TS Part2

MATH11131 Part 2: Forecasting, seasonal variation and filtering
⊲ MATH11131 Part 2: Forecasting,

seasonal variation and filtering
Forecasting
Seasonal variation
Removing trends
Ioannis Papastathopoulos
School of Mathematics, University of Edinburgh
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MATH11131 Part 2: Forecasting,
⊲ Forecasting
Forecasting is dangerous
Straight-line regression
ARMA forecasting
Forecasting Xn+1 at time n
Example
n
Finding Xn+h for h > 1
Forecast error
Example
Forecast error
Comments
Prediction uncertainty
ARIMA forecasting
Exponential smoothing
Forecasting
Exponential smoothing and
ARIMA(0,1,1) models
ARIMA(0,1,1) models
Summary
Adjustments for a finite number of
past observations
past observations
Holt’s method
Holt’s method
Recursive formula for Holt’s method
Holt’s method and the ARIMA(0,2,2)

model
Seasonal variation
Removing trends
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seasonal variation and filtering We seek to use observed data to make predictions about (as yet) unobserved events.
Forecasting
⊲ Forecasting is dangerous Why is this so difficult?
ARMA forecasting
Example
Unknown unknowns : unforseeable changes in the underlying process
n
Forecast error
Example
Forecast error
Comments
Known unknowns we forecast using a model (or models) that depend on unknown
ARIMA forecasting
quantities (parameters)
ARIMA(0,1,1) models
ARIMA(0,1,1) models
Summary
Unknown knowns even if we knew the structure and parameters of a stochastic
past observations
model, the output would be random
past observations
Holt’s method
Holt’s method The only known known is that people tend to underestimate (or neglect?) uncertainty.

model
Seasonal variation
Removing trends
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Suppose we seek to predict the value of Xn+h at future time n + h based on the data
Forecasting iid
X
Forecasting is dangerous Xt = β0 + β1 (t − t̄) + wt , t = 1, 2, . . . , n, wt ∼ (0, σ 2 ), t̄ = n−1 t
⊲ Straight-line regression
ARMA forecasting
Xt (t − t̄)/ (t − t̄)2 .
P P
Example
n
for which the (uncorrelated) estimators are β̂0 = X̄ and β̂1 =
Forecast error
Example

n
The natural predictor is Xn+h = βˆ0 + β̂1 (n + h − t̄) and this has variance
Forecast error
Comments
2

n 2 1 (n + h − t̄)
ARIMA forecasting var(Xn+h ) = V (h) = σ + P 2
,
n (t − t̄)
ARIMA(0,1,1) models
ARIMA(0,1,1) models
Summary
which increases quadratically in n + h − t̄, but tends to zero for fixed h as n → ∞.
past observations If the model is correct, the future observations will be
past observations Xn+h = β0 + β1 (n + h − t̄) + wn+h , where wn+h is independent of the previous data,
Holt’s method
Holt’s method and then
n
) = σ 2 + V (h) → σ 2
var(Xn+h − Xn+h (1)
model
even if the sample size n → ∞.
The terms in (1) represent the uncertainty due to intrinsic variability of the system, σ 2,
Seasonal variation

Removing trends
and that due to estimating the system, V (h), to which must be added the variability
due to guessing the system (here a linear model) from the data.
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ARMA forecasting

Forecasting
Forecasting – Forecasting is the process of estimating future values of an observed time series.
Straight-line regression – The problem is to estimate the value of Xn+h for some integer h given observations
⊲ ARMA forecasting x1 , . . . xn .
Example
n
– We will discuss forecasting for regular ARMA(p,q) models.
Forecast error
Example
– To simplify matters, we will assume that there is no constant term.
Forecast error
Comments
Prediction uncertainty Notation:
ARIMA forecasting
n
– Let Xn+h denote the forecast made at time n for Xn+h .
ARIMA(0,1,1) models
Exponential smoothing and – E.g. When h = 1 we have
ARIMA(0,1,1) models
n
Summary Xn+1 = forecast for Xn+1 , made at time n.
past observations
past observations General idea:
Holt’s method
Holt’s method
Recursive formula for Holt’s method – The general idea is to set wt = 0 (its mean) for any future value of t. Thus, at time
Holt’s method and the ARIMA(0,2,2) n, wn+1 , wn+2 , . . . are set to zero. Xt is set to its forecasted value for future values
model
n
of t. For example, for a forecast made at time n, Xn+1 is set to Xn+1 . Then,
Seasonal variation
forecasts are made using the form of the model. The approach discussed is known as
Removing trends
the Box-Jenkins approach.
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seasonal variation and filtering From the definition of an ARMA(p,q) process, we know that
Forecasting
Straight-line regression Xn+1 = (α1 Xn + α2 Xn−1 + . . . + αp Xn+1−p ) + wn+1 + θ1 wn + . . . θq wn+1−q .
ARMA forecasting
⊲ Forecasting X n+1 at time n
n
Example
n
To obtain the forecast for time n + 1, made at time n (Xn+1 ) we set wn+1 to zero, so
Forecast error
Example
that
n
Forecast error
Comments
Xn+1 = (α1 Xn + α2 Xn−1 + . . . + αp Xn+1−p ) + θ1 wn + . . . θq wn+1−q .
ARIMA forecasting So,
n
ARIMA(0,1,1) models
Xn+1 = Xn+1 − wn+1 . (2)
ARIMA(0,1,1) models
Summary
Now, since {Xt } is regular, we can write wn+1 as:
past observations
Adjustments for a finite number of φ(B)
past observations
wn+1 =π(B)Xn+1 , where π(B) =
Holt’s method
Holt’s method
θ(B)
=Xn+1 + π1 Xn + π2 Xn−1 + . . .
model
Seasonal variation
Substituting this into (2), we get our forecast, of
Removing trends
n
Xn+1 = −π1 Xn − π2 Xn−1 − . . .
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Example

seasonal variation and filtering Supppose θ(B) = 1 (so the model is AR(p)). We then have π(B) = φ(B), and hence
Forecasting
πi = −αi for i = 1, 2, . . . p and πi = 0 for i > p.
ARMA forecasting
⊲ Example n Using the formula obtained for the one step ahead forecast, we get
Forecast error
Example n
Forecast error Xn+1 = α1 Xn + α2 Xn−1 + . . . + αp Xn+1−p ,
Comments
ARIMA forecasting
which also follows from setting wn+1 = 0 in the formula for the AR(p) model:
ARIMA(0,1,1) models
ARIMA(0,1,1) models
Xn+1 = α1 Xn + α2 Xn−1 + . . . + αp Xn+1−p + wn+1 .
Summary
past observations
past observations
Holt’s method
Holt’s method

model
Seasonal variation
Removing trends
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n

