The University of the South Pacific EC 203 Economic Statistics

Tutorial 12 Time Series Analysis and Forecasting (Chapter 16(5th ed.) or Ch 18 (6th ed))
Coverage:
 Components of a time series
 Smoothing techniques
 Trend analysis
 Measuring the cyclical effect
 Measuring the seasonal effect
 Introduction to forecasting
 Time series forecasting with exponential smoothing
 Time series forecasting with regression
Task 1

A) As part of an effort to forecast future sales, a manager of a wholesale cigarette company in NZ recorded
the quarterly cigarette sales ($ m) for the years 2009-2012. The sales are shown in the following table
and recorded.
i) Calculate the 3-quarters and 5-quarter moving averages missing values.
ii) Apply exponential smoothing technique with W=0.2 and W=0.7.

Formula:
3 period Moving Avg. Formula

5 period Moving Avg. Formula

exponential smoothing S1 = y1 t=1

technique St = wyt + (1-w)St-1 t2
Exponentially
smooth
(in millions) 3Q 5Q
Year Quarter Period Cigarette sales M avg. M avg. w =0.2 w =0.7
2009 Mar 1 377 - -
Jun 2 574 -
Sep 3 582
Dec 4 903 540.2 800.7
2010 Mar 5 356 641.0 617.6 503.4 489.4
Jun 6 664 534.3 668.2 535.5 611.6
Sep 7 583 694.0 568.4 545.0 591.6
Dec 8 835 607.3 622.4 603.0 762.0
2011 Mar 9 404 621.7 604.8 563.2 511.4
Jun 10 626 535.3 655.8 575.8 591.6
Sep 11 576 680.0 566.4 575.8 580.7
Dec 12 838 600.7 599.6 628.2 760.8
2012 Mar 13 388 598.7 589.4 580.2 499.8
Jun 14 570 578.2 549.0
Sep 15 575 -
Dec 16 1017 - -
b) What happens to level of smoothing when we increase period of moving average and when we increase
smoothing constant(w).

Task 2

Annual sales for a pharmaceutical company are believed to change linearly over time. Based on the last 10 years’
sales records, to measure the trend component following simple linear regression output was generated.

SUMMARY OUTPUT
Regression Statistics
Multiple R 0.829573
R Square 0.688192
Standard Error 1.351968
Observations 10
ANOVA
df SS MS F Sig. F
Regression 1 32.27345 32.27345 17.65682 0.002988
Residual 8 14.62255 1.827818
Total 9 46.896
Standard Upper
Coefficients Error t Stat P-value Lower 95% 95%
Intercept 17.28 0.92357 18.71 6.88E-08 15.15024 19.40976
t 0.625455 0.148847 4.202002 0.002988 0.282213 0.968696

i) Comment on existence of linear trend based on regression output.

ii) Write your fitted trend equation.
iii) Forecast annual sales for period 11.
iv) In table below Calculate missing value of predicted Y (Y-hat) and Calculate missing percentage of
trend ((Y/Y-hat)*100).

Sales % of
t (Y) Pre.Y(YHat) Trend
1 18 17.9
2 19.4 104.7
3 18 94.0
4 19.9 19.8
5 19.3 20.4 94.6
6 21.1 21.0 100.3
7 23.5 21.7 108.5
8 23.2 22.3
9 20.4 22.9 89.0
10 24.4 23.5 103.7
 v) Below graph illustrates % of trend overtime, comment on cyclical effect.

120.0 % of trend
115.0
110.0
105.0
100.0
95.0
90.0
85.0
80.0
1 2 3 4 5 6 7 8 9 10

Task 3

Two different forecasting models were used to forecast the time series for 2009, 2010, 2011 & 2012. The
forecast values and the actual values for these years are shown in the following table. Use MAD and SSFE to
determine which models performed best.

Actual Forecast Value (F) using model

Year Value Model 1 Model 2
2006 129 136 118
2007 142 148 141
2008 156 150 158
2009 183 175 163
Formula:

True and False

1. Any variable that is measured over time in sequential order is called a time series.

2. Smoothing time-series data by the moving average method or exponential smoothing method is an attempt
to remove the effect of the random variation component.

3. The time-series component that reflects the irregular changes in a time series that are not caused by any
other component, and tends to hide the existence of the other, more predictable components, is called random
variation.

4. In an exponentially smoothed time series, the smoothing constant w is chosen on the basis of how much
smoothing is required. In general, a small value of w such as 0.1 results in a great deal of smoothing, while a
large value of w, such as 0.9, results in very little smoothing.
5. The term ‘seasonal variation’ may refer to the four traditional seasons, or to systematic patterns that occur
during a quarter, a week, or even one day, but within 12 months.

6. A time series can consist of four different components: long-term trend, cyclical variation, seasonal variation,
and random variation.

7. The cyclical variation component of a time series is a wave like movement, showing peaks and troughs.

8. A trend is one of the four different components of a time series. It is a long-term, relatively smooth pattern or
direction exhibited by a series, and its duration is more than one year.

9. The purpose of using the moving average is to take away the short-term seasonal and random variation,
leaving behind a combined trend and cyclical movement.

10. The most commonly used measures of forecast accuracy are the mean absolute deviation (MAD) and the
sum of squares for forecast error (SSE).