The Holt-Winters Forecasting Procedure

Author(s): C. Chatfield
Source: Journal of the Royal Statistical Society. Series C (Applied Statistics), Vol. 27, No. 3
(1978), pp. 264-279
Published by: Wiley for the Royal Statistical Society
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Appl.Statist.(1978),
27, No. 3, p. 264-279

The Holt-Winters
Forecasting
Procedure
By C. CHATFIELD

University
ofBath,Britain
[Received
July1977.Finalrevision
May1978]
SUMMARY
The Holt-Winters forecasting procedureis a simplewidelyused projectionmethod
whichcan cope withtrendand seasonalvariation.However,empiricalstudieshave
tendedto showthatthemethodis notas accurateon averageas themorecomplicated
Box-Jenkins procedure.Thispaperpointsoutthattheseempirical studieshaveused
theautomatic versionofthemethod, whereasa non-automatic versionis also possible
in whichsubjectivejudgement is employed,forexample,to choosethecorrectmodel
forseasonality.The paperre-analyses sevenseriesfromtheNewbold-Granger study
forwhichBox-Jenkins forecasts werereported to be muchsuperiorto the(automatic)
Holt-Winters forecasts.Theseriesdo notappearto haveanycommonproperties, but
it is shownthattheautomaticHolt-Winters forecastscan oftenbe improved bysub-
jectivemodifications. It is arguedthata fairercomparisonwouldbe thatbetween
Box-Jenkins and a non-automatic versionof Holt-Winters.Some generalrecom-
mendations are made concerning thechoiceof a univariateforecasting procedure.
The paperalso makessuggestions regardingtheimplementation oftheHolt-Winters
procedure, includinga choiceof startingvalues.
Keywords: HOLT-WINTERS METHOD; BOX-JENKINS METHOD; FORECASTING; EXPONENTIAL
SMOOTHING
1. INTRODUCTION
AN importantclass of forecastingproceduresis that of univariateor projectionmethods,
whereforecastsof a givenvariable are based only on the currentand past values of this
variable. One simplewidelyused methodof this typeis the Holt-Wintersprocedure(e.g.
Winters,1960; Chatfield,1975,p. 87; Montgomeryand Johnson,1976,Chapter5; Granger
and Newbold,1977,p. 164). This generalizessimpleexponentialsmoothingso as to cope with
trendand seasonalvariation.
A technicaldescriptionof the methodis givenin the appendix. There are two typesof
seasonal model: an additiveversionwhichassumesthatthe seasonal effectsare of constant
size and a multiplicative
versionwhichassumesthattheseasonaleffects are proportionalin size
to thelocal deseasonalizedmeanlevel. Bothseasonal modelsassumethatthelocal deseasona-
lized mean levelmaybe modifiedby an additivetrendtermand also thatthereis an additive
errortermof constantvariance.
The user mustdecide whetherto use the additiveor multiplicative seasonal model or a
non-seasonalmodel. He mustthenselectstarting values fortheseasonal factors(ifa seasonal
model is used) and also for the local mean and trend. As each new observationbecomes
available,the local mean,the seasonal factorsand the trendare all updated by exponential
smoothingusing threesmoothingconstantswhichwe will denote by a, /, y respectively.
Forecastscan thenbe producedforanynumberofstepsahead.
Because it is so straightforward,the Holt-Wintersmethodis particularlysuitable for
productionplanningand stock controlwhen forecastsare requiredfor a large numberof
variables. Then a fullyautomaticversionof the methodis usuallyused so thata computer-
based systemcan be set up to make routineforecastswithouthumanintervention.In this
case, themultiplicativeseasonal model is usuallyused foreveryseries. Alternatively, a non-
automaticversionof the methodis possiblewhere,forexample,the user chooses the most
264

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 THE HOLT-WINTERS FORECASTING PROCEDURE 265
appropriate
model,takesanyoutliersordiscontinuities andkeepsa careful
intoconsideration
checkon theforecast
errors.
Thispaperpresents a newlook at theHolt-Winters
procedure, theanalysisof
describes
seveneconomicseries,makesa number ofpractical
suggestions theimplementation
regarding
oftheprocedure(bothin itsautomatic and non-automatic makesrecom-
form)and finally
mendations thechoiceofa univariate
regarding forecasting particularly
procedure, in regard
todeciding
betweenthenon-automatic Holt-Winters
procedure
andtheBox-Jenkinsapproach.

2. A COMPARISON WITH OTHER PROCEDURES

Thechoiceofan appropriate forecasting procedure dependson a variety ofconsiderations
suchas theobjective oftheforecasting exercise,thenumber ofobservations availableandthe
number ofvariablesto be forecast.Multivariate methods areadvocatedin econometrics and
therehavebeensomeinconclusive attempts to compareeconometric modelswithunivariate
methods (e.g. Cooperand Nelson,1975). The bivariate versionofthemethodproposedby
BoxandJenkins (1970)is alsoofcurrent interest,butthereareas yetfewcasestudies available.
So inthispaperwerestrict attention to univariate methods whichhavebeenofprimeinterest
to statisticians.
Withso manymethods available,itis difficultfortheuserto choosetheonemostsuitable
forhissituation.Someguidanceon therelative accuracyofthedifferent procedures is pro-
videdby thelarge-scale empirical comparisons of Newboldand Granger(1974) and Reid
(1975)using,in eachcase,over100seriesofmacroeconomic data. Theirresults suggest that
theHolt-Winters (abbreviated HW) procedure has comparable accuracyto thebestof the
othersimpleautomatic procedures suchas Brown'smethodandHarrison's sea-trend system.
However,theunivariate Box-Jenkins methodgave moreaccurateforecasts thantheHW
procedure forabouttwo-thirds oftheseriesanalysed.TheBox-Jenkins (abbreviated BJ)pro-
cedurerequirestheuserto identify an appropriate modelin a generalclass of stochastic
processes calledautoregressive-integrated-moving-average models(orARIMA models).Another
empirical comparison by Groff (1973)cameto different conclusions regarding theaccuracy
oftheBJprocedure, buttheseresults appeartobeinvalidated bythefactthattheBJidentifica-
tionprocedure wasnotusedforeachindividual series.
Nowaccuracy, as measured bymean-square forecasterror, is onlyoneconsideration when
selectinga forecasting procedure.Simpleprojection methodsare oftenpreferred to theBJ
procedure fora variety ofpracticalconsiderations suchas cost,availableexpertise and the
factthattheBJprocedure requires at least50 observations to havea goodchanceofsuccess.
Ofcourse,itis sometimes argued(e.g.Jenkins, 1974)thattheHW method is optimalfora
specialcase oftheARIMA classofmodels,theimplication beingthatonemight as wellusethe
moregeneralBJprocedure.Butinfactthemultiplicative HW modeldoesnothavean ARIMA
equivalent, whiletheARIMA modelcorresponding to theadditive HW modelis so complicated
thatitwouldneverbe identified in practice(see Chatfield, 1977). Thus,forall practical pur-
poses,theHW method is nota specialcase oftheBJprocedure.Indeed,whatis remarkable
aboutthe Newbold-Granger and Reid comparisons is thatHW actuallyperforms better
thanBJforaboutone-third oftheseries.Possiblereasonsforthisphenomenon arediscussed
by Chatfield (1977) and two particular analyseswhereit happensare thosedescribedby
Chatfield andProthero (1973)andMontgomery and Contreras (1977).
Finally,in defenceof theHW procedure againsttheempirical resultsof theNewbold-
Granger and Reidstudies, it mustbe saidthatthesecomparisons werenotaltogether fairin
oneimportant respect.Whiletheresults giveimportant guidanceon therelative accuracyof
completely automatic methods, theysaylittleaboutthecomparison withtheBJprocedure
because,if one is thinking of usinga complicated methodlikeBJ,it wouldseemfairerto
compareit withnon-automatic versionsof thesimpler procedures.It wouldafterall be a
miracle ifthecompletely automatic HW procedure outperformed theBJprocedure onaverage,