seasonal variation and filtering Using Wold’s decomposition, we have that
Forecasting
Forecasting is dangerous ∞
Straight-line regression X
ARMA forecasting
Xn+h = ψi wn+h−i . (3)
Example i=0
⊲ Finding n
Xn+h for h > 1
Forecast error
Example On setting wn+1 = wn+2 = . . . = wn+h = 0, we obtain
Forecast error
Comments
n
ARIMA forecasting
Xn+h = ψh wn + ψh+1 wn−1 + . . . (4)
ARIMA(0,1,1) models
This is theoretically computable, since we can find wn , wn−1 , . . . from the formula
ARIMA(0,1,1) models
Summary
wt = π(B)Xt (the inversion formula).
past observations Denoting the error in the forecast for Xn+h by en (h), we have that
past observations
Holt’s method n
Holt’s method en (h) = Xn+h − Xn+h ,

model i.e. the error is the difference between the actual value and the forecasted value.
Seasonal variation
Using (3) and (4), this can be written
Removing trends
en (h) = wn+h + ψ1 wn+h−1 + . . . + ψh−1 wn+1 .
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Forecast error

seasonal variation and filtering Regarding the error en (h) as a random variable, we have
Forecasting
Straight-line regression E[en (h)] =0
ARMA forecasting
2 2
2
Example
Var[en (h)] = 1 + ψ1 + . . . ψh−1 σ .
n
⊲ Forecast error
Example
Forecast error
Comments
Hence, if {wt } are Gaussian white noise, a 95% confidence interval for Xn+h is
ARIMA forecasting 1/2
n
ψ12 2

Xn+h ± 1.96 1 + + . . . ψh−1 σ.
ARIMA(0,1,1) models
ARIMA(0,1,1) models
Summary
past observations
In particular, when h = 1, we have en (1) = wn+1 ∼ N (0, σ 2 ), and a 95% confidence
past observations interval for Xn+1 is
n
Holt’s method
Holt’s method Xn+1 ± 1.96σ.

model
In practice, the approach given above is often used to obtain the variance of the
Seasonal variation
Removing trends
estimate. There are other, recursive approaches that can be used to obtain point
estimates of the forecasts (see e.g. p83-84 of Chatfield).
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Example

seasonal variation and filtering Consider the AR(1) process
Forecasting
Xt = 0.5Xt−1 + wt
ARMA forecasting
where {wt } denotes Gaussian white noise.
Example
Finding Xn+hn
for h > 1 We have already seen that an AR(1) process can be written
Forecast error
⊲ Example
∞
Forecast error X
Comments
Xt = ψ(B)wt = ψi wt−i ,
ARIMA forecasting
i=0
ARIMA(0,1,1) models
ARIMA(0,1,1) models
where ψi = αi for i = 1, 2 . . . if the process is causal. The root of φ(B) = (1 − 0.5B) is
Summary
1/0.5, which lies outside the unit circle. So the process is causal, and we can use the
past observations
Adjustments for a finite number of decomposition given above. For this example, we have α = 0.5.
past observations
Holt’s method The forecast for Xn+h is given by
Holt’s method
n
Xn+h = ψh wn + ψh+1 wn−1 + . . . = 0.5h (wn + 0.5wn−1 + . . .) = 0.5h Xn .
model
Seasonal variation
Removing trends
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Forecast error

seasonal variation and filtering The forecasting error en (h) is given by
Forecasting
∞
n
ARMA forecasting
Xn+h − Xn+h = 0.5i wn+h−i − 0.5h (wn + 0.5wn−1 + . . .)
Example
n
i=0
Forecast error
Example
= wn+h + 0.5wn+h−1 + . . . 0.5h−1 wn+1 ,
⊲ Forecast error
so en (h) ∼ N (0, (1 + 0.52 + 0.54 + . . . 0.52h−2 )σ 2 ), using that {wt } are uncorrelated
Comments
and normally distributed, with mean zero and variance σ 2 .

ARIMA forecasting
ARIMA(0,1,1) models
A 95% prediction interval for Xn+h is given by
ARIMA(0,1,1) models
Summary !1/2
Adjustments for a finite number of h−1
past observations
X
n
past observations
Xn+h ± 1.96 σ 0.52i
Holt’s method
Holt’s method
i=0
Recursive formula for Holt’s method 2h
1/2
h 1 − 0.5
Holt’s method and the ARIMA(0,2,2) =0.5 Xn ± 1.96 σ
model
1 − 0.52
Seasonal variation
Removing trends where this final simplification uses the sum of a geometric series.
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Comments

seasonal variation and filtering The best linear predictor for a process with mean µ has the form
Forecasting
Forecasting is dangerous ∞
n
ARMA forecasting
Xn+h =µ+ ψj wn+h−j
Example
n
j=h
Forecast error
Example
Forecast error
but because the ψj converge to zero exponentially fast for any causal ARMA model, we
⊲ Comments n
have Xn+h → µ as h → ∞.
ARIMA forecasting
ARIMA(0,1,1) models
Exponential smoothing and Likewise for large h, the prediction error
ARIMA(0,1,1) models
Summary
past observations
h−1
X ∞
X
past observations var(e(h)) = σ 2 ψj2 → σ 2 ψj2 exponentially fast as h → ∞
Holt’s method
Holt’s method j=0 j=0

model
Seasonal variation
Removing trends
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seasonal variation and filtering We’ve already seen that there are three components to prediction uncertainty:
Forecasting
Forecasting is dangerous – model uncertainty
ARMA forecasting – estimation uncertainty
Example
n
– innovation variability
Forecast error
Example
Forecast error
Previous discussion pertains only to the innovation uncertainty, assuming that the model
Comments
⊲ Prediction uncertainty
structure and its parameters are known
ARIMA forecasting
ARIMA(0,1,1) models
We can use bootstrap simulation (Davison, A. C. and Hinkley (2013). Bootstrap
ARIMA(0,1,1) models
Methods and their Application, CUP) to include the other two:
Summary
past observations
– we simulate R new sets of data X1∗ , . . . , Xn∗ from some plausible model;
past observations
– we fit the model class to each of these datasets, choosing the ‘best’ model by AIC or
Holt’s method
Holt’s method
similar, and estimating the parameters
n∗
– we use the ‘best’ fitted model to obtain Xn+h for each dataset
n∗
model – finally we use the R replicates of Xn+h to assess the uncertainty of the original
Seasonal variation
prediction Xn+h
Removing trends – Model selection must be automated.
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ARIMA forecasting
For ARIMA models, φ(B) is replaced with Φ(B) = φ(B)(I − B)d .

