary
• Described what forecasting is
• Explained time series & its components
• Smoothed a data series
– Moving average
– Exponential smoothing
• Forecasted using trend models
You and StatGraphics
• Specification
[Know assumptions
underlying various
models.]
• Estimation
[Know mechanics of
StatGraphics Plus Win].
• Diagnostic checking
Questions?
Source of Elaborate Slides