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266 APPLIED STATISTICS
thoughas we have seen it does actuallydo thisforabout one-thirdof the series. This high-
lightsa generalproblemwithempiricalcomparisons,as noted by Box (1970) in a different
context,thattheyare oftenmade in circumstances whichgreatlyfavourone contenderand
the resultis as expected. For example,whena researchworkerproposes a new forecasting
methodhe naturallyunderstandsit betterthanothermethodsand maywell getbetterresults
withit than othermethods. With regardto the HW method,empiricalcomparisonshave
hithertoignoredthepossibilityof usingsubjectivejudgementto improveforecastsand so, in
thispaper, I attemptto comparetheautomaticand non-automatic HW procedures.
One of thedifficulties
of attemptingempiricalcomparisonsof forecasting
proceduresusing
real data is thatthereis no such thingas a "randomsampleof timeseries". For mystudyI
used a speciallyselectednon-randomsampleforthefollowingreason. One interesting feature
of the resultsreportedby Newbold and Granger(1974) was that BJ sometimesgave much
betterforecaststhanHW, whereasHW was rarelysuperiorto BJbymorethana smallmargin.
This was perhapsto be expectedgiventhattheBJprocedureallowsa choicefroma muchwider
class of models.By usingseriesforwhichBJgave muchbetterforecaststhanautomaticHW,
I would endeavourto answertwoqueries. Firstly,to see ifseriesofthistypehave anygeneral
featureswhichwould yieldguidelinesforindicatingwhenBJis likelyto be preferable to auto-
maticHW and, secondly,to see iftheHW resultscan be improvedby usinga non-automatic
versionof the method. I contactedDr P. Newbold and he kindlysentme seven seriesfrom
thoseexaminedin theNewbold-GrangercomparisonforwhichBJgave muchbetterforecasts
than HW. These seriesare listedin Table 1.

TABLE 1
The seriesanalysed

Numberofmonthly
observations
in

Code Description Fitting

period Forecasting
period
A Yield on shorttermGovernment securities 204 48
B Numberof TV licences 168 24
C NationalCoal Board Juvenile
recruitment 72 27
D Employment in Manufacturing
(Canada) 108 30
E IndustrialProduction:Manufacturing
(Canada) 108 30
F Unemployment (Belgium) 108 30
G Hourlyearningsin manufacturing(Canada) 108 30

Newbold and Granger(1974) dividedeach seriesinto two parts; a fitting period,which

was used to fitan appropriatemodel,and a forecastperiodwhenforecastswerecomparedwith
actual observations.The lengthsof each periodare shownin Table 1.
Unfortunately, recordsno longerexistof the Box-Jenkinsmodelsfittedin the Newbold-
Grangercomparisonor of the mean-squareforecasterrors(over the forecastperiod) which
resultedfrom using the BJ or automatic HW methods. However, records of the ratio
(BJ m.s.e./HWm.s.e.) do exist. For seriesB to G whichall showseasonal variation,thisratio
lies between04 and 07. SeriesC givesthelowestratio. Therewerefewnon-seasonalseries
in the Newbold-Grangerset, the "worst" cases havinga higherratio between08 and 09.
SeriesA was selectedat randomfromthosecases.
The absence of detailedrecordson the Newbold-Grangercomparisonis annoyingand
raisesa generalqueryabout empiricalstudieswhichare not availableforre-examination, but
thisshould not preventus achievingour objectives.Admittedly, any improvements thatwe
make on theautomaticHW procedureswillbe improvements on our findingsonly,but there

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 THE HOLT-WINTERS FORECASTING PROCEDURE 267
is good reasonto supposethatsimilarimprovements willbe possiblefortheNewbold-Granger
automaticresults.
Throughoutthe paper,I not onlyestimateparametersby least squares but also compare
accuracyby means of mean-squareforecasterrors,thus effectively assuminga quadratic
cost-of-error function.This assumptionis oftenqueriedand it has to be admittedthatit is
usuallymade forpracticalconvenienceand because thereis oftenno clearlysuperioralter-
native(e.g. see Grangerand Newbold,1973). However,Granger's(1969) resultsdo givesome
iftheerror
comfortthatthechoiceof a quadraticcost functionis nottoo critical,particularly
distributionand the cost functionare approximatelysymmetric.To check on this,I re-
estimatedthe HW smoothingparameters,whichare evaluatedin Section4, by minimizing
mean absoluteone-step-aheadforecasterrors.This made virtuallyno difference forall seven
series.