Forecasting
ARMA forecasting
Forecasting Xn+1 at time n Much of the theory discussed for forecasting with ARMA models can still be used.
Example
Finding Xn+hn
for h > 1 However, the Wold decomposition is no longer used. Instead, forecasts may be obtained
Forecast error
Example recursively, by setting future values of {wt } to zero as before (we do not go into detail
Forecast error
Comments here, although specific examples are given later).
⊲ ARIMA forecasting
ARIMA(0,1,1) models We will discuss two ad-hoc forecasting methods, which may be used on both ARMA
ARIMA(0,1,1) models
Summary
and ARIMA models: exponential smoothing and Holt’s method. It turns out that these
past observations
methods are equivalent to the method discussed above for some specific ARIMA models.
past observations
Holt’s method
Holt’s method

model
Seasonal variation
Removing trends
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n
seasonal variation and filtering The method of Exponential smoothing forecasts Xn+1 using a weighted sum of past
Forecasting
observations (where {Xt } is a time series with no trend).
ARMA forecasting
The formula used is
Example
n
n
= (1 − θ)Xn + (1 − θ)θXn−1 + (1 − θ)θ2 Xn−2 + . . . ,
Forecast error Xn+1
Example
Forecast error
Comments
where θ is some constant such that 0 < θ < 1 (so all the weights are positive). A
ARIMA forecasting
⊲ Exponential smoothing recursive version of this formula is
ARIMA(0,1,1) models
n
ARIMA(0,1,1) models
Xn+1 = (1 − θ)Xn + θXnn−1 ,
Summary
past observations
i.e. a weighted average of the current value (Xn ) and the previous forecast for Xn .
past observations
Holt’s method
Holt’s method A suitable constant, θ may be obtained by minimising errors for forecasts of known

values in the series.
model
Seasonal variation
In practice, a starting value such as Xt−t−1 is needed, where t is some past time.
Removing trends Remark: this method does not assume a particular model for the series {Xt }.
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Exponential smoothing and ARIMA(0,1,1) models

seasonal variation and filtering Consider the ARIMA(0,1,1) process
Forecasting
Straight-line regression Xt = Xt−1 + wt − θwt−1 ,
ARMA forecasting
Example
Finding Xn+hn
for h > 1 where wt ∼ W N (0, σ 2 ).
Forecast error
Example
We have shown that ∞
Forecast error X
Comments
wt = πi Xt−i ,
ARIMA forecasting
i=0
⊲ ARIMA(0,1,1) models
where πi = −(1 − θ)θi−1 for i = 1, 2 . . . and π0 = 1. Using the Box-Jenkins approach (i.e.
ARIMA(0,1,1) models
Summary
the approach discussed for ARMA(p,q) models), we have that
past observations
n
past observations
Xn+1 =Xn+1 − wn+1 (e.g. see (2))
Holt’s method ∞
Holt’s method X
Recursive formula for Holt’s method =Xn+1 − πi Xn+1−i
model
i=0
Seasonal variation
= − π1 Xn − π2 Xn−1 − . . .
Removing trends
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Exponential smoothing and ARIMA(0,1,1) models

seasonal variation and filtering Therefore, using our equation for πi , we get
Forecasting
n
= (1 − θ)Xn + (1 − θ)θXn−1 + (1 − θ)θ2 Xn−2 + . . .
Straight-line regression Xn+1
ARMA forecasting
Example
Finding Xn+hn
for h > 1
which is the exponential smoothing formula, provided that θ satisfies 0 < θ < 1. Thus,
Forecast error
Example
when the process {Xt } is ARIMA(0,1,1), exponential smoothing corresponds to the
Forecast error
Comments
Box-Jenkins approach discussed previously.
ARIMA forecasting
ARIMA(0,1,1) models
⊲ ARIMA(0,1,1) models
Summary
past observations
past observations
Holt’s method
Holt’s method

model
Seasonal variation
Removing trends
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Summary

seasonal variation and filtering Exponential smoothing may be used when {Xt } has no systematic trend, so that
Forecasting
E[Xt ] = µ (a constant, maybe 6= 0).
ARMA forecasting
Example
n
Finding Xn+h
Forecast error
for h > 1
When {Xt } ∼ ARIMA(0, 1, 1) (without constant), exponential smoothing gives the
Example
Forecast error
same results as the Box-Jenkins approach if 0 < θ < 1.
Comments
ARIMA forecasting
n
ARIMA(0,1,1) models Using the recursive formula, it is possible to find Xn+1 from Xn and Xnn−1 .
ARIMA(0,1,1) models
⊲ Summary
past observations
past observations
Holt’s method
Holt’s method

model
Seasonal variation
Removing trends
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Adjustments for a finite number of past observations

seasonal variation and filtering The exponential smoothing formula requires an infinite number of past observations.
Forecasting
ARMA forecasting
Forecasting Xn+1 at time n In practice, Xt will only be available for, say t = n, n − 1, . . . 1. The weights used in
Example
Finding Xn+hn
for h > 1 exponential smoothing should be modified so that they sum to one.
Forecast error
Example
Forecast error
Comments
Prediction uncertainty This may be done in various ways, e.g.:
ARIMA forecasting
ARIMA(0,1,1) models 1. Increase the weight on X1 to w, such that
ARIMA(0,1,1) models
Summary
Adjustments for a finite number (1 − θ) + (1 − θ)θ + . . . + (1 − θ)θn−2 + w = 1
⊲ of past observations
past observations
Holt’s method . This gives
Holt’s method
2 n−2

w =1 − (1 − θ) 1 + θ + θ + . . . + θ
model
(1 − θn−1 )
Seasonal variation =1 − (1 − θ) (as a geometric sum)
Removing trends
(1 − θ)
=θn−1 .
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Adjustments for a finite number of past observations

Forecasting 2. Multiply all of the weights by a factor, f such that

ARMA forecasting
f [(1 − θ) + (1 − θ)θ + . . . + (1 − θ)θn−2 + (1 − θ)θn−1 ] = 1.
Example
n
Forecast error Then n

