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HEEMA

SUMANT

& ABHISHEK

Moving average method

A quantitative method of forecasting or smoothing a

time series by averaging each successive group (no. of

observations) of data values.

term MOVING is used because it is obtained by summing

and averaging the values from a given no of periods, each

time deleting the oldest value and adding a new value.

For applying the method of moving averages the

period of moving averages has to be selected

This period can be 3- yearly moving averages 5yr

moving averages 4yr moving averages etc.

For ex:- 3-yearly moving averages can be calculated

from the data : a, b, c, d, e, f can be computed as :

If the moving average is an odd no of values e.g., 3 years,

there is no problem of centring it. Because the moving

total for 3 years average will be centred besides the 2nd

year and for 5 years average be centred besides 3rd year.

But if the moving average is an even no, e.g., 4 years

moving average, then the average of 1st 4 figures will be

placed between 2nd and 3rd year.

This process is called centering of the averages. In

case of even period of moving averages, the trend

values are obtained after centering the averages a

second time.

Goals :

Smooth out the short-term fluctuations.

Identify the long-term trend.

MERITS Of Moving average

method

simple method.

flexible method.

OBJECTIVE :-

If the period of moving averages coincides with the

period of cyclic fluctuations in the data , such

fluctuations are automatically eliminated

This method is used for determining seasonal, cyclic and

irregular variations beside the trend values.

LIMITATIONS Of Moving average

method

No trend values for some year.

M.A is not represented by mathematical function - not

helpful in forecasting and predicting.

The selection of the period of moving average is a difficult

task.

In case of non-linear trend the values obtained by this

method are biased in one or the other direction.

Moving Average Example

Year Units Moving

1994 2

1995 5 3

1996 2 3

1997 2 3.67

1998 7 5

1999 6

John is a building contractor with a record of a total

of 24 single family homes constructed over a 6-year

period. Provide John with a 3-year moving average

graph.

Avg.

Moving Average Example

Solution

Year Response Moving

Avg.

1994 2

1995 5 3

1996 2 3

1997 2 3.67

1998 7 5

1999 6

94 95 96 97 98 99

8

6

4

2

0

Sales

L = 3

No MA for 2 years

Calculation of moving average

based on period

When period is odd-

example:-

Calculate the 3-yearly moving averages of the data

given below:

yrs 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989

Sales

(million

of

rupees)

3 4 8 6 7 11 9 10 14 12

year Sales,(millions

of rupees)

3-yearly totals 3-yearly moving

averages(trends)

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

3

4

8

6

7

1 1

9

1 0

1 4

1 2

1 5

1 8

2 1

2 4

2 7

3 0

3 3

3 6

5=(1 5/3)

6=(1 8/3)

7=(2 1/3)

8=(2 4/3)

9=(2 7/3)

1 0=(3 0/3)

1 1=(3 3/3)

1 2=(3 6/3)

In Figure, 3-yrs MA plotted on graph fall on a straight line, and the cyclic

f luctuation have been smoothed out. The straight Line is the required trend

line.

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989

1

2

3

years

s

a

l

e

s

4

6

8

10

12

Actual line

Calculation of moving average

based on period

When period is even:-

Example :-

Compute 4-yearly moving averages from the

following data:

year 1991 1992 1993 1994 1995 1996 1997 1998

Annual sale(Rs

in crores)

36 43 43 34 44 54 34 24

Year

(1)

Annual

sales (Rs in

crores) (2)

4-yearly

moving

total (T)

(3)

4-yearly

moving

averages (A)

(3)/4 {4}

4-yearly centred moving averages

OR (trend values) (5)

1991 36

1992 43

156 39

1993 43 (39+41)/2=80/2=40

164 41

1994 34 (41+43.75)/2=84.75/2=

42.375

175 43.75

1995 44 (43.75+41.50)/2=42.625

166 41.50

1996 54 (41.50+39)/2=40.25

156 39

1997 34

1998 24

s

a

l

e

s

year

Method of least squares

This is the best method for obtaining trend values.

It provides a convenient basis for obtaining the line of best

fit in a series.

Line of the best fit is a line from which the sum of the

deviations of various points on its either side is zero.

The sum of the squares of the deviation of various

points from the line of best fit is the least. That is

why this method is known as method of least squares.

Method of least squares

Least squares, also used in regression analysis,

determines the unique trend line forecast which

minimizes the mean squares of deviations. The

independent variable is the time period and the

dependent variable is the actual observed value in

the time series

equation of straight line trend:

Y=a+bX

b = XY -

X

2

-n

2

a= -b

Where,

a = Y-intercept

b = slope of the best-fitting estimating line.