3. GRAPHICAL ANALYSIS OF THE DATA

I began by plottingthe data in Figs 1-7 to show up the main qualitativefeaturesof the
series. Pointsto look forincludetrend,seasonality,outliersand any evidenceof a changein
structure.We note the followingfeatures.

Seasonalpattern
SeriesA is non-seasonal,whileSeriesB loses its small seasonal componentafterthe first
fouror fiveyears. The restof the seriesare seasonal, but in markedlydifferent ways. For
example,theseasonalvariationis relativelysmallforSeriesG, butlargeforF. The size of the
variationincreaseswiththemeanforSeriesE, butdecreasesforG as themean increases. For
SeriesC, theseasonal variationappears to decreasesharplyin size afterthefirsttwo or three
years.

Trend
Thereis increasingtrendforSeriesB, D, E and G, whilethemeanlevelforSeriesA increases
and decreasessharplymanytimesin a mannerreminiscent of a randomwalk. SeriesC shows
littletrendwhileSeriesF showstwo turningpoints,firstdecreasing,thenincreasing, and then
decreasingagain.

Randomcomponent
Some of the seriesshow a high randomcomponent(e.g. Series A and C) while others
show a low randomcomponent(e.g. SeriesB).

To summarizethepreviousremarks,it appears thatthe sevenseriesexhibitverydifferent

properties.Indeed,some of the seriesexhibitnon-stationary changesin trendor seasonality
whichmay be thoughtunusual or exceptional. But, as Harrisonand Stevens(1975) have
pointedout,suchdata seriesare in no wayexceptionalor pathological.
AlthoughI have analyseda relativelysmall sampleof timeseries,I am forcedto surmise
thattimeseries,forwhichBJ performsmuchbetterthan(automatic)HW, do notappear to
have any generalcommonfeatures.
The readermay now ask if the fittedBJ or HW models have any featuresin common.
In Section4 we will see thatthe HW smoothingparametersvaryconsiderablyforthe seven
series. As fortheBJmodels,theones fittedby Newboldand Grangerare no longeravailable.
This authorcould refitBJmodels(as he has forSeriesA-see Section6), butthemodelsmight
wellbe differentto thosefittedbyNewboldand Granger. Giventhedifferent propertiesof the
series,it seemshighlyunlikelythattheBJ modelsdo have anyfeaturesin commonand, even
iftheydo, it would be unlikelyto help in decidingbeforehand
ifa BJ analysisis worthdoing.

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 10
16,000 -)

9
14,000-

12,000-

035

0 E~~~~~~~~~~~~~~~~n

of 200-of
1 fitting
period

I1 5 0 15 20 5
Year Yea

FIG. 1. SeriesA. FIG. 2. Seri

2,400
2400 ~~~~~~~~~~~~~~~~~~~~~~~~130
-~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~0

2,000 13120 -0

a, ~~~~~~~~~~~~~~~End
1,600 of
fittinga
E ~~~~~~~~~~~~~~~period 110

61,2006

800 6~~~~~~~~~~~~~~~~~~~~E0
400

Cd~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~itn
b x~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
6 7 51
0 2 3go
Year Year~~~~~~~~~~~~~~~~~~~~~~~~~C
400- FI.3.SrisC.FG.4nSresD

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 180

150

C:m
~~~~~~~~~~~~~~~~~~~~~~~~~~160
C
-
~~~~~~~~~~~~~~~~~~~~~~~-140-
t;130

E 2 120-

800

090

End 60
of
fitting
period
70
~~~~~~~~~~~~~~5
Year
10 405
Year

FIG. 5. SeriesE. FIG. 6. Seri

160-

c
m~~~~~~~~~~~~~~~~~~~
C
1420 -

0~~~~~~~~~~~~~~~~~~
0(D

End
- ~~~~~~~~~~~~~~~~~~~~
fitting
period