Example [1 − θ ]
Forecast error
f (1 − θ) = 1,
Comments
(1 − θ)
ARIMA forecasting
Exponential smoothing and so
1
ARIMA(0,1,1) models
Exponential smoothing and f= n
·
ARIMA(0,1,1) models 1−θ
Summary
past observations
Adjustments for a finite number When n is large, both of these approaches give similar results.
⊲ of past observations
Holt’s method
Holt’s method

model
Seasonal variation
Removing trends
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Holt’s method

seasonal variation and filtering The Holt method of forecasting is widely used and may be employed when there is a
Forecasting
linear trend in the series (i.e. E[Xt ] = α + βt for some constant α, β). The Holt-Winters
ARMA forecasting
method (omitted) is an extension of Holt’s method to include seasonal variations.
Forecasting Xn+1 at time n n
Example
n
Suppose we want to find Xn+1 (we are currently at time n). Holt’s method sets
Forecast error
n
Example
Forecast error
Xn+1 = an+1 + bn+1
Comments
ARIMA forecasting where
ARIMA(0,1,1) models 1. an+1 is an estimate of the ‘local’ level of the series (i.e. ignoring the trend) at time
ARIMA(0,1,1) models n. Using the same approach as exponential smoothing, we will set
Summary
an+1 = αXn + (1 − α)Xnn−1 for some α (0 < α < 1)

past observations
past observations
⊲ Holt’s method
Holt’s method
so that an+1 is a weighted average of Xn and of the forecast from the previous time
Holt’s method and the ARIMA(0,2,2) point.
model
Seasonal variation
Removing trends
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Holt’s method

Forecasting 2. bn+1 is an estimate of the trend (so the increase from time n). We will let
ARMA forecasting
bn+1 = γ(an+1 − an ) + (1 − γ)bn for some γ (0 < γ < 1)
Example
n
Forecast error so that bn+1 is a weighted average of the change in ‘level’ from time n to time
Example
Forecast error n + 1 (an+1 − an ) and the estimate of the trend at time n (bn ).
Comments
ARIMA forecasting
It will be shown that Holt’s method agrees with the usual (Box-Jenkins) method if
ARIMA(0,1,1) models
1. The underlying time series is ARIMA(0,2,2) (without constant).
ARIMA(0,1,1) models
2. α and γ are chosen suitably.
Summary
past observations
But Holt’s method can be used more generally, choosing α and γ using error
past observations
minimisation methods.
Holt’s method
⊲ Holt’s method
As with exponential smoothing, a particular model is not assumed for the data.

model
Seasonal variation
Removing trends
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Theorem 1. A recursive formula for Holt’s method is given by
n
= α(1 + γ)Xn − αXn−1 + (2 − α − αγ)Xnn−1 − (1 − α)Xn−1
n−2
Forecasting
Forecasting is dangerous Xn+1
ARMA forecasting
Example
Proof. We know that
n
Finding Xn+hn
Forecast error
for h > 1
Xn+1 = an+1 + bn+1 .
Example
Forecast error Substituting in the given definitions for an+1 and bn+1 and rearranging we get
Comments
n
ARIMA forecasting
Exponential smoothing Xn+1 = αXn + (1 − α)Xnn−1 + γ(an+1 − an ) + (1 − γ)bn
ARIMA(0,1,1) models
ARIMA(0,1,1) models
Summary = αXn + (1 − α)(an + bn ) + γ αXn + (1 − α) (an + bn )
past observations
past observations
Holt’s method
Holt’s method
− γan + (1 − γ)bn
Recursive formula for Holt’s
⊲ method

model
= α(1 + γ)Xn + (1 − α − αγ)an + (2 − α − αγ)bn
Seasonal variation
Removing trends
= α(1 + γ)Xn + (2 − α − αγ)(an + bn ) − an . (5)
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n−2
We now observe that an + bn = Xnn−1 and an = αXn−1 + (1 − α)Xn−1
seasonal variation and filtering . Substituting these
Forecasting
Forecasting is dangerous into (5) we get
ARMA forecasting
n
Example
Xn+1 n−2
= α(1 + γ)Xn − αXn−1 + (2 − α − αγ)Xnn−1 − (1 − α)Xn−1 .
n
Forecast error
Example Note: in practice, to use this recursive formula, we would need two starting values, e.g.
Forecast error
Comments X0−1 and X−1
−2
.
ARIMA forecasting
ARIMA(0,1,1) models
ARIMA(0,1,1) models
Summary
past observations
past observations
Holt’s method
Holt’s method
⊲Holt’s method and the ARIMA(0,2,2)
model
Seasonal variation
Removing trends
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Holt’s method and the ARIMA(0,2,2) model

Consider the ARIMA(0,2,2) model
Forecasting
Forecasting is dangerous Xt = 2Xt−1 − Xt−2 + wt + θ1 wt−1 + θ2 wt−2 ,
ARMA forecasting
Example
where θ1 and θ2 are constants and {wt } ∼ W N (0, σ 2 ).
n
To find a recursive formula for Xn+1 using the usual (Box-Jenkins) method, set
n
Forecast error

Example
Forecast error
wn+1 = 0 and write
Comments
Prediction uncertainty n
ARIMA forecasting Xn+1 = 2Xn − Xn−1 + θ1 wn + θ2 wn−1 .
ARIMA(0,1,1) models
Exponential smoothing and Now note that
ARIMA(0,1,1) models
Summary wn = Xn − Xnn−1 and wn−1 = Xn−1 − Xn−1
n−2
,
past observations
past observations
and hence
Holt’s method
Holt’s method n
Recursive formula for Holt’s method Xn+1 = 2Xn − Xn−1 + θ1 wn + θ2 wn−1
Holt’s method and the
⊲ ARIMA(0,2,2) model
Seasonal variation
n−2
= 2Xn − Xn−1 + θ1 (Xn − Xnn−1 ) + θ2 (Xn−1 − Xn−1 )
Removing trends
= (2 + θ1 )Xn − θ1 Xnn−1 − (1 − θ2 )Xn−1 − θ2 Xn−1

n−2
.
25 / 62
seasonal variation and filtering This recursive formula has the same form as the recursive formula for the Holt method
Forecasting
if we have that
ARMA forecasting 1. α(1 + γ) = (2 + θ1 )
Example
n
2. α = (1 − θ2 )
Forecast error 3. (2 − α − αγ) = −θ1
Example
Forecast error 4. (1 − α) = θ2 .
Comments
ARIMA forecasting
From (2) and (4), we see that α = (1 − θ2 ). Using (1), we get that
ARIMA(0,1,1) models
Exponential smoothing and (2 + θ1 ) 1 + θ1 + θ2
ARIMA(0,1,1) models
γ= −1= .
Summary
(1 − θ2 ) 1 − θ2
past observations
past observations
Holt’s method
Substituting these equations for α and γ into (2 − α − αγ), we get −θ1 (exercise:
Holt’s method
check), so these equations are consistent with (3).
model
⊲ We see that if α = (1 − θ2 ) and γ = 1 + θ1 + θ2 /1 − θ2 , the Holt method gives the
Seasonal variation same recursive formula as the Box-Jenkins approach, and so for ARIMA(0,2,2) models,
Removing trends
the two forecasting approaches are equivalent.
26 / 62
Forecasting
⊲ Seasonal variation
Seasonal variation
Seasonal variation
Quarterly seasonal variation
Example
Example
Removing trends
Seasonal variation
27 / 62
Seasonal variation

