Long Assignment-I

Model-III Ratio Seasonality No Trend Anurag Singh

Nine Common Trends in Economic time Series can be Forecast by using Exponential Smoothing Methods

Two-Parameter (Holt) Exponential Smoothing

Simple Exponential smoothing is not responsible for forecasting data that exhibit extended trends, in two parameter (Holt) exponential smoothing, the data are assumed to consist of fluctuations about a level that is changing with some constant linear trend. Two parameter exponential smoothing is often called the Holt method, after its originator C.C. Holt. Two parameter exponential smoothing is appropriate for forecasting sales in established market with stable growth, it is inappropriate in either stable or rapidly growing markets. Holts exponential smoothing model uses a smoothed estimate of the trend component as well as the level component to produce forecast. In the two parameter exponential smoothing forecast equation, the current smoothed level is added to a linear trend to forecast future values. The updated value of the smoothed level is computed as the weighted average of the new data and the best estimate of the new level based on old data. The Holt combines old and new estimates of the one-period change of the smoothed level, thus defining the current level or local trend.

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Long Assignment-I
Model-III Ratio Seasonality No Trend Anurag Singh

Exponential smoothing method of forecasting with ratio seasonality

Seasonal Component

Seasonal component accounts for regular patterns of variability within certain time periods. Variability does not always correspond with the seasons of the year it can be within week or within day Seasonal behavior.

It is a model with only Ratio Seasonality and No Trend. Seasonal index is constructed by taking the actual demand and divide each monthly demand by the annual average, by this we get a set of seasonal indices. Seasonal index are reflective only of that years experience. If the seasonal cycle repeated itself consistently each year than using a 1981 indices each year would be appropriate. Ex. Average demand during 1981 was 24.07, so the index of January would be 19.36/24.07=0.804; for February, it would be 25.45/24.07=1.057. S. No. Jan 1981 Feb Mar Apr May June July Aug Sep Oct Nov Dec Jan 1982 Feb Mar Apr May June July Actual (Dt) 19.36 25.45 19.73 21.48 20.77 25.42 23.79 28.35 26.80 25.32 25.22 27.14 32.52 31.33 25.32 27.53 26.38 23.72 29.14 Demand St It 0.804 1.057 0.819 0.892 0.863 1.056 0.988 1.178 1.113 1.052 1.048 1.128 Ft,1

30.0000

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Long Assignment-I
Model-III Ratio Seasonality No Trend Anurag Singh

These indices are for 1981, and are used only to initialize the process. Now, from the given indices, we can find actual demand figures by dividing them b the previous years index for that period, It-L (where L is the no. of periods in one cycle. 12 if the data given are by month, 4 if the data given are by quarter.) Therefore, if actual demand for February 1982 is Dt=31.33, we divide it by the index for February of the previous year 1981, It-12=1.057 to obtain 31.33/1.057=29.64. The effect of this process is to deseasonalize by decreasing adjusted demand during high-demand periods and increasing it during low demand periods. The deseasonalized smoothed average St is then, Base Seasonality ( ( ) ) ( ( ) ) 0< <1 0< <1 (1) (2)

Where, is smoothing constant for seasonal indices. The more recent data are weighted more heavily, depending on the value of smoothed constant , so always consider most recent data. Forecast made in tth period for 1 period ahead of it Therefore:S. No. Jan 1981 Feb Mar Apr May June July Aug Sep Oct Nov Dec Jan 1982 Actual (Dt) 19.36 25.45 19.73 21.48 20.77 25.42 23.79 28.35 26.80 25.32 25.22 27.14 32.52 Demand St It 0.804 1.057 0.819 0.892 0.863 1.056 0.988 1.178 1.113 1.052 1.048 1.128 0.877 Ft,1 Ft,1=Ft+1=StIt+1-L (3)

30.0000 31.0448

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Long Assignment-I
Model-III Ratio Seasonality No Trend Anurag Singh

Feb Mar Apr May June July

31.33 25.32 27.53 26.38 23.72 29.14

30.9043 30.9055 30.9013 30.8679 30.0273

1.044 0.819 0.892 0.860 0.976

32.81 25.31 27.57 26.67 32.60 29.67

Forecasting accuracy is may not be good with seasonal data because: This model does not account for the trend, which is a component of data. An entire year data is consumed in order to initialize the seasonal indices. Seasonal cycles in the data may not be stable from year to year.

References
Class room notes. Modern Production Management Buffa & Sarin Fundamentals of Managerial Economics by Mark Hirschey. Smoothing Methods Prof. Dr. W. toporowski.

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