80 ~~~~ ~
~~~~~~~Year10k
FIG. 7. SeriesG.

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270 APPLIED STATISTICS
4. THE AUTOMATIC HOLT-WINTERS PROCEDURE
The second main objectiveof thisstudywas to findgeneralways of improvingthe auto-
matic HW procedure. As the Newbold-Grangerresultswere no longeravailable, the next
step was to carryout the automaticHW procedureon each seriesto produce resultsfor
comparisonpurposes. Thereis no guaranteethatmyresultswillbe exactlythesame as those
producedbyNewboldand Grangerbuttheyshouldbe adequate forthepurposeof examining
the non-automaticHW procedure.
Two computerprogramswere written.The firstestimatesthe best values of the three
smoothingconstantsby minimizing the sum of squared one-step-aheadforecasterrorsover
theperiodof fitexcludingthefirsttwoor threeyears'data whichwereused as a run-inperiod.
The second programcomputesone-step-aheadforecastsover the forecastperiod usingthe
optimal smoothingconstants. The programsallow seasonal and non-seasonaldata to be
analysedand also allow theseasonal variationto be additiveor multiplicative.The procedure
is as describedby Winters(1960) exceptthatstarting valuesfortrendand seasonaltermswere
estimatedfromthefirsttwo years'data ratherthanfromthefirstand last yearsof thefitting
period.
For the seasonal Series (B to G), Newbold and Grangerused a multiplicative seasonal
modelin everycase (as also did Reid, 1975),whileforSeriesA a non-seasonalmodelwas used.
I did thesame. Usingthesamefitting periodsas Newboldand Granger,I foundtheestimated
valuesof thethreesmoothingconstantsto be as in Table 2. These estimatesdeservecomment

TABLE 2

Estimatedsmoothing
constants

Series (mean) (seasonal) (trend)

A 08 - 020
B 0-3 1.0 0415
C 0-4 1-0 0.03
D 0-6 1-0 0-10
E 0-6 0-8 0-05
F 0-6 1.0 0-14
G 0-2 0-4 0-20

as some of the values are muchhigherthanthosecustomarilyquoted in the literature.For

example, Coutie et al. (1964) say that typicalvalues for sales data are 01 <c( < 03 and
0 < y < 003, whileReid (1975) saystypicalvaluesmightbe x = 02, p = 0 3 and y = 0 1,in my
notation. Now changesof 0 1 or 0 2 in thevalues of oxand / willnot make muchdifference,
but the above "typical" values are considerablydifferent fromsome of my estimatesand
would do ratherbadlyforsome of theseries.
On the basis of my experiencewiththese and other series,I suggestthat it is rather
dangerousto tryto give"typical"valuesforthesmoothingconstants.Thus,theHW smooth-
ing parametersshouldnot be guessed,but ratherestimatedfromthedata.
Using the optimal smoothingconstants,I next computedmean-squareone-step-ahead
forecasterrorsovertherespectiveforecasting periods. From theseI calculatedtherespective
coefficientsof determination, namelythe proportionsof the total correctedsums of squares
whichwere"explained"by theone-step-ahead forecasts.AlthoughHW was expectedto have
inferioraccuracyto BJ fortheseseries,thecoefficients of determinationwereall foundto be
reasonablyhigh,rangingfrom77% forSeriesC to over99% forSeriesG. In thelattercase,
the HW methodwould almost certainlybe judged sufficiently accurateeven thoughthe BJ
forecastsmaybe even better.

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 THE HOLT-WINTERS FORECASTING PROCEDURE 271
5. THE NON-AUTOMATIC HOLT-WINTERS PROCEDURE
This sectionconsidersa varietyof ways in whichthe automaticHW procedurecan be
modifiedso as to produceimprovedforecasts.I do not claim thatthesemodificationsare in
anysense"new", as theywillalreadybe used bygood statisticians
whereappropriate.But one
importantaim of thispaper is to stressthattheywerenot used in theempiricalcomparisons
of Newbold-Granger and Reid as these authors used the automatic version of the
method.

5.1. CorrectChoiceof Model

SeriesB is seasonalforthefirstfouror fiveyears,butnon-seasonalthereafter. As Newbold
and Grangerused a seasonalmodel,I naturallydid thesame in the"automatic"run,butit is
clear that a non-seasonalmodel may be appropriatefor makingforecastsin the forecast
period. This is done by settingthemultiplicative seasonal factorsequal to one, and settingP
to be zero. The two othersmoothingconstantswere then re-estimated to be ox= 0O8and
y = 02. Note particularly thatthevalue of oxis completelydifferent to thevalue in Table 2.
The mean-squareforecasterrorin the forecastperiod was thencalculatedand foundto be
less thanhalfthevalue fortheseasonal model,therebyincreasingthecoefficient of determina-
tionin theforecastperiodfrom0915 to 0 964. This astonishingimprovement may be com-
pared withtheNewbold-GrangerfindingthattheBJmean-squareforecasterrorwas between
0 6 and 0 7 timestheirautomaticHW mean-squareforecasterror.
At firstsight the improvementnoted above may be somewhatsurprising,as many
statisticiansthinkthenon-seasonalmodelis a specialcase of the seasonal model obtainedby
setting := 0. But thisignorestheeffectof theinitialseasonal factors.If a seasonal modelis
appliedto non-seasonaldata, theinitialseasonalfactorswillreflect randomvariationand they
willalwaysbe presentif : = 0. If a positivevalue of : is taken,theeffectof theinitialvalues
willgraduallydie out onlyto be replacedbyfurther randomvariation.If,forexample,we try
theseasonal model on SeriesA, whichis clearlynon-seasonal,themean-squareforecasterror
morethandoubles even withan optimumchoiceforI.
Now, in mostmodel-fitting problems,the additionof unnecessaryparametersleads to a
smallimprovement in mean-squareerror,even thoughit may not be significantly large. But
herewe have a situationwheretheadditionof unnecessary parametersmakesthemean-square
errormuchworse,because thestarting valuesforthenon-existent seasonal factorsare not set
equal to their"best" values,namelyunity.Thus, it is clearlyimportantto use a non-seasonal
modelfornon-seasonaldata.
But whathappenswhenthe seasonal variationis small comparedwiththe randomvaria-
tion? Is it betterto use a seasonal or non-seasonalmodel? For Series C to F, whichhave
largeseasonal components,we foundas expectedthatthemean-squareerrorfortheseasonal
modelis muchsmallerthanforthenon-seasonalmodel. But forSeriesG, wheretheseasonal
variationis small comparedwithothersourcesof variation,we foundthata slightlysmaller
mean-squareerrorcould be obtainedby settingthe initialseasonal factorsto be unity,but
