31:4.2.

(Weighted Moving Averages

In the moving averages method, each observation in the calculation receives the same weight.
One
variation, known as weighted moving averages, involves selecting different weights for each data
value and then computing a weighted average or the most recent n data values as the forecast. In most
of the cases, the most recentobservation receives themost weight, and the weight decreases for older
observations. )For example. in sample problem 3101, a three-weekly moving average may be
calculated by assigning weightage of 5, 2 ana I espectively for the three weeks values.
forecast for week 5 is 9.16 shown helow
Weighted moving averages as .

Weighted moving avérage = 10 x +8 x+9 x = 9.16.

m e
Cxape
 Sum of weights

31:4,3 Exponential Smoothing

is
method, where the forecast for the next period
It is a specíal case of the weighted moving averages the
observations. It is based on the premise that
calculated as weighted average of all the previous
most important for predicting the future
value.
most recent observation is the
is
The basic exponential smoothing model
F+1 aY + (1 - a ) F,

forecast of the time series for periodt + 1,

where F+1 =

Y, = actual value of the time series in periód t,

F, = forecast of the time series for period t,

a s 1).
a =
smoothing constant, (0
The above equation is re-written as

Fi+1 F +a (Y, - F).

The difference (Y, -

F) represents the error in the previous forecast.

the calculations, we let F, equal the actual value of the time series in period 1, i.e..
To start
2 is
F =
Y Hence, the forecast for period
F2 aY +(1F1 + a (Y
) Fi =
F,) Y, + a(Y1 -

Yi) Y
= -

forecast for period 2 is equal to the actual value of the

This shows that the exponential smoothing
time series in period 1.
FORECASTING 921

The forecast for period 3 is

F3 Y2 +(1
= a -

a) Fa = a Y2 + (1 - a) Y
Similarly, F Yy + (1 -

a)F a Y, +=
(1 -

a) [o ¥2 + (1 -

a) Y)
a Yy + a (l -

a) ¥, + (1 -

a) Y.
Hence, F is a weighted average of the first three time series values. The sum of the coefficients,
or weights, for Y, Y2 and Yy equals 1. A similar argument can be made to show that in general, any
forecast F+ | is a weighted average of all previous time series values.
It may be noted that despitethe fact that exponential smoothing provides a forecast, a
i.e.,
weighted average of all past observations, all the past data do not need to be saved in order to
compute the forecast for the next period.
The smoothing constant, a, may be altered to change relative values
entering into the forecast. A high value of the constant would give a high weightage to the recent
weightage of different
value, while its low value would give a relatively large weightage to the past data. For example, if
0.4, then the two most recent values would get a weightage of 0.4 and 0.4 (1 0.4), i.e., 0.24. -

=
The new forecast is based practically on the values of the last two periods.