X = value of independent variable

Y = value of dependent variable

= mean of the values of the independent

variable

= mean of the values of the dependent

variable

x

x

y

x n

y

x

y

When =0

then b= XY

X

2

a= =Y/N

x

y

MERITS

This method gives the trend values for the entire time

period.

This method can be used to forecast future trend

because trend line establishes a functional relationship

between the values and the time.

This is a completely objective method.

LIMITATIONS

It requires some amount of calculations and may

appear tedious and complicated for some.

Future forecasts made by this method are based only

on trend values; seasonal, cyclical or irregular

variations are ignored.

If even a single item is added to the series a new

equation has to be formed.

Example:-

Determine trend line:-

Year:

2000 2001

2002

2003 2004

Sales(

in Rs

000):

35 56 79 80 40

Calculation

Year (x) Sales (Y) X

X

2

XY

2000

2001

2002

2003

2004

35

56

79

80

40

-2

-1

0

1

2

4

1

0

1

4

-70

-56

0

80

80

TOTAL Y=290 X=0 X

2

=10 XY=34

Calculation

Now a = = Y/ N =290/ 5=58

and b = XY/X =34/10 =3.4

Substituting these values in equation of trend

line which is

Y=58+3.4X ,with 2002=0

y

Year

(x)

X

=x-2002

Trend values

(Y=58+3.4X)

2000

2001

2002

2003

2004

-2

-1

0

1

2

58+3.4(-2)=51.2

58+3.4(-1)=54.6

58+3.4(0)=58.0

58+3.4(1)=61.4

58+3.4(2)=64.8

A problem involving all four

component of a time series

firm that specializes in producing recreational

equipment . To forecast future sale firm has collected

the information.

Given time series -1)trend 2)cyclic 3)seasonal

Quarterly

sales

Sales per quarter( $10,000)

Year I II III IV

1991 16 21 9 18

1992 15 20 10 18

1993 17 24 13 22

1994 17 25 11 21

1995 18 26 14 25

Solution

Procedure for describing information in time series

consist of four stages:-

1. finding seasonal indices- using moving average

method

2. Deseasonalized the given data.

3. Developing the trend line.

4.Finding the cyclical variation around the trend line.

Calculating the Seasonal Indexes

1. Compute a series of n -period centered moving

averages, where n is the number of seasons in the

time series.

2. If n is an even number, compute a series of 2-

period centered moving averages.

3. Divide each time series observation by the

corresponding centered moving average to identify

the seasonal-irregular effect in the time series.

4. For each of the n seasons, average all the

computed seasonal-irregular values for that season

to eliminate the irregular influence and obtain an

estimate of the seasonal influence, called the

seasonal index, for that season.

Deseasonalizing the Time Series

The purpose of finding seasonal indexes is to

remove the seasonal effects from the time series.

This process is called deseasonalizing the time

series.

By dividing each time series observation by the

corresponding seasonal index, the result is a

deseasonalized time series.

With deseasonalized data, relevant comparisons

can be made between observations in successive

periods.

Calculation of 4-Qr centered moving average :

Year

(1)

Quarter

(2)

Actual

sales

(3)

Step 1:

4-Qr moving

total

(4)

Step 3:

4-Qr centered

moving average

(6)

Step:4

% of actual to

moving averages

(7)={(3)100}(6)

1991 I.

II.

III.

IV.

16

21

9

18

64

63

15.875

15.625

56.7

115.2

1992

I.

II.

III.

IV.

15

20

10

18

62

63

63

65

15.625

15.750

16.000

16.750

96.0

127.0

62.5

107.5

1993

I.

II.

III.

IV.

17

24

13

22

69

72

76

76

17.625

18.500

19.000

19.125

96.5

129.7

68.4

115.0

year

(1)

quarter

(2)

Actual sales

(3)

Step 1:

4-Qr

moving

total

(4)

Step 2:

4-Qr

moving

average

(5)=(4)4

Step 3:

4-Qr

centered

moving

average

(6)

Step:4

% of actual to

moving

averages

(7)={(3)100}(

6)

1994

I.

II.

III.

IV.

17

25

11

21

77

75

74

75

19.25

18.75

18.50

18.75

19.000

18.625

18.625

18.875

89.5

134.2

59.1

111.3

1995

I.

II.

III.

IV.