seasonal variation and filtering Time series may exhibit seasonal variation. Consider, for example, temperature readings or
Forecasting
sales figures. An example is:
Seasonal variation
Seasonal variation
600
Number of passengers (thousands)
Example
Example
500
Removing trends
400
300
200
100
1950 1952 1954 1956 1958 1960
Year
The Box-Jenkins data, with monthly totals of international airline passengers in the USA,
from January 1949 to December 1960.
28 / 62
Seasonal variation

seasonal variation and filtering To model time series with seasonal variation, the data can be transformed by removing
Forecasting
the seasonal component.
Seasonal variation
Seasonal variation
The series can then be modelled using the techniques for stationary series that we have

already discussed.
Example
Example
Forecasts can be made by forecasting the transformed stationary series, and then
Removing trends inverting any transformations made.
We will go through an example that has quarterly seasonal variations. The methods can
be adjusted to consider other types of seasonal variation, e.g. monthly.
29 / 62

seasonal variation and filtering Consider a quarterly time series, such that time is measured in quarter years. E.g.
Forecasting
Seasonal variation
Seasonal variation Months 2003 2004 2005 2006
Seasonal variation
⊲ Quarterly seasonal variation Jan-Mar 21 35 39 78
Quarterly seasonal variation Apr-Jun 42 54 82 114
Jul-Sept 60 91 136 160
Example
Example Oct-Dec 12 14 28 40
Removing trends
Figure 1: Quarterly demand for electricity in a government building. Data provided by a
former MSc in OR student.
It might be suspected that there is seasonal variation in this data. In a cool country,
demand for electricity might be higher in the winter than in the summer.
30 / 62
seasonal variation and filtering A plot of the data is given below. It seems that there is both seasonal variation and a trend.
Forecasting
Seasonal variation
Seasonal variation
Seasonal variation Electricity demand
⊲
150
Example
Example
Removing trends
100
Demand
50
5 10 15
Time
31 / 62

seasonal variation and filtering Let time (t) be measured in quarter years since the beginning of the observation period
Forecasting
(which lasts for n quarters).
Seasonal variation
Seasonal variation
Seasonal variation For a series with quarterly seasonal variation, we let
⊲ Quarterly seasonal variation xt =Raw observation at time t

Example =ut + e′t + st for 1 ≤ t ≤ n,
Example
Removing trends
where ut is the ‘trend’ at time t, e′t is a random error with zero mean and st is the
seasonal variation at time t.
It is assumed that st takes the values sI , sII , sIII and sIV in quarters I, II, III and IV
respectively. By convention, we assume that
sI + sII + sIII + sIV = 0.
The usual procedure is first to smooth the raw data. There are various methods of
doing this (one of which we will discuss later).
32 / 62
seasonal variation and filtering For quarterly seasonal variation we will use the 5-term adjusted-average formula with
Forecasting
coefficients
Seasonal variation
1 1 1 1 1
Seasonal variation
, , , , ,
Seasonal variation
Quarterly seasonal variation 8 4 4 4 8
Quarterly seasonal variation which may be applied for all t, except the two values in the upper tail and the two values
⊲
in the lower tail. The 5-term adjusted-average formula with these coefficients sets
Example
Example
Removing trends 1 1 1
yt = xt−2 + (xt−1 + xt + xt+1 ) + xt+2 (3 ≤ t ≤ n − 2)
8 4 8
and
et = xt − yt (3 ≤ t ≤ n − 2).
To calculate the seasonal variation in each quarter, we start by taking the average of et
over all observations that relate to the first quarter, calling this sI∗ . Similarly, we obtain
sII
∗ ,sIII
∗ and sIV
∗ for quarters two, three and four.
33 / 62
seasonal variation and filtering To ensure that the seasonal variations add to zero, we set
Forecasting
Seasonal variation
Seasonal variation
sI =sI∗ − adj
Seasonal variation
Quarterly seasonal variation sII =sII
∗ − adj
sIII =sIII
∗ − adj
⊲
Example
Example
sIV =sIV
∗ − adj
Removing trends
where adj = 14 (sI∗ + sII

∗ + sIII
∗ + sIV
∗ )
The ‘de-seasonalised’ (or ‘seasonally adjusted’) series may be found by subtracting the
appropriate seasonal variation from xt (e.g. if t is in quarter 1, s(t) = sI ). This gives a
series of the form zt = ut + e′t.
The trend ut can be removed using other methods (e.g. differencing, as in ARIMA
models or filtering, see next lecture).
Remark: for data with seasonal variation which is not quarterly, another smoothing
method should be used. For example, for monthly seasonal variation, a common choice for
smoothing is the adjusted average formula
1 1 1
yt = xt−6 + (xt−5 + . . . + xt + . . . xt+5 ) + xt+6 .
24 12 24
34 / 62
Example

seasonal variation and filtering For the data concerning quarterly electric use, we get
Forecasting
Seasonal variation t xt yt et Quarter

Seasonal variation
Seasonal variation 1 21 x x I
Quarterly seasonal variation 2 42 x x II
Quarterly seasonal variation 3 60 35.50 24.50 III
4 12 38.75 -26.75 IV
⊲ Example 5 35 44.13 -9.13 I
Example
Removing trends
6 54 48.25 5.75 II
7 91 49.00 42.00 III
8 14 53.00 -39.00 IV
9 39 62.13 -23.13 I
10 82 69.50 12.50 II
11 136 76.13 59.88 III
12 28 85.00 -57.00 IV
13 78 92.00 -14.00 I
14 114 96.50 17.50 II
15 160 x x III
16 40 x x IV
35 / 62
Example
This leads to sI∗ = −15.424, sII III IV

∗ = 11.92, s∗ = 42.13 s∗ = −40.92 and adj = −0.57. As
Forecasting
Seasonal variation
a result
Seasonal variation
Seasonal variation
Quarterly seasonal variation sI = − 14.85
sII =12.49
Example sIII =42.70
⊲ Example
Removing trends sIV = − 40.35.
36 / 62
Forecasting
Seasonal variation
⊲ Removing trends
Trends
Adjusted average graduation

