Department of Information Technology, Vardhaman College of Engineering, Hyderabad.

Web:(www.vardhaman.org)

Unit-4
Course contents:
• Forecasting

• Time-Series Decomposition

• ARIMA models

• Measures of Forecast Accuracy

• Case studies : predictive applications to various Business and health

care domains

Faculty Name: Dr.Saroja Kumar Rout

Department: Information Technology

Course Name: Predictive Analytics

Course Code:A6608

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 Department of Information Technology, Vardhaman College of Engineering, Hyderabad.
Web:(www.vardhaman.org)

What Is Time Series Forecasting? Overview

Time series forecasting essentially allows businesses to predict future outcomes by

analyzing previous data, and providing businesses with a glimpse into what direction data
are trending.But time series forecasting is not without its challenges. To use time series
forecasting, one must have accurate data from the past and have some assurance that this
data will be representative of future events. Curious to know whether time series
forecasting is applicable to your business? Then you’re in luck. Below, we’ll detail
everything you need to know about time series forecasting, so that you can decide whether
or not time series forecasting is right for you and your business.

What is a time series?

A time series is usually modelled through a stochastic process Y(t), i.e. a sequence of
random variables. In a forecasting setting we find ourselves at time t and we are interested
in estimating Y(t+h), using only information available at time t.

Time Series Forecasting: An Overview

Source: AiSmartz

What Is Time Series Forecasting?

Time series forecasting is a method of predicting future events by analyzing historical data.
Some examples of this include:
• Annual crop yields
• Monthly sales performances

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 Department of Information Technology, Vardhaman College of Engineering, Hyderabad.
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• Cryptocurrency transactions
When Should You Use Time Series Forecasting?

Time series forecasting can be used when you have quantitative data that has been
measured over a period of time. For time series forecasting to work, you must ensure that
several criteria are met.

Forecasting with time series models involves using historical data to predict future values
in a time-ordered sequence. Time series forecasting is widely used in various fields,
including finance, economics, sales, weather, and more. Here's a general overview of the
process for building a time series forecasting model:
1. Data Collection: Gather historical time-ordered data. The data should include a time
index and the corresponding observations.
2. Data Preprocessing: Clean and preprocess the data. This includes handling missing
values, outliers, and transforming the data as needed. Common preprocessing steps
include differencing to remove trends or seasonal patterns and scaling if necessary.
3. Exploratory Data Analysis (EDA): Perform EDA to understand the data's
characteristics, including seasonality, trends, and autocorrelation. Visualizations and
statistical tests can be helpful in this stage.
4. Train-Test Split: Split the data into a training set (historical data) and a testing set
(future data for evaluation). The testing set should be held out and not used for model
training.
5. Model Selection: Choose an appropriate time series forecasting model. Some
common models include:

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 Department of Information Technology, Vardhaman College of Engineering, Hyderabad.
Web:(www.vardhaman.org)

• ARIMA (AutoRegressive Integrated Moving Average): Suitable for stationary

data with autocorrelation.
• Exponential Smoothing (ETS): Useful for data with seasonality and trends.
• Prophet: Designed for daily seasonal data with holidays and events.
• LSTM (Long Short-Term Memory): A type of recurrent neural network (RNN)
for more complex sequential data.
• VAR (Vector Autoregression): Used when dealing with multiple time series
variables.
6. Model Training: Train the selected model using the training data. This involves
estimating model parameters and fitting the model to the historical data.
7. Model Evaluation: Use the testing set to evaluate the model's performance. Common
evaluation metrics include Mean Absolute Error (MAE), Mean Squared Error (MSE),
Root Mean Squared Error (RMSE), and others.
8. Forecasting: Once the model is trained and evaluated, use it to make future forecasts.
The forecast horizon depends on your specific application.
9. Model Refinement: Depending on the model's performance, you might need to fine-
tune parameters, consider alternative models, or retrain the model with more recent
data to improve accuracy.
10. Deployment: If the model meets your forecasting requirements, deploy it for
generating real-time or future predictions.
11. Monitoring: Continuously monitor the model's performance and retrain it as needed,
especially if the data distribution or patterns change.
Remember that choosing the right model and preprocessing steps depends on the specific
characteristics of your time series data. Seasonality, trends, and autocorrelation are
critical factors to consider when selecting the appropriate model. Additionally, time
series forecasting often involves an iterative process of model selection, training, and
evaluation to achieve the best results.

