APPLIED TIME SERIES ST 3009

Dr. N.D. Basnayake

FORECASTING BASED ON MULTIPLICATIVE
DECOMPOSITION
Two main differences in the multiplicative model when compared to additive
model.

1. The seasonal effects are adjusted so that they average to k (no. of seasons)
for a multiplicative decomposition whereas for additive adjustment is done
to make the average to 0.

2. Forecasting equation for multiplicative model.

𝑌෠𝑡 = 𝑇෠𝑡 ∗ 𝑆መ𝑡
STEP 1: ESTIMATING THE TREND
Year Quarter Sales 4.M.A C.M.A
1985 1 2881 * *
* 2 3249 * *
* 3 3180 * 3221.13
* 4 3505 3203.75 3263.50
1986 1 3020 3238.50 3325.00
* 2 3449 3288.50 3387.75
* 3 3472 3361.50 3434.50 USING MOVING AVERAGE
* 4 3715 3414.00 3470.88
SMOOTHING
1987 1 3184 3455.00 3509.88
* 2 3576 3486.75 3561.25
* 3 3657 3533.00 3606.38
* 4 3941 3589.50 3657.50
1988 1 3319 3623.25 3595.00
2 3850 3691.75 3525.50
3 2883 3498.25 *
4 4159 3552.75 *
STEP 2: DETRENDING THE SERIES
Year Quarter Sales 4.M.A C.M.A S.E- detrended
1985 1 2881 * * *
* 2 3249 * * *
* 3 3180 * 3221.13 0.9872
* 4 3505 3203.75 3263.50 1.0740
1986 1 3020 3238.50 3325.00 0.9083
* 2 3449 3288.50 3387.75 1.0181
* 3 3472 3361.50 3434.50 1.0109
* 4 3715 3414.00 3470.88 1.0703 S.E = Y/CMA =S*R
1987 1 3184 3455.00 3509.88 0.9072
* 2 3576 3486.75 3561.25 1.0041
* 3 3657 3533.00 3606.38 1.0140
* 4 3941 3589.50 3657.50 1.0775
1988 1 3319 3623.25 3595.00 0.9232
2 3850 3691.75 3525.50 1.0920
3 2883 3498.25 * *
4 4159 3552.75 * *
STEP 3: ESTIMATING AND ADJUSTING THE
SEASONAL EFFECT
Year Adjusted S.E=
Average of Average of
Quarter
1985 1986 1987 1988 S.E S.E - adjusted
value
1 - 0.9083 0.9072 0.9232 0.9129 0.9056
2 - 1.0181 1.0041 1.0920 1.0381 1.0308
3 0.9872 1.0109 1.0140 - 1.0041 0.9968
4 1.0740 1.0703 1.0775 - 1.0740 1.0667
Sum 4.0291 4.000
Adjusted value= (4.0291-4)/4 = 0.007275
STEP 3: ESTIMATING AND ADJUSTING THE
SEASONAL EFFECT
Year Adjusted S.E=
Quarter Average of S.E Average of S.E -
Year Quarter Sales 4.M.A C.M.A S.E- detrended Adj.S.E 1985 1986 1987 1988 adjusted value

1985 1 2881 * * * 0.9056 1 - 0.9083 0.9072 0.9232 0.9129 0.9056

2 - 1.0181 1.0041 1.0920 1.0381 1.0308
* 2 3249 * * * 1.0308 3 0.9872 1.0109 1.0140 - 1.0041 0.9968
4 1.0740 1.0703 1.0775 - 1.0740 1.0667
* 3 3180 * 3221.13 0.9872 0.9968 Sum 4.0291 4.000