Notes
Practical steps
Desirable properties of an
adjusted-average formula
Distortion of the trend
Cubic trend
Removing trends
Spencer’s 15 point average filter
The problem of the tails
Fitting a polynomial
Differencing
Differencing to remove seasonality
Example - seasonality and trend
37 / 62
Trends

seasonal variation and filtering We have so far described the ‘trend’ of a time series as the long term change in mean,
Forecasting
E[Xt ].
Seasonal variation
Removing trends
⊲ Trends More formally, we will use the notation
Notes
Practical steps
Xt = ut + st + Et for t ∈ Z,
where ut is the ‘trend’ at time t, st is the seasonal component at time t and Et is a
Cubic trend
random error with zero mean. It is assumed that if the seasonality has period d, then
st + st+1 + . . . st+d−1 = 0.
Differencing This model is known as the classical decomposition model.
For example, if the series has a linear trend, we might set ut = a + bt, where a and b are
constants.
38 / 62
seasonal variation and filtering In the last lecture we saw how to estimate the seasonal component st , based on
Forecasting
observations x1 , . . . xn .
Seasonal variation
Removing trends
Trends We will now discuss methods of removing the trend, ut .
⊲
Notes
Practical steps The idea is that by removing the deterministic components st and ut , we will hopefully
Desirable properties of an be left with a stationary stochastic process Et . Then, the stationary models we have
Distortion of the trend already studied (ARMA) can be fitted to Et and used to estimate and forecast the
Cubic trend process (adding the trend and seasonality back in as appropriate).
Fitting a polynomial We have already discussed the use of differencing (ARIMA models) to remove trend.
Differencing
Example - seasonality and trend There are two other common procedures for trend removal (known as detrending).
These are
1. Fitting a parametric function to the data.
2. Filtering.
In this section, we will focus on the use of filters for detrending a series.
39 / 62
The process of adjusted-average graduation (also known as a linear filter) converts

one set of time series observations ({xt }) into another ({yt }) using the formula
Forecasting
Seasonal variation β
X
Removing trends
Trends
yt = Kj xt+j ,
⊲ Adjusted average graduation j=α
Notes
Practical steps
where {Kj ; j = α, α + 1, . . . , β} is a set of coefficients.
The values {yt } are the smoothed or graduated observations. These smoothed
Cubic trend
observations are used as an estimate of the trend, so ût = yt .
Differencing
Thus,P
a weighted average is used to estimate the trend. It therefore makes sense to
have Kj = 1.
E.g. when adjusting for seasonal variations we used a linear filter with
1 1 1 1 1
K−2 = , K−1 = , K0 = , K1 = , K2 = ,
8 4 4 4 8
and then subtracted the estimated trend (yt ) from the observations (xt ) in order to
estimate st .
40 / 62
Notes

seasonal variation and filtering We may need to use adjustments to the above formula to smooth observations at the
Forecasting
edges of the dataset.
Seasonal variation
Removing trends
Trends The length (l) of the adjusted average formula is given by the number of coefficients,
Adjusted average graduation i.e.
⊲ Notes
Practical steps l =β−α+1
Distortion of the trend A central formula has α = −β (so the coefficients Kj run from j = −β to j = β, and
Cubic trend the length is 2β + 1).
A symmetric formula is a central formula such that
Differencing
Example - seasonality and trend Kj = K−j for j = 1, 2, . . . β
41 / 62
Practical steps

seasonal variation and filtering Suppose we have an observed series x1 , . . . xn , with seasonal variation of period d (e.g. for
Forecasting
quarterly data the period is 4) and a trend. Using the classical decomposition model, we
Seasonal variation
Removing trends
have that
Trends
xt = ut + st + et , for t = 1, . . . n.
Notes
⊲ Practical steps
Brockwell and Davis (2002) suggest the following steps to remove seasonality and trend:
1. Use an adjusted average formula of the following form
(
1 1 1

Cubic trend
d 2 xt−q + xt−q+1 + . . . + 2 xt+q for d=2q, q<t<n−q,
yt = 1
d (xt−q + xt−q+1 + . . . + xt+q ) for d=2q+1, q+1<t<n−q .
Differencing
to obtain an initial estimate of the trend, ût = yt .
2. Subtract ût from the observations xt .
3. Estimate the seasonal effects as done in the previous lecture to obtain ŝt (adjusted so
Pd
that t=1 ŝt = 0).
42 / 62
seasonal variation and filtering 4. Subtract the estimates of the seasonal effects to obtain a new series x′t = xt − ŝt .
Forecasting
Seasonal variation
Removing trends
5. Use a suitable adjusted average formula to estimate the trend of the new series {x′t }
Trends (let this new estimate now be ût ).
6. Subtract this estimate of the trend from {x′t }, to obtain a new series x′′t = xt − ŝt − ût .
Notes
Practical steps
⊲Desirable properties of an
Distortion of the trend 7. Model this new series {x′′t } with a stationary process.
Cubic trend
Note that steps 1 to 4 are equivalent to those previously discussed for the removal of trend
The problem of the tails for quarterly seasonal variation.
Differencing
43 / 62
Desirable properties of an adjusted-average formula

seasonal variation and filtering Assuming that the seasonal variation has been removed from the observations x1 , . . . xn , we
Forecasting
have that
Seasonal variation
Removing trends β β
Trends X X
yt = Kj xt+j = Kj (ut+j + et+j )
Notes
j=α j=α
Practical steps
β β
⊲ adjusted-average formula
=
X
Kj ut+j +
X
Kj et+j
Cubic trend j=α j=α

Spencer’s 15 point average filter =u′t + e′t (say).
Differencing
To use yt as an estimate of the trend at time t, we would like that
Example - seasonality and trend Pβ
′ ′
et = K e
j=α j t+j ≈ 0, and that the {e t } are somehow ‘smaller’ and ‘smoother’ than
{et }.
′
ut is equal to, or close to ut , i.e. so that there is no distortion of the trend.
44 / 62

seasonal variation and filtering In practice, it is possible to choose the coefficients {Kj } so that specific trends (k-th
Forecasting
order polynomials) are not distorted by the filter.
Seasonal variation
Removing trends
Trends
Adjusted average graduation We will first derive some conditions on the coefficients that result in filters that do not
Notes
Practical steps distort linear trends (i.e. trends of the form a + bt for constants a and b).
⊲ Distortion of the trend
Cubic trend
Assume that the trend ut = a + bt. In order for this trend to not be distorted, we must
have that u′t = ut for t = 1, . . . n. Substituting ut = a + bt into the formula for u′t we get
β β
Differencing X X
u′t = Kj ut+j = Kj (a + b(t + j))
j=α j=α
β
X β
X
=(a + bt) Kj + b jKj .
j=α j=α
45 / 62
seasonal variation and filtering So if the coefficients are such that
Forecasting Pβ
Seasonal variation
1. j=α Kj = 1 and
Pβ
Removing trends
Trends
2. j=α jKj = 0,
Adjusted average graduation we will have that
Notes
Practical steps u′t = a + bt = ut ,
and the filter will allow the linear trend to pass without distortion.
⊲
Cubic trend
Note that if the filter is symmetric, then α = −β and Kj = K−j so condition, (ii) is
The problem of the tails automatically satisfied.
Differencing
The adjusted-average formula used for the example on quarterly seasonal variation had
coefficients 18 , 41 , 41 , 14 , 81 . This formula is symmetric and has

2
X
Kj = 1.
j=−2
Therefore, this filter does not distort linear trend, and is ‘exact on straight lines’.
46 / 62
Cubic trend
Now suppose that the trend is cubic, so that ut = a + bt + ct2 + dt3.