2. Time-Series Decomposition
Time-series decomposition is a statistical technique used to break down a time
series data into its constituent components. These components typically include trend,
seasonality, and residual (or error). The goal of time-series decomposition is to better
understand the underlying patterns and structures within the data, aiding in analysis and
forecasting.
1. Trend:

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 Department of Information Technology, Vardhaman College of Engineering, Hyderabad.
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• The trend component represents the long-term movement or pattern in the

data. It captures the overall direction, whether the series is increasing,
decreasing, or staying relatively constant over time.
2. Seasonality:
• Seasonality refers to the repeating patterns or variations in the data that occur
at regular intervals. These intervals could be daily, weekly, monthly, or any
other consistent time frame. Seasonality accounts for the cyclical fluctuations
observed in the time series.
3. Residual (Error):
• The residual component, also known as the error term, represents the random
fluctuations or noise in the data that cannot be attributed to the trend or
seasonality. It includes any irregularities or unexpected variations that are not
explained by the identified trend and seasonality.
Time-series decomposition methods can be additive or multiplicative:

Time-series decomposition is valuable for various applications, including identifying

underlying patterns, removing seasonality for trend analysis, and improving forecasting
accuracy. Common methods for time-series decomposition include moving averages,
exponential smoothing, and more advanced techniques like the Seasonal-Trend
decomposition using LOESS (STL) or the Classical Decomposition method.

3. ARIMA models

What is ARIMA?
ARIMA is an acronym that stands for Auto-Regressive Integrated Moving Average. It is a
class of model that captures a suite of different standard temporal structures in time series
data.
In this tutorial, We will talk about how to develop an ARIMA model for time series
forecasting in Python.

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 Department of Information Technology, Vardhaman College of Engineering, Hyderabad.
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An ARIMA model is a class of statistical models for analyzing and forecasting time series
data. It is really simplified in terms of using it, Yet this model is really powerful.
ARIMA stands for Auto-Regressive Integrated Moving Average.
ARIMA, which stands for AutoRegressive Integrated Moving Average, is a popular time
series forecasting model that combines autoregression, differencing, and moving averages.
ARIMA models are used for analyzing and forecasting univariate time series data. The model
is particularly effective in capturing different components of time series data, including trends
and seasonality.

Here are the key components and concepts of ARIMA models:

1. AutoRegressive (AR) Component:
• The autoregressive component involves modeling the relationship between an
observation and several lagged observations (previous time steps). The "p" in
ARIMA(p, d, q) denotes the order of the autoregressive component, indicating
the number of lagged observations used in the model.
2. Integrated (I) Component:
• The integrated component refers to differencing the time series data to make it
stationary. Stationarity is crucial for ARIMA models because they perform
better on time series data with a constant mean and variance. The "d" in
ARIMA(p, d, q) represents the order of differencing required to achieve
stationarity.
3. Moving Average (MA) Component:
• The moving average component involves modeling the relationship between
the current observation and a residual error from a moving average model
applied to lagged observations. The "q" in ARIMA(p, d, q) signifies the order
of the moving average component, representing the number of lagged forecast
errors included in the model.
The general form of an ARIMA model is denoted as ARIMA(p, d, q), where:
• "p" is the order of the autoregressive component.
• "d" is the order of differencing.
• "q" is the order of the moving average component.
ARIMA models are suitable for time series data that exhibit trends and seasonality. They are
widely used in various fields for tasks such as financial forecasting, economic modeling, and
demand forecasting.
The model parameters (p, d, q) are typically determined through analysis of the time series
data, including autocorrelation and partial autocorrelation functions, as well as by assessing
the stationarity of the data through differencing. While ARIMA models are effective for many
time series, they may need adjustments or extensions for more complex patterns or non-
stationary data.

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 Department of Information Technology, Vardhaman College of Engineering, Hyderabad.
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Steps to Use ARIMA Model

We construct a linear regression model by incorporating the specified number and type of
terms. Additionally, we prepare the data through differencing to achieve stationarity,
effectively eliminating trend and seasonal structures that can adversely impact the regression
model.
1. Visualize the Time Series Data
Visualize the Time Series Data involves plotting the historical data points over time to
observe patterns, trends, and seasonality.
2. Identify if the date is stationary
Identify if the data is stationary involves checking whether the time series data exhibits a
stable pattern over time or if it has any trends or irregularities. Stationary data is necessary for
accurate predictions using ARIMA, and various statistical tests can be employed to determine
stationarity.
3. Plot the Correlation and Auto Correlation Charts
To plot the correlation and auto-correlation charts in the steps of using the ARIMA model
online, you analyze the time series data. The correlation chart displays the relationship
between the current observation and lagged observations, while the auto-correlation chart
shows the correlation of the time series with its own lagged values. These charts provide
insights into potential patterns and dependencies within the data.
4. Construct the ARIMA Model or Seasonal ARIMA based on the data
To construct an ARIMA (Autoregressive Integrated Moving Average) model or a Seasonal
ARIMA model, one analyzes the data to determine the appropriate model parameters, such as
the order of autoregressive (AR) and moving average (MA) components. This step involves
selecting the optimal values for the model based on the characteristics and patterns observed
in the data.
Let’s Start
import numpy as np
import pandas as pd
import matplotlib.pyplot as plt
%matplotlib inline
Defining the Dataset
In this tutorial, I am using the below dataset.
df=pd.read_csv('time_series_data.csv')
df.head()

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 Department of Information Technology, Vardhaman College of Engineering, Hyderabad.
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# Updating the header

df.columns=["Month","Sales"]
df.head()
df.describe()
df.set_index('Month',inplace=True)

from pylab import rcParams

rcParams['figure.figsize'] = 15, 7
df.plot()

If we see the above graph then we will able to find a trend that there is a time when sales are
high and vice versa. That means we can see data is following seasonality. For ARIMA first
thing we do is identify if the data is stationary or non – stationary. if data is non-stationary we
will try to make them stationary then we will process further.