allowing : to be non-zero. This modificationmay be justifiedas follows. If the random
variationis biggerthantheseasonalvariation,thenunitymaybe closeron averageto thetrue
seasonal values than the values calculatedfromthe firstyear or two's data only,but sub-
sequentsmoothingmaygivebetterseasonal estimates.
Apart fromthe choice betweenseasonal and non-seasonalmodels,the choice between
multiplicative and additiveseasonalitymayalso be important.This choiceis usuallymade by
subjectivelyassessingthe graph of the data and is difficult to make part of an automatic
procedure.
In our groupof series,the seasonal componentsof SeriesC, D, E and F do appear to be
approximately but thatof Series G does not sinceit actuallydecreasesin size
multiplicative,
as the mean level increases. This means thatthe seasonal componentof Series G is neither

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272 APPLIED STATISTICS
additivenormultiplicative,
butitseemsworthseeingiftheadditivemodelis a betterapproxima-
tionthanthemultiplicativemodel. In theevent,theadditivemodelgave virtually no improve-
mentof fit,presumablybecause thesize of the seasonal variationis smallcomparedwiththe
trend. No doubt therewillbe otherserieswherethechoiceof thecorrectseasonal modelwill
be crucial. Indeed,theauthorwas once asked by a commercialorganizationto findout why
theirHW forecastswere"blowingup". It transpired thatthedata had not been plotted,that
a multiplicativemodel was being used when the data were clearlyadditive,and that their
computerprogram"wenthaywire"as a resultbecausetheseasonalfactorswerenotnormalized
aftereach year'scycle.

5.2. Adjustment of theData

Anothergeneralpoint to consideris whetherany observationsneed to be adjusted or
deleted. Freak values or outliersmay arise fromsome knownphenomenonas, forexample,
whensales are affectedby a strike. Such values need to be "adjusted" beforethe analysis
commences,in whateverway seemsappropriate.A second pointto consideris whetherit is
reasonableto regardthe data as havingbeen generatedby a singlemodel. Sometimesthe
propertiesof a timeseriesmaychangesubstantially duringtheperiodunderstudyso thatthe
firstpartof thedata mayhave littleor no relevanceforthepurposeof constructing a model
and makingforecastsfromtheend of the series. In thissortof situationit may be betterto
discardthefirstpartof thedata beforeattempting to fita model.
From a look at our seven series,theredo not appear to be any freakvalues. The only
adjustmentswhichappear to be worthconsideringare forSeriesC and F, wheretheseasonal
variationin thefirsttwo yearsor so is largerthanin lateryears,and forSeriesB, wherethe
seasonal variationdisappearsafterabout fourto fiveyears. Thesethreeserieswerereanalysed
omittingthefirsttwo years'data in thecase of SeriesC and F, and omitting thefirstsix years'
data in thecase of SeriesB. However,thesemodifications did not giveany improvement on
averageto theHW forecastsin theforecasting period. It appears thattheeffectsof theearly
observationshave by thenmoreor less died out. Thus theHW forecastsforour sevenseries
cannot be improvedby modifying the data in a common-senseway, thoughno doubt sub-
jectivedata-adjustment may be usefulforsome otherseries.
5.3. The Treatmentof Autocorrelated Errors
The final modificationwe considerhere resultedfromnotingthat the one-step-ahead
forecasterrorsproducedby the HW proceduretendedto go in "runs" havingthesame sign.
In otherwords,thefirst-order autocorrelation rl, of theforecasterrorswas some-
coefficient,
times"large" and positiveindicatingthattheforecastswerenot optimal. The values of r1in
both the fitting
and forecasting period were calculatedforall seven seriesand are givenin
Table 3.

TABLE 3
First-order
autocorrelation
coefficients
of one-step-ahead
HWforecasterrors

Series r, infitting
period r, inforecasting
period
A 0-38 049
B 024 -002
C 0-10 -0-19
D 0-33 0-36
E 0.01 0-13
F 0-42 070
G 0-24 0-34

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 THE HOLT-WINTERS FORECASTING PROCEDURE 273
One generalprocedureforimprovingHW forecastssuggestedby Newbold and Granger
(1974) is to take a linearcombinationof the forecastsfromthe HW procedureand froma
techniquecalled stepwiseautoregression(Grangerand Newbold, 1977, Section 5.4). This
combinationoftwosetsof "automatic"forecastsgivesresultscomparablein accuracyto those
of Box-Jenkins.Intuitively, thestepwiseautoregression forecastsmaybe able to takeaccount
of autocorrelation in thetimeserieswhichcannotbe describedby a HW model. Here we try
an even simplermethodof takingautocorrelation into accountwhichhas been suggestedby
D. J. Reid for improvingforecastsfromgeneralexponentialsmoothing(see Grangerand
Newbold,1977,p. 169). It is calleda two-stage forecasting procedurebyGilchrist(1976,p. 262).
The modification consistsof fittinga first-orderautoregressive modelto theHW one-step-
ahead forecasterrors,whichwe denote by {el}. The quantity{Aet}is added to the one-step-
ahead forecastmade at timet, whereAis a newparameterwhichwe willcall theautoregressive
parameter.An intuitively sensibleestimateof A is the value of r1 obtainedforthe forecast
errorsin thefitting periodusingtheunmodified HW procedure.
Now, whentestingthenull hypothesisthata seriesof N observationscome froma purely
random process,it can be shown (see Chatfield,1975, p. 62) that values of Ir1j exceeding
2/4Nare significantly differentfromzero at the 5 per centlevel. Box and Pierce(1970) have
shownthat,whencalculatingr1fortheresidualsfroma fittedARMAprocess,2/1Nwillgenerally
providean over-estimate of the criticalvalue. It seemsa reasonableconjecturethatthismay
also applyto the residualsfroma fittedHW seasonal model althoughtheupdatingprocedure
forestimatingparametersmay introduceadditionalautocorrelation.I have not attempteda
theoreticalanalysisas I do not "believe" any of themodelsto be completelyaccurate. Rather
I see the methoddescribedabove as a robustway of treatingany departuresfromthe HW
model and suggest2/1Nas an approximatecriticalvalue fortestingwhethervalues of r1are
significantlydifferent fromzero.
In Table 3 we see thatthevalues ofr1forSeriesA, B, D, F and G are significantly different
fromzero in thefitting period,indicatingthatit should be possibleto improvetheHW fore-