Forecasting
Seasonal variation
Removing trends
Trends We now have that
Notes β
X β
X
u′t = Kj (a + b(t + j) + c(t + j)2 + d(t + j)3 )
Practical steps
Kj ut+j =
adjusted-average formula j=α j=α
β
⊲ Cubic trend X
= Kj (a + bt + bj + c(t2 + 2tj + j 2 ) + d(t3 + st2 j + 3j 2 t + j 3 )
The problem of the tails j=α
Fitting a polynomial X X
=(a + bt + ct2 + dt3 ) Kj + (b + 2ct + 3t2 d)
Differencing
Differencing to remove seasonality jKj
X X
+ (c + 3td) j 2 Kj + d j 3 Kj
47 / 62
So, we will have u′t = a + bt + ct2 + dt3 if and only if the following four conditions hold:
Forecasting Pβ
Seasonal variation 1. j=α Kj = 1
Removing trends
Trends
Pβ
2. j=α jKj = 0
Notes Pβ 2
Practical steps 3. j=α j Kj = 0
Desirable properties of an Pβ 3
4. j=α j Kj = 0
Cubic trend
⊲ For symmetric filters conditions (ii) and (iv) are automatically satisified, so we need only
check conditions (i) and (iii).
Differencing
Example - seasonality and trend Similar conditions can be obtained for quadratic trends and trends which are
polynomials of higher orders.
48 / 62

seasonal variation and filtering Spencer’s 15 point average filter is a symmetric filter with coefficients
Forecasting
Seasonal variation
Removing trends
(K0 , K±1 , K±2 , K±3 , K±4 , K±5 , K±6 , K±7 ) =
Trends 1
(74, 67, 46, 21, 3, −5, −6, −3).
Notes
320
Practical steps
Desirable properties of an This filter is symmetric so we only need to check conditions (i) and (iii) to check whether
Distortion of the trend the filter is exact on cubics.
Cubic trend We have that
⊲ Spencer’s 15 point average filter Pβ
j=α Kj = 1 so condition (i) holds.
Differencing P
Pβ 2 β 2
Pβ 2
Example - seasonality and trend j=α j Kj = 2 j=1 j Kj so condition (iii) is satisfied if j=1 Kj = 0. We have
j
1
(1 × 67 + 22 × 46 + 32 × 21 + 42 × 3 + 52 × −5 + 62 × −6 + 72 × −3) = 0,
320
so condition (iii) holds.
49 / 62

seasonal variation and filtering The central filters discussed can not be applied for observations in the ‘tails’ of the
Forecasting
dataset (i.e. observations at the start and end of the dataset).
Seasonal variation
Removing trends
Trends
Adjusted average graduation Instead, we must use non-central filters, that use only present and past values of xt .
Notes
Practical steps
This problem is particularly important for forecasting.
Cubic trend

⊲ The problem of the tails A common example of a non-central filter is exponential smoothing (see forecasting
Differencing
section), where
Differencing to remove seasonality X∞
yt = (1 − θ)θj xt−j for 0 < θ < 1.
j=0
Methods for adjusting the weights for a finite number of past observations can be used
here.
50 / 62

seasonal variation and filtering Another method of removing and estimating a trend using the classical decomposition
Forecasting
model is by fitting a k-th order polynomial to the observations x1 , . . . xn .
Seasonal variation
Removing trends
Trends
Adjusted average graduation To do this, let the trend ut = a0 + a1 t + . . . ak tk .

Notes
Practical steps
Least squares estimation can be used to find estimates of the coefficients a0 , a1 , . . . ak .
Cubic trend
This involves minimizing the sum of squares, given by
Spencer’s 15 point average filter n
(xt − ut )2 .
X
⊲ Fitting a polynomial
Differencing
Differencing to remove seasonality t=1
The fitting of such a polynomial should be done after any seasonal adjustments have
been made to the series.
51 / 62
Differencing

seasonal variation and filtering If an estimate of the trend is not required, detrending can be carried out using
Forecasting
differencing.
Seasonal variation
Removing trends
As we have already seen, if the observed series {xt } is thought to have a polynomial
Trends
trend of degree k, then the k-th order differences ∇k xt should be considered.
Notes
For example, if the trend is quadratic, with ut = a + bt + ct2 , then assuming that
Practical steps
xt = ut + et for stationary {et },
∇2 xt =xt − 2xt−1 + xt−2
Cubic trend
=ut + et − 2(ut−1 − et−1 ) + ut−2 + et−2
=a + bt + ct2 − 2a − 2b(t − 1) − 2c(t − 1)2
⊲ Differencing + a + b(t − 2) + c(t − 2)2 + (et − 2et−1 + et−2 )
=(a − 2a + a + 2b − 2c − 2b + 4c) + t(b − 2b + 4c + b − 4c)
+ t2 (c − 2c + c) + e′t
=2c + e′t , where e′t = ∇2 et .
Thus, the second differences are a stationary process, with constant of 2c.
Differencing in this way should be applied after any seasonal adjustments have been
made.
52 / 62

seasonal variation and filtering The technique of differencing can also be used to remove seasonality in a series.
Forecasting
If observations x1 , . . . xn are thought to have seasonality of period d, then the difference
Seasonal variation
Removing trends
Trends (1 − B d )xt = xt − xt−d
Notes
Practical steps should be considered.
Desirable properties of an Assume we have
Distortion of the trend xt = ut + st + et ,
Cubic trend
with st representing the deterministic seasonal effect with period d, so that st = st−d ,
The problem of the tails and {et} stationary. This means that
Differencing
⊲ Differencing to remove seasonality
(1 − B d )xt = ut + st + et − ut−d − st−d − et−d = (ut − ut−d ) + (et − et−d ).
The term ut − ut−d is the trend component of the differenced series. This can be
estimated using any of the methods discussed.
The term et − et−d is a stationary series.
Note that (1 − B d ) 6= ∇d = (1 − B)d .
53 / 62

seasonal variation and filtering We will consider an example concerning Edinburgh house prices from the first quarter of
Forecasting
1993 to the first quarter of 2005. The following gives the first few entries of a dataset with
Seasonal variation
Removing trends
quarterly measurements of the average house price (in £) in Edinburgh.
Trends
Adjusted average graduation Quarter Year Price (£)