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 Department of Information Technology, Vardhaman College of Engineering, Hyderabad.
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Case studies : predictive applications to various Business and health care

domains

Case studies- Business Domain:

Case Study: Retail Sales Forecasting
Objective: The primary goal of this case study was to implement predictive analytics to
forecast retail sales accurately, allowing the company to optimize inventory management and
improve overall revenue.
Approach:
1. Data Collection:
• Gathered historical sales data for various products across different stores.
• Collected information on external factors such as economic indicators,
seasonality, and promotional events.
2. Feature Selection:
• Identified key features affecting sales, including historical sales performance,
seasonal trends, and external factors that might influence consumer behavior.
3. Model Selection:
• Chose a predictive modeling technique, such as time series analysis or
machine learning algorithms (e.g., decision trees, random forests), based on
the complexity of the data and the desired accuracy.
4. Data Preprocessing:
• Cleaned and preprocessed the data, handling missing values and outliers.
• Created a structured dataset suitable for training the predictive model.
5. Training the Model:
• Split the dataset into training and testing sets.
• Trained the predictive model using historical data, allowing the algorithm to
learn patterns and relationships between features and sales outcomes.
6. Validation:
• Validated the model using the testing set to ensure its accuracy and
generalizability.

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 Department of Information Technology, Vardhaman College of Engineering, Hyderabad.
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Results:
1. Accurate Sales Forecasting:
• The predictive model successfully forecasted sales trends for various products
in different stores.
• Accuracy was achieved through a combination of historical sales patterns and
external factors.
2. Optimized Inventory Management:
• Armed with accurate sales forecasts, the company optimized inventory levels
for each product and store.
• Reduced instances of overstocking and stockouts, leading to more efficient
supply chain management.
3. Improved Revenue:
• By minimizing excess inventory costs and capitalizing on sales opportunities,
the company experienced improved revenue.
• Strategic decision-making based on predictive analytics positively impacted
the bottom line.
4. Responsive Marketing Strategies:
• The insights from the predictive model allowed for the development of
targeted marketing strategies.
• Promotional efforts and discounts were strategically timed to align with
predicted high-demand periods.
This case study demonstrates how predictive analytics in retail sales forecasting can lead to
more informed decision-making, improved operational efficiency, and ultimately, enhanced
business performance.

Case studies- Health care domains:

Case Study: Patient Readmission Prediction

Objective: The primary objective of this case study was to implement predictive analytics to
identify patients at high risk of hospital readmission. The goal was to improve patient care,
reduce healthcare costs, and enhance overall hospital operational efficiency.
Approach:
1. Data Collection:
• Gathered comprehensive patient data, including demographics, medical history,
admission records, and post-discharge information.

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 Department of Information Technology, Vardhaman College of Engineering, Hyderabad.
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• Identified relevant features such as chronic conditions, previous

hospitalizations, and socio-economic factors.
2. Feature Engineering:
• Created relevant features for predicting readmission risk, considering factors
such as the number of previous hospitalizations, length of stay, and the presence
of specific chronic diseases.
3. Model Selection:
• Chose a suitable predictive modeling technique, such as logistic regression or
machine learning algorithms like decision trees or ensemble methods, based on
the complexity of the data.
4. Data Preprocessing:
• Handled missing data and outliers appropriately.
• Ensured that the dataset was well-structured for training the predictive model.
5. Training the Model:
• Split the dataset into training and testing sets.
• Trained the predictive model using historical patient data to learn patterns
associated with readmission risk.
6. Validation:
• Validated the model's performance using a separate testing set.
• Assessed the model's accuracy, sensitivity, specificity, and other relevant
metrics.
Results:
1. Identification of High-Risk Patients:
• The predictive model successfully identified patients at a high risk of hospital
readmission based on learned patterns from historical data.
2. Personalized Care Plans:
• Healthcare providers could intervene with personalized care plans for identified
high-risk patients, addressing specific needs and potential risk factors.
3. Reduced Readmission Rates:
• The implementation of personalized interventions led to a reduction in hospital
readmission rates for the identified high-risk group.
4. Resource Optimization:

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 Department of Information Technology, Vardhaman College of Engineering, Hyderabad.
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• Hospitals could allocate resources more efficiently by focusing on patients

identified as high risk, ensuring that the necessary support and interventions
were provided.
5. Cost Savings:
• By reducing unnecessary readmissions, the hospital achieved cost savings
associated with both direct medical expenses and indirect costs related to patient
care.
This case study illustrates the powerful impact of predictive analytics in healthcare by enabling
proactive and personalized care strategies, ultimately leading to improved patient outcomes
and more efficient use of healthcare resources.

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