casts fortheseseries. The modifiedHW procedurewas triedover theforecasting period for
all thesefiveseries. For seriesB the modification gave slightlyworse results-a 2 per cent
increasein mean-squareerror. But forSeriesA, D, F and G substantialimprovements were
made,averaginga 23 per centreductionin mean-squareerror.Averagedoverall sevenseries,
theimprovement is 12 per cent. This compareswithan averageimprovement of 20 per cent
reportedby Newbold and Granger(1974) whencombiningHW withstepwiseautoregression.
Given the simplicity of themodifiedHW procedureand Reid's earliersuccesswitha similar
modification, the methodseems worthyof further consideration.Indeed I suggestthatthe
value of r1 should be routinelycalculatedin the fitting period to see if the modificationis
worthtrying.
As themodifiedHW proceduredependson fourparameters, namelyo, /, y and A,it might
appearadvantageousto estimatetheparameterssimultaneously in thefittingperiod. However,
thisgave virtuallythe same values for our seven seriesas were obtainedby estimatingof,:
and y bytheoriginalmethodand takingA = r1. As thelatterprocedureinvolvesminimizing a
sum of squares in onlythreedimensions,it will be preferred.
For a k-steps-aheadpredictor,the modificationresultingfromthe above approach will
become Akel, whichquicklybecomes small as k increases,so thatthe modification will not
helpin forecasting severalstepsahead. In thisconnection,we notethatNewbold and Granger
foundthattheadvantageenjoyedby BJoverautomaticHW also decreasedwithk.
6. SERIEsA
AlthoughtheHW procedurehas been applied to all sevenseriesin our set,it is not at all
clearthatit is an appropriatemethodforSeriesA whichis non-seasonaland showsno regular
trend. Ratherthemeanlevelmovesup and downin a "random"waywhichexperiencedtime-
seriesanalystswillrecognizeas lookingsomethinglike a randomwalk.

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274 APPLIED STATISTICS
For a randomwalk,successivefirstdifferences forma purelyrandomprocess(or discrete
whitenoise) and theoptimalpredictorof theobservationat time(t + 1) is simplytheprevious
observation,namelyxi. Over theforecasting period,thisgivesa mean square errorwhichis
betterthan the standardHW procedurethoughnot quite as good as the modifiedHW
procedure.
TABLE 4

The autocorrelation
functionof thefirstdifferences
of SeriesA

Autocorrelation Autocorrelation
Lag coefficient Lag coefficient

0 1 7 -0i10
1 0X32 8 -0X14
2 0*03 9 -0-03
3 0.09 10 -0-01
4 0*00 11 0.01
5 0.01 12 0.09
6 -0X01 13 0X00

The randomwalk forecastcan be further improvedas theretendto be severalincreasesor

severaldecreasesin a row. The autocorrelation functionof thedifferenced seriesis shownin
Table 4, and we see thatthe coefficient
at lag one is the onlyone significantly
differentfrom
zero. This indicatesthatthe firstdifferencesforma first-orderMA processor, equivalently,
thatxt followsan ARIMA model of order(0, 1, 1) namely
Xt-xi1- = VX1= Et?+0t-1, (6.1)
where{et} denotes a discrete-time(unobservable)white-noiseprocess. The value of 0 was
estimatedby least squares over the fittingperiod to be 0-36. The resultingone-step-ahead
predictionmade at timet is
x(t,1) = xj+0 36e1,
whereet= x - (t- 1, 1), and themean-squareerrorovertheforecasting periodturnedout to
be 31 per centbetterthanthestandardHW procedureand 8 per centbetterthanthemodified
HW procedure.
Here the Box-Jenkinsidentification procedureis surprisingly easy: partlybecause the
seriesis non-seasonal,partlybecause firstdifferencing
is adequate and partlybecause onlya
one-parameter modelis indicated.The necessarycomputerprogramswerewritten in less than
a day.
Now, simpleexponentialsmoothingis actuallyoptimalforan ARIMA (0, 1,1) process(e.g.
Grangerand Newbold, 1977,p. 172),and simpleexponentialsmoothingis widelythoughtto
be a specialcase oftheHW procedure,so whywas I gettingdifferent mean-squareerrorsfrom
my HW and BJ computerprograms? The answer was simple yet far-reaching.Simple
exponentialsmoothingis a specialcase of thenon-seasonalHW modelonlyiftheinitialtrend
value is set equal to zero. Whenthiswas done, thebestestimateof y forSeriesA turnedout
to be zero and identicalforecastsfromthe HW and BJ methodswere obtained with the
smoothingconstantofestimatedto be 1 36.
Now the HW smoothingconstantsa, P and y are usuallyconstrainedto the range(0, 1).
But simpleexponentialsmoothing,namely
A(t,1) = oax,+(1 -o )(t- 1, 1) (6.2)
is optimalfor
Vxt = Et-(1- )eE (6.3)

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 THE HOLT-WINTERS FORECASTING PROCEDURE 275
Comparing(6.3) with(6.1) we see that0 = o- 1. Now (6.1) is invertible
forj 01< 1, or equiva-
lentlyfor0< a.<2 (see Box and Jenkins,1970,p. 107). When a. lies in the range(1,2) the
simpleexponentialsmoothingpredictorgivenby(6.2) can stillbe expressedin theform
x(t, 1) = Xt+ a(l -X) Xt1+o(1
)ax(2+-o *2
The sum of thecoefficientsstillconvergesbut theweightsnow oscillatein sign. Here the BJ
procedureprovides valuable insightinto what is essentiallya generalizationof simple
exponentialsmoothing.Newbold and Grangerrestricted the HW parametera to the range
(0, 1) and thisexplainswhytheirBJforecastswerebetter.

7. STARTING VALUES
The analysisof theSeriesA data highlighted
theneed to take a carefullook at starting-up
values. I subsequentlyfoundthat the Newbold-Grangerstartingvalues (see Grangerand
Newbold, 1977,p. 165) wereas follows:
(a) Mean: theaverageobservationin thefirstyear,as also suggestedby Winters(1960), and
used in myfirstrun.
(b) Trend: thiswas set to zero, unliketherecommendations of Winters(1960) and Chatfield
(1975). In myfirstrunI used theaveragemonthlydifference betweenthefirstand second
years'averages.
(c) Seasonal factors:thesewerecalculatedfromthefirstyear'sdata only,by comparingeach
observationwiththeoverallaveragein thefirstyear. No adjustments are made fortrend
as theinitialtrendvalueis setequal to zero. Winters(1960) and Montgomery and Johnson
(1976) suggestaveragingoverthewholeof thefitting periodwitha trendadjustment, while
myfirstrunused averagesoverthefirsttwo yearswitha trendadjustment.
I triedthe Newbold-Grangerstartingvalues on all sevenseriesusingthe automaticpro-
cedure. Over the fitting period therewas littledifference in mean-squareerroron average,