18

26

14

25

76

79

83

19.00

19.75

20.75

19.375

20.250

92.9

128.4

Computing the seasonal index

Year I II III IV

1991 - - 56.7 115.2

1992 96.0 127.0 62.5 107.5

1993 96.5 129.7 68.4 115.0

1994 89.5 134.2 59.1 111.3

1995 92.9 128.4 - -

modified sum=188.9 258.1 121.6 226.3

modified mean: Qr I: 1882=94.45

II: 258.12=129.05

III: 121.62=60.80

IV: 226.32=113.15

397.45

Quarter indices Adjusting factor = seasonal indices

=400/397.45=1.0064

I 94.45 1.0064 = 95.1

II 129.05 1.0064 = 129.9

III 60.80 1.0064 = 61.2

IV 113.15 1.0064 = 113.9

sum of seasonal indices = 400.1

Calculation 0f deaseasonalised

time series values

Year

(1)

Quarter

(2)

Actual sales

(3)

Seasonal index/100

(4)

Deseasonalized sales

(5)=(3)(4)

1991 I

II

III

IV

16

21

9

18

0.951

1.299

0.612

1.139

16.8

16.2

14.7

15.8

1992

I

II

III

IV

15

20

10

18

0.951

1.299

0.612

1.139

15.8

15.4

16.3

15.8

1993

I

II

III

IV

17

24

13

22

0.951

1.299

0.612

1.139

17.9

18.5

21.2

19.3

1994

I

II

III

IV

17

25

11

21

0.951

1.299

0.612

1.139

17.9

19.2

18.0

18.4

1995

I

II

III

IV

18

26

14

25

0.951

1.299

0.612

1.139

18.9

20.0

22.9

21.9

Identifying the trend component

Year

(1)

Qr

(2)

Deseasonalized sales

(3)

Translating or

coding the time

variable(4)

x

(5)=(4)2

xY

(6)=(5)(3)

x

(7)=(5)

1991

I

II

III

IV

16.8

16.2

14.7

15.8

-9.5

-8.5

-7.5

-6.5

-19

-17

-15

-13

-319.2

-275.4

-220.5

-205.4

361

289

225

169

1992

I

II

III

IV

15.8

15.4

16.3

15.8

-5.5

-4.5

-3.5

-2.5

-11

-9

-7

-5

-173.8

-138.6

-114.1

-79.0

121

81

49

25

1993

Mean

I

II

III

IV

17.9

18.5

21.2

19.3

-1.5

-0.5

0*

0.5

1.5

-3

-1

1

3

-53.7

-18.5

21.2

57.9

9

1

1

9

1994 I

II

III

IV

17.9

19.2

18.0

18.4

2.5

3.5

4.5

5.5

5

7

9

11

89.5

134.4

162.0

202.4

25

49

81

121

1995 I

II

III

IV

18.9

20.0

22.9

21.9

Y=360.9

6.5

7.5

8.5

9.5

13

15

17

19

245.7

300.0

389.3

416.1

169

225

189

361

We assign mean=0 ,b/w II&III(1993) & measure translated time,x,by 0.5 because

periods is even

b= XY

X

2

a= =Y/N

Identifying the cyclical variation

Year

(1)

Quarter

(2)

Deseasonalised sales

(3)

Y=a+bx

(4)

(Y100)/Y

percent of trend

(5)

1991

I

II

III

IV

16.8

16.2

14.7

15.8

18+0.16(-19)=14.96

18+0.16(-17)=15.28

18+0.16(-15)=15.60

18+0.16(-13)=15.92

112.3

106.0

94.2

99.2

1992 I

II

III

IV

15.8

15.4

16.3

15.8

18+0.16(-11)=16.24

18+0.16(-9)=16.56

18+0.16(-7)=16.88

18+0.16(-5)=17.20

97.3

93.0

96.6

91.9

1993 I

II

III

IV

17.9

18.5

21.2

19.3

18+0.16(-3)=17.52

18+0.16(-1)=17.84

18+0.16(1)=18.16

18+0.16(3)=18.48

102.2

103.7

116.7

104.4

1994 I

II

III

IV

19.9

19.2

18.0

18.4

18+0.16(5)=18.80

18+0.16(7)=19.12

18+0.16(9)=19.44

18+0.16(11)=19.76

95.2

100.4

92.6

93.1

1995 I

II

III

IV

18.9

20.0

22.9

21.9

18+0.16(13)=20.08

18+0.16(15)=20.40

18+0.16(17)=20.72

18+0.16(19)=21.04

94.1

98.0

110.5

104.1

Graph of time series , trend line and 4-Qr centered moving

average for sales data

4-Qr centered moving average

(both trend & cyclical component)

s

a

l

e

s

X=0

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