Notes
Practical steps Q1 1993 57607.90
Q2 1993 61504.50
Distortion of the trend Q3 1993 60762.60
Cubic trend Q4 1993 64394.70
Q1 1994 62848.60
Differencing
Q2 1994 67671.20
Differencing to remove seasonality Q3 1994 64035.40
⊲ Example - seasonality and trend
Q4 1994 67702.60
54 / 62
A plot of the raw data is given below. We see a clear trend but it is not clear whether there
Forecasting
is any seasonal variation.
Seasonal variation
Removing trends
Trends

Notes
Practical steps
Cubic trend

Differencing
⊲
55 / 62
seasonal variation and filtering We will assume the classical decomposition model of
Forecasting
Seasonal variation
Removing trends
xt = ut + st + et ,
Trends
Adjusted average graduation where xt is the observed house price at time t, ut is the trend, st is the seasonal effect
Notes
Practical steps and et is a stationary series with mean zero.
Cubic trend
As we have quarterly data, we would expect seasonal variation to have period 2, so we
set d = 4, and st = st−d for all t.
Differencing
56 / 62
seasonal variation and filtering The first few lines of R output are
Forecasting Date Price ERR1 SAS1 SAF1 ST C1
Seasonal variation
Removing trends
Q1 1993 57607.90 1794.47 60798.24 -3190.34 59003.78
Trends
Q2 1993 61504.50 -3449.07 56490.89 5013.61 59939.96
Notes
Q3 1993 60762.60 718.42 62530.73 -1768.13 61812.31
Practical steps
Q4 1993 64394.70 1156.80 64449.83 -55.13 63293.04
adjusted-average formula Q1 1994 62848.60 1520.51 66038.94 -3190.34 64518.44
Q2 1994 67671.20 -2216.33 62657.59 5013.61 64873.92
Cubic trend

Differencing
57 / 62
The values in the SAF1 column are the values sI , sII , sIII and sIV . Note that the two
Forecasting
Seasonal variation
values shown in Q1 are the same.
Removing trends
Trends

The values in SAS1 are xt − ŝt .
Notes
Practical steps
Desirable properties of an R has estimated the trend ut using an adjusted average formula with coefficients
1
9 (1, 2, 3, 2, 1), with adjustments in the tails (applied to the seasonally adjusted data).
Cubic trend This formula is exact on straight lines. This estimated trend is given in the ST C1
Spencer’s 15 point average filter column. We could use another formula for this if we wanted.
Differencing
The ERR1 column is xt − ŝt − ût , i.e. it is the estimates êt . These should hopefully
form a stationary series.
⊲
58 / 62
We can plot the estimated trend, to help us see the general change in house prices in
Forecasting
Edinburgh, without the seasonal effect. We see (unsurprisingly) that house prices rose fairly
Seasonal variation steadily over the time period.
Removing trends
Trends

Notes
Practical steps
Cubic trend

Differencing
59 / 62
We can also plot the errors. They seem fairly stationary, although there was a big error
Forecasting
around Q2 of 2004. We might need to investigate this.
Seasonal variation
Removing trends
Trends

Notes
Practical steps
Cubic trend

Differencing
60 / 62
The Ljung-Box statistics for the errors imply that they are not white noise. We should
Forecasting
therefore investigate possible stationary models to fit to the error terms.
Seasonal variation A correlogram of the errors is
Removing trends
Trends

Notes
Practical steps
Cubic trend

Differencing
61 / 62
A PACF for the errors is shown below. It looks like an AR(1) model might be appropriate.
Forecasting
What would you estimate for the parameter α1 ?
Seasonal variation
Removing trends
Trends

Notes
Practical steps
Cubic trend

Differencing
62 / 62

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MATH11131 Part 2: Forecasting, seasonal variation and filtering

⊲ MATH11131 Part 2: Forecasting,

Holt’s method and the ARIMA(0,2,2)

MATH11131 Part 2: Forecasting,

Holt’s method and the ARIMA(0,2,2)

MATH11131 Part 2: Forecasting,

MATH11131 Part 2: Forecasting,

MATH11131 Part 2: Forecasting,

MATH11131 Part 2: Forecasting,

Holt’s method and the ARIMA(0,2,2)

MATH11131 Part 2: Forecasting,

Holt’s method and the ARIMA(0,2,2)

en (h) = wn+h + ψ1 wn+h−1 + . . . + ψh−1 wn+1 .

MATH11131 Part 2: Forecasting,

Holt’s method and the ARIMA(0,2,2)

MATH11131 Part 2: Forecasting,

MATH11131 Part 2: Forecasting,

and normally distributed, with mean zero and variance σ 2 .

MATH11131 Part 2: Forecasting,

Holt’s method and the ARIMA(0,2,2)

MATH11131 Part 2: Forecasting,

For ARIMA models, φ(B) is replaced with Φ(B) = φ(B)(I − B)d .

Holt’s method and the ARIMA(0,2,2)

Holt’s method and the ARIMA(0,2,2)

MATH11131 Part 2: Forecasting,

MATH11131 Part 2: Forecasting,

Holt’s method and the ARIMA(0,2,2)

MATH11131 Part 2: Forecasting,

Holt’s method and the ARIMA(0,2,2)

MATH11131 Part 2: Forecasting,

MATH11131 Part 2: Forecasting,

Forecasting 2. Multiply all of the weights by a factor, f such that

Holt’s method and the ARIMA(0,2,2)

MATH11131 Part 2: Forecasting,

an+1 = αXn + (1 − α)Xnn−1 for some α (0 < α < 1)

MATH11131 Part 2: Forecasting,

Holt’s method and the ARIMA(0,2,2)

MATH11131 Part 2: Forecasting,

Holt’s method and the ARIMA(0,2,2)

MATH11131 Part 2: Forecasting,

= (2 + θ1 )Xn − θ1 Xnn−1 − (1 − θ2 )Xn−1 − θ2 Xn−1

Quarterly seasonal variation

MATH11131 Part 2: Forecasting,

Quarterly seasonal variation

1950 1952 1954 1956 1958 1960

MATH11131 Part 2: Forecasting,

Quarterly seasonal variation

MATH11131 Part 2: Forecasting,

MATH11131 Part 2: Forecasting,

⊲ Quarterly seasonal variation xt =Raw observation at time t

sI + sII + sIII + sIV = 0.

where adj = 14 (sI∗ + sII

MATH11131 Part 2: Forecasting,

Seasonal variation t xt yt et Quarter

This leads to sI∗ = −15.424, sII III IV

Adjusted average graduation

MATH11131 Part 2: Forecasting,

The process of adjusted-average graduation (also known as a linear filter) converts

MATH11131 Part 2: Forecasting,

MATH11131 Part 2: Forecasting,

2. Subtract ût from the observations xt .

MATH11131 Part 2: Forecasting,

Cubic trend j=α j=α