thoughthereweresizeabledifferences forindividualseries. For example,SeriesF was 55 per
cent worseusingthe Newbold-Grangervalues,whileSeriesA and D were 26 per centand
16 per cent betterrespectively.Over the forecastperiod,the Newbold-Grangervalues did
somewhatbetteron average. SeriesF was 41 per centbetterwhileSeriesA was 14 per cent
betterif asis restricted
to the range(0, 1) but 23 per cent betterif asis allowed to take the
value 1 36. The estimatedsmoothingconstantsweremuchthesame exceptforthevalue of y.
For SeriesA we havealreadyseenthatthevaluewas reducedfrom0 2 to 0 0, whileforSeriesD
thevalue increasedfrom0-1 to 0 2.
The choice of startingvalues clearlyrequiresmore investigationand we need more
experiencewithothersetsof data. The choicewilldependto someextenton thepropertiesof
theseries. For data like SeriesA, whichcontainno steadytrend,it is betterto set theinitial
trendvalue to zero. The advantageof theNewbold-Grangerstartingvalues is thattheycan
also adapt to cope withthe situationwheretrendis present.Thus, on the groundsof sim-
plicityand accuracy,I am inclinedto recommendthe use of the Newbold-Grangerstarting
values,thoughotherstartingvalues maysometimesbe appropriate.
I repeatedthecomparisonof theautomaticand non-automatic HW proceduresusingthe
Newbold-Granger starting values. Once again,it was easyto improvetheautomaticforecasts
usingsubjectivejudgement.In particular,whena non-seasonalmodelwas used forSeriesB,
an even largerreductionin mean-squareforecasterrorwas obtained than when using the
previousstarting values. It was also foundthattheone-step-ahead forecasterrorstendedto be
autocorrelated so thatfurther reductionsin mean-squareerrorcould be made by themethod
describedin Section5.3. Thus thenon-automatic HW procedureis superiorto theautomatic
versionforboth setsof startingvalues.

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276 APPLIED STATISTICS

8. DISCUSSION AND CONCLUSIONS

Theanalysesreported in thispapersuggest thefollowing.
(a) SeriesforwhichBJforecasts are muchbetterthanforecasts fromtheautomaticHW
procedure do notappearto haveanycommonproperties.
(b) It is ofteneasyto improve automatic HW forecasts bysimplesubjective modifications.
Now,earlierempirical studieshaveconcentrated on comparing theBJprocedure with
automatic procedures,although theyareat oppositeextremes ofcomplexity and reallyhave
different purposes.In thispaperwe haveconcentrated on a non-automatic versionof the
HW procedure whosecomplexity is in-between thesetwoextremes. Thedifferencesfromthe
automatic procedureareas follows.
(a) A carefulsubjective choiceis necessary to choosethecorrectseasonalmodel,either
additive,or multiplicative or non-seasonal.It is particularly importantnot to use a
seasonalmodelfornon-seasonal data.
(b) Subjectively adjustanyoutliers dueto knowneffects. Alsoconsideromittingtheobserva-
tionsintheearlypartoftheseriesiftheirproperties aredifferenttothoseofthelaterpart
oftheseries.
(c) If theforecast errorsare correlated, fita first-orderautoregressivemodelto them.It is
suggested thatthefirst-orderautocorrelation coefficient
oferrorsinthefitting
periodshould
be calculated routinely.
Although thesesubjectivemodifications requiresomeeffort,itisclearly
muchlessthanthat
required bythefullBJprocedure.
Apartfromtheabovesuggestions, thispaperalso makesthefollowing practicalrecom-
mendations fortheHW procedure, whether usedinitsautomatic ornon-automatic form.
(a) Starting valuesforthemean,trendand seasonalfactors maybe calculated fromthefirst
year'sdataonly,withtheinitialtrend-value setequalto zero.
(b) The"typical"valuesfortheHW smoothing parameters whicharequotedintheliterature
areoftena longwayfromtheestimated values,anditis recommended thatthesmoothing
parameters shouldalwaysbe estimated rather thanguessed.
In conclusion I wouldliketo makesomegeneralrecommendations regardingthechoice
ofa univariate forecasting procedure.Theseare based,notonlyon myexperience withthe
seriesanalysedin thispaper,butalso on myexperience withotherseriesand on themany
analysesreported in theliterature byotherauthors.
(a) Automatic procedures areappropriate whentherearea largenumber ofitemsto forecast.
Forexample, inproduction planningand stockcontroltheremaybe severalhundred (or
evenseveralthousand)seriesto consider.The automatic versionof theHW procedure
seemsas goodas any.
(b) Non-automatic procedures are appropriatein mostothersituations, as fewseriesare so
standard thatit is safeto treatthemautomatically. Thereare manysuchprocedures to
choosefrom,butmyexperience is mainlywiththenon-automatic versionof theHW
procedure and theBJprocedure.I haveseenlittleevidenceto suggestthatanyother
methodis definitely superior to eitheror bothof thesemethods, althoughseveralother
methods arecomparable in accuracy and thereadershoulduse one he feelshappywith.
Restrictingattention to non-automatic HW and BJ,weshouldrecognize thatbothhavea
placeintheforecaster's toolbagandthatthechoicebetween themis noteasy. Sometimes
practicalconsiderations willruleout theBJprocedure as, forexample,if thereare in-
sufficient
observations or insufficient
expertiseavailable.If thisis notthecase thenI
suggestthefollowing.

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 THE HOLT-WINTERS FORECASTING PROCEDURE 277

(i) For seriesin whichthe variationis dominatedby trendand seasonal variation(e.g.

thosein Figs 2-7), I recommendthe use of the non-automaticHW procedure. The BJ
procedure,whichrequiresconsiderablymoreeffort, will rarelygive muchimprovement
of theBJprocedurewillheredependprimarily
in fit. This is because theeffectiveness on
the intialdifferencing procedureratherthan on the ARMA model-fitting stage (see also
theremarksof Akaike, 1973,and Parzen, 1974,p. 725).
(ii) For seriesin whichthe randomvariationis "large" comparedwithtrendand seasonal
variation,theBJprocedureis worthtrying.This appliesparticularly to series,likethatin
Fig. 1, whichshowa random-walktypeof behaviour.
(iii) For series showingdiscontinuities, like that in Fig. 8, there is littlepoint in trying
time-series projectionmethods.The authorwas recently askedto produceunivariatefore-
casts for this series,but refused. The suddenjump correspondsto a sales drive. If
forecastsare required,then informedguessworkis likelyto be betterthan statistical