* 4 3505 3203.75 3263.50 1.0740 1.0667

1986 1 3020 3238.50 3325.00 0.9083 0.9056
* 2 3449 3288.50 3387.75 1.0181 1.0308
* 3 3472 3361.50 3434.50 1.0109 0.9968
* 4 3715 3414.00 3470.88 1.0703 1.0667
1987 1 3184 3455.00 3509.88 0.9072 0.9056
* 2 3576 3486.75 3561.25 1.0041 1.0308
* 3 3657 3533.00 3606.38 1.0140 0.9968
* 4 3941 3589.50 3657.50 1.0775 1.0667
1988 1 3319 3623.25 3595.00 0.9232 0.9056
2 3850 3691.75 3525.50 1.0920 1.0308
3 2883 3498.25 * * 0.9968
4 4159 3552.75 * * 1.0667
STEPS TO CALCULATE THE SEASONAL EFFECTS
1. Divide the trend (either from MA method or regression) from corresponding values
of the time series (seasonal effect).
2. Calculate the average seasonal effect for each season (i.e for quarterly data,
there should be 4 average values)
3. Obtain the summation of the average seasonal effect values (Need to take this to
the value of the number of seasons) – Denote the answer by ‘S’
4. Obtain (S -k)/k where k is the number of seasons
5. Subtract the answer obtained in step 4 from each seasonal effect to produce the
ADJUSTED SEASONAL EFFECTS (𝑺 ෡𝒕 ) corresponding to each season.
STEP 4: FORECASTING BASED ON MULTIPLICATIVE DECOMPOSITION
S.E- De-
Year Quarter Sales 4.M.A C.M.A detrended Adj.S.E Seasonalized
1985 1 2881 * * * 0.9063 3178.86
* 2 3249 * * * 1.0306 3152.53
* 3 3180 * 3221.13 0.9872 0.9968 3190.21
* 4 3505 3203.75 3263.50 1.0740 1.0662 3287.38
1986 1 3020 3238.50 3325.00 0.9083 0.9063 3332.23 Obtain the de-
* 2 3449 3288.50 3387.75 1.0181 1.0306 3346.59 seasonalized
* 3 3472 3361.50 3434.50 1.0109 0.9968 3483.15 series by
* 4 3715 3414.00 3470.88 1.0703 1.0662 3484.34 dividing
1987 1 3184 3455.00 3509.88 0.9072 0.9063 3513.19
* 2 3576 3486.75 3561.25 1.0041 1.0306 3469.82
adjusted
* 3 3657 3533.00 3606.38 1.0140 0.9968 3668.74 seasonal effect
* 4 3941 3589.50 3657.50 1.0775 1.0662 3696.3 from the
1988 1 3319 3623.25 3595.00 0.9232 0.9063 3662.14 original series.
2 3850 3691.75 3525.50 1.0920 1.0306 3735.69
3 2883 3498.25 * * 0.9968 2892.26
4 4159 3552.75 * * 1.0662 3900.77
STEP 4: FORECASTING BASED ON MULTIPLICATIVE
DECOMPOSITION
Fit a regression model taking the x-axis (independent) as time (t) and the y-axis
(dependent) as the de-seasonalised series.

Parameters of the trend line

෢ 𝑆𝐸 = 𝑇෠𝑡 = 𝛽መ0 + 𝛽መ1 𝑡
𝐷𝐸
𝛽መ0 = 3082.46 𝑎𝑛𝑑 𝛽መ 1 = 48.54
𝑇෠𝑡 = 3082.46 + 48.54𝑡

Since we are forecasting the 1st two quarters of 1989, the respective time indices are 17 and
18.
𝑇෠17 = 3082.46 + 48.54 ∗ 17 = 3907.64 and 𝑇෠18 = 3082.46 + 48.54 ∗ 18 = 3956.18
STEP 4: FORECASTING BASED ON MULTIPLICATIVE
DECOMPOSITION

Year Quarter Time Index 𝑇෠𝑡 𝑎𝑑𝑗. 𝑆መ𝑡 𝑌෠𝑡 = 𝑇෠𝑡 * 𝑆መ𝑡
1 17 3907.64 0.9063 3541.494
1989
2 18 3956.18 1.0306 4077.239
THANK YOU!

See you at the next lecture!

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