ASSOCIATIVE

FORECASTING
TECHNIQUES
Brandon Barrera Macapelit
 
 Associative techniques rely on identification of
related variables that can be used to predict
value of the variable of interest.


 The essence of associative techniques is the

development of an equation that summarizes
the effects of predictor variables.

 The primary method of analysis is known as
regression.

 Two main purposes of regression


 To measure relationship between two or more

variables.


 To predict or estimate values of dependent

variable(Y) from known values of independent
variable(X).
 Simple Linear Regression
 The simplest and most widely used form of regression
involves a linear relationship between two variables.

 The term “simple” is used since we consider only one
independent variable.

 Its objective is to obtain an equation of a linear line ,called
the regression line, that will allow us to predict values of
one dependent variable(Y) from known values of one or
more independent variables(X).

  The estimated regression line is defined by the
equation
 yс= a + bx
 where
 Ŷ = a + bX
Yc= predicted(dependent) variable
 X = predictor(independent) variable
 b = slope of the line
 a = Value of Yc when x=0; the height
 of the line at the y-intercept
 The coefficients a and b of the line are based on the
following two equations:


 b=n(Σxy) – (Σx)(Σy)

n(Σx2)- (Σx)2


 a= Σy- bΣx
 n


 where n= # of paired observations




Example:
Units of sales, x. Profits, y. (in millions)
Healthy Hamburgers has a chain of 12
(in millions)

stores in northern Illinois. Sales figures

7 .15
and profits for the stores are given in
2 .1
the following table. Obtain a regression
6 .13
line equation for the data and predict
4 .15
profit for a store assuming sales of
14 .25
10 million.


15 .27

16 .24

12 .2
14 .27
20 .44
15 .34
7 .17
 Units of sales, x. Profits, y. (in millions)
(in millions)

7 .15
2 .1
Profits

6 .13
4 .15
14 .25
15 .27
16 .24
Units sold 12 .2
14 .27
a= 0.0506 y c = 0.0506 + 0.0159x 20 .44
b=
0.0159 At sales of 10 million, 15 .34
yc = 0.0506 + 0.0159(10) 7 .17
yc = 0.2099031  Forecast
 


 One application of regression in forecasting relates to

the use of indicators, these are uncontrollable
variables that tend to lead or precede changes in a
variable of interest.


 Other potential indicators are population shifts, local

political climates and activities of other firms.

 Correlation measures the strength and direction
of relationship between variables.

 Correlation can range from -1.00 to +1.00.

 +1.00 indicates that changes in 1 variable are
always matched by changes in the other; -1.00
indicates that increases in one variable are
matched by decreases in the other.

 A correlation close to 0 indicates little linear
relationship.


 The correlation between the two variables can be

computed using the equation



 r= n(∑xy)- (∑x)(∑y)
 √n(∑x2)- (∑x)2 √n(∑y2)-(∑y)2


 The square of correlation,r2, provides measure of
the percentage of variability in the values of y
that is “explained” by the independent variable.

 A high value of r2, .80 or more, would indicate
that the independent variable is a good
predictor of values of the dependent variable. A
low value, .25 or less, would indicate a poor
predictor, and a value between .25 and .80
would indicate a moderate predictor.

 Example:
 Sales of new houses and three-month lagged
unemployment are shown in the following table.
Determine if unemployment levels can be used to
predict demand for new houses and, if so, derive a
predictive equation.


Units
 sold 20 41 17 35 25 31 38 50 15 19 14

Unemployment % 7.2 4.0 7.3 5.5 6.8 6.0 5.4 3.6 8.4 7.0 9.0
 1. Plot the data to see if a linear model seems reasonable.

Units sold

Level of unemployment (%)

In t his case, a linear m odel seem s appropriat e for t he

range of t he dat a.

Units sold 20 41 17 35 25 31 38 50 15 19 14

Unemployment % 7.2 4.0 7.3 5.5 6.8 6.0 5.4 3.6 8.4 7.0 9.0


2. Check the correlation to confirm that it is not close to zero and



then obtain the regression equation:



r = -.966
r2= .933156 or 93%

This is fairly high negative correlation. The regression equation is



a= 71.85
yc= a + bx


b= -6.91

yc= 71.85 + (-6.91)x

yc= 71,85 – 6.91x

Problem:
 x y
The following data were collected during 15 74
a study of consumer buying patterns.
25 80

40 84
 a. Plot the data. 32 81
b. What percentage of the variation
51 96
 is explained by x? 47 95
c. Obtain a linear regression line
30 83
 for the data.
d. Use the equation obtained in c to
18 78
 predict the expected value of
14 70
 y if x=41. 15 72

22 85
24 88

33 90



 a. Plot the data.

x y

15 74

25 80
40 84

32 81
 51 96
 47 95
 b. What percentage of the variation 30 83
 is explained by x? 18 78

r2=( .8691)2=.7553 14 70
c. Obtain a linear regression line 15 72
 for the data. 22 85
 a= 66.33 b= 0.5838 24 88
 d. Use the equationy c =obtained
66.33 + in c to
0.5838x 33 90
 predict the expected value of
 y if x= 41.
 y c = 66.33 + 0.5838(41)
y c = 90.27