projections.A usefulrule-of-thumb is thatif you thinkyou can producegood forecasts
for a series "by eye", then statisticalprojectionswill probablywork well. But if you
can't, thentheywon't!

2200

2000

1800

1600
a)
1400-

a) 1200
0

D-a 1000.
E
800-

600-

400-

1 2 3 4 5 6 7
Year
ofnewinsurance
FIG. 8. Numbers policies lifeoffice.
issuedbya particular

ACKNOWLEDGEMENTS
commentson earlierversionsof this paper by a referee,
I am gratefulfor constructive
E. McKenzie,P. Newbold,G. J.A Sternand K. D. C. Stoodley,thelatter
A. S. C. Ehrenberg,
havingremindedme of theconnectionbetweenexponentialsmoothingand an ARIMA (0, 1, 1)
model.

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Statist. Soc, A, 136, 330.
Box, G. E. P. (1970). Book reviewof De Bruyn'sbook on cusumcharts.Rev.Int.Statist.Inst.,38, 305.
Box, G. E. P. and JENKINS, G. M. (1970). Time-seriesAnalysis, Forecasting and Control. San Francisco:
Holden-Day(rev.edn publ. 1976).
inARIMAtime-series
ofresidualautocorrelations
Box, G. E. P. andPIERCE, D. A. (1970). Distribution models.
J. Amer. Statist. Ass., 65, 1509-1526.

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278 APPLIED STATISTICS
CHATFIELD,C. (1975). TheAnalysisofTimeSeries:Theory
andPractice.London: Chapmanand Hall.
(1977). Some recentdevelopments
in time-series
analysis.J. R. Statist.Soc. A, 140,492-510.
CHATFIELD,C. and PROTHERO,D. L. (1973). Box-Jenkins
seasonalforecasting:
Problemsin a case-study.
J. R. Statist.Soc. A, 136,295-336.
COOPER,J. P. and NELSON,C. R. (1975). The ex-anteprediction
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MIT-PENN econometric models,and some resultson compositepredictions.J. of Money,Creditand
Banking,7, 1-31.
COUTIE,G. A. etal. (1964). Short-term Forecasting.I.C.I. monograph No. 2. Edinburgh:Oliverand Boyd.
DURBIN,J.and MURPHY,M. J.(1975). Seasonaladjustment basedon a mixedadditive-multiplicative model.
J. R. Statist.Soc. A, 138,385-410.
GILCHRIST,W. (1976). StatisticalForecasting.London: Wiley.
GRANGER, C. W. J.(1969). Predictionwitha generalizedcostoferrorfunction.Op. Res. Quart.,20, 199-207.
GRANGER,C. W. J. and NEWBOLD,P. (1973). Some commentson the evaluationof economicforecasts.
Appl.Econ.,5, 35-47.
(1977). Forecasting EconomicTimeSeries. New York: AcademicPress.
GROFF,G. K. (1973). Empiricalcomparisonof modelsforshortrangeforecasting. Man. Sci., 20, 22-31.
HARRISON,P. J.and STEVENS,C. F. (1975). Bayesforecasting in action: case studies. Warwick:Statistics
ResearchReportNo. 14.
JENKINS,G. M. (1974). Contribution to thediscussionof thepaperbyNewboldand Granger.J.R. Statist.
Soc. A, 137, 148-150.
McKENZIE, E. (1976). A comparisonof some standardseasonalforecasting
systems.The Statistician,
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D. C. and CONTRERAS,
MONTGOMERY, L. E. (1977). A noteon forecasting
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APPENDIX
The additiveseasonal HW model assumesthattheobservationat timet,xi,is givenby

xi = (local mean)+ (seasonal factor)+ error,

whilethemultiplicative
model assumes
xt= (local mean)x (seasonal factor)+ error.
Both modelsassumean additivetrendtermsuch that
(local mean at timet) = {local mean at (t- 1)}+ local trend.
In practicetheseasonal effect
maybe intermediate betweenadditiveand multiplicative,
as
in the models describedby Durbin and Murphy(1975), but the Holt-Wintersprocedure
requiresone to choose eitheran additiveor multiplicative
model. Both modelsalso assume
an additiveerrorof constantvariance,butin practicetheerrorvariancemayincreasewiththe
mean. Ifboththeseasonaland errortermsarethoughtto be multiplicative,thenthelogarithms
of the data may be analysedusingthe additivemodel,althoughit should be notedthatthis
assumesthatthetrendtermis also multiplicative.
effectively
In orderto describethe updatingand forecastingprocedures,we introducethe following
notation:
mt= estimateof thedeseasonalizedmean levelat timet;
Ft= estimatedseasonal factorforperiodt;

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 THE HOLT-WINTERS FORECASTING PROCEDURE 279

r, =estimatedtrendtermforperiodt (i.e. expectedincreaseor decreasein thedeseasona-

lized mean levelin one timeperiod);
s = numberof observationsin seasonal cycle(so that,forexample,s 12 formonthly
data).
For theupdatingprocedure,letus assumethat,fromthedata up to period(t- 1), we have
estimatesof themean and trendin period(t- 1) and also of theseasonal factorsup to period
(t- 1). Earlierestimatesof the mean and trendare not required,but note that the last s
seasonalfactorsneedto be stored. Whena new observation,xt,becomesavailable,themean,
seasonaland trendtermsare all updatedusingthreesmoothingconstantswhichwe denoteby
oa,,Band y. In themultiplicative
case (whichis themostcommonlyused),theupdatingformulae
are
Mt= xx1/F,_,+
(1 -o) (mt-,+ ri-i), (A.1)
Ft= xl/m?+
(1 -13) Ft-, (A.2)
r,= y(mt-mt_i)+ (1- y) r-i. (A.3)
Then forecastsfromtimet can be made usingtheformula
x(t, h) = forecastof Xt+h made at timet
= (m?+hrt)FtIs+h (h = 1,2, ...). (A.4)
Formulae(A. 1)-(A.4) can readilybe adapted forthe additivecase. (A.3) staysthe same,but
(A.1), (A.2) and (A.4) become
Mt= o(x-F1t-s)+ (1 -c) (m ?rt-), (A.5)
Ft= g(x,- m) + (I1-O) Ft-s (A.6)
and
x(t, h) = mt+ hrt
+ Ft-+?h (A.7)
The seasonal factorsneed to be normalizedaftereach year'scycleby makingtheiraverage
one in themultiplicative case and by makingthemsumto zero in theadditivecase.
The readershould be warnedthatthe above notationis by no means standard. Nearly
everyauthorseemsto use a different setofsymbolsand so greatcareis neededwhencomparing
expressionsgivenby different authors. For example,the smoothingconstantsare variously
givenas (A, B, C) byNewboldand Granger(1974), (A, D, C) by Grangerand Newbold(1977),
(Yl,
'3, Y2) by McKenzie (1976),whileReid (1975) used a, /, y butin each case "his parameter"
= one- "my parameter".Even moreconfusingis the factthatst is variouslyused to denote
themean (Winters,1960),trend(Reid, 1975) and seasonal variation(Chatfield,1975).
Starting-upvalues are needed forthe mean,trendand seasonal termsand theseare dis-
cussed in Section7. Estimatesof the smoothingconstantsare also requiredas describedin
Section4.

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