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Statistical Forecasting Models

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Ertuna 1

Statistical Forecasting Models

(Lesson - 07)

Best Bet to See the Future

Dr. C. Ertuna 2

Statistical Forecasting Models

Time Series Models: independent variable

is time.

Moving Average

Exponential Smoothening

Holt-Winters Model

Explanatory Methods: independent

variable is one or more factor(s).

Regression

Dr. C. Ertuna 3

Time Series Models

Statistical Time Series Models are very

useful for short range forecasting problems

such as weekly sales.

Time series models assume that whatever

forces have influenced the variables in

question (sales) in the recent past will

continue into the near future.

Dr. C. Ertuna 4

Time Series Components

A time series can be described by models based on the following

components

T

t

Trend Component

S

t

Seasonal Component

C

t

Cyclical Component

I

t

Irregular Component

Using these components we can define a time series as the sum of its

components or an additive model

Alternatively, in other circumstances we might define a time series as

the product of its components or a multiplicative model often

represented as a logarithmic model

t t t t t

I C S T X

t t t t t

I C S T X

Dr. C. Ertuna 5

Components of Time Series Data

A linear trend is any long-term increase or

decrease in a time series in which the rate of

change is relatively constant.

A seasonal component is a pattern that is

repeated throughout a time series and has a

recurrence period of at most one year.

A cyclical component is a pattern within the time

series that repeats itself throughout the time series

and has a recurrence period of more than one year.

Dr. C. Ertuna 6

Components of Time Series Data

The irregular (or random) component

refers to changes in the time-series data that

are unpredictable and cannot be associated

with the trend, seasonal, or cyclical

components.

Dr. C. Ertuna 7

Stationary Time Series Models

Time series with constant mean and variance

are called stationary time series.

When Trend, Seasonal, or Cyclical effects are

not significant then

a) Moving Average Models and

b) Exponential Smoothing Models

are useful over short time periods.

Dr. C. Ertuna 8

Moving Average Models

Simple Moving Average forecast is

computed as the average of the most recent

k-observations.

Weighted Moving Average forecast is

computed as the weighted average of the

most recent k-observations where the most

recent observation has the highest weight.

Dr. C. Ertuna 9

Moving Average Models

Simple Moving Average Forecast

Weighted Moving Average Forecast

k

Y

) Y ( E F

1 t

k t i

i

t t

k

Y w

) Y ( E F

1 t

k t i

i i

t t

Dr. C. Ertuna 10

Weighted Moving Average

To determine best

weights and period

(k) we can use

forecast accuracy.

MSE = Mean

Square Error is a

good measure for

forecast accuracy.

RMSE = is the

square root of the

MSE.

Actual wMA(k=3)

Month Burglaries 100.00% =SUM(C4:C6) All weights should add-up exactly to 1

42 88 0.1 The further away from the forecast period

43 44 0.3 weights: the lower is the weight

44 60 0.6 Most recent observation has the highest weight

45 56 58.0 =B5*$C$6+B4*$C$5+B3*$C$4

46 70 56.0 =B6*$C$6+B5*$C$5+B4*$C$4

47 91 64.8 =B7*$C$6+B6*$C$5+B5*$C$4

48 54 81.2 :

49 60 66.7 :

50 48 61.3 :

51 35 52.2 :

52 49 41.4 :

53 44 44.7 :

54 61 44.6 :

55 68 54.7 :

56 82 63.5 :

57 71 75.7 :

58 50 74.0

59 59.5 Preliminary forecasted number of burglaries

MSE = 256.3 =SUMXMY2(B7:B20,C7:C20)/COUNT(B7:B20)

RMSE = 16.01 =SQRT(C22)

Data: Evens - Burglaries

Dr. C. Ertuna 11

Weighted Moving Average

Tools / Solver

Set Target Cell: Cell containing RMSE value

Equal to: Min

By Changing Cells: Cells containing weights

Subject to constraints: Cell containing sum of the weight = 1

Options / (check) Assume Non-Negativity

Solve ----- Keep Solver Solution ----- OK

Actual wMA(k=3)

Month Burglaries 100.00%

42 88 0.1

43 44 0.3

44 60 0.6

45 56 58.0

46 70 56.0

47 91 64.8

48 54 81.2

49 60 66.7

50 48 61.3

51 35 52.2

52 49 41.4

53 44 44.7

54 61 44.6

55 68 54.7

56 82 63.5

57 71 75.7

58 50 74.0

59 59.5

MSE = 256.3

RMSE = 16.01

Dr. C. Ertuna 12

Weighted Moving Average

Best weights for a given k (in

this case 3) is determined by

solver trough minimizing

RMSE.

Same procedure could be

applied to models with different

ks and the one with lowest

RMSE could be considered as

the model with best forecasting

period.

Actual wMA(k=3)

Month Burglaries 100.00%

42 88 0.0285

43 44 0.2093

44 60 0.7622

45 56 57.5

46 70 56.5

47 91 66.8

48 54 85.6

49 60 62.2

50 48 59.6

51 35 50.7

52 49 38.4

53 44 46.0

54 61 44.8

55 68 57.1

56 82 65.8

57 71 78.5

58 50 73.2

59 55.3

MSE = 250.6

RMSE = 15.83

Dr. C. Ertuna 13

Moving Average Models

Tools/ Data Analysis / Moving Average

Input Range: Observations with title (No time)

Output Range: Select next column to the input

range and 1-Row below of the first observation

Chart misaligns the forecasted values!

Forecasted 59th month is aligned with 58th month

Months Crime k = 3 errors

50 48

51 35 #N/A #N/A

52 49 #N/A #N/A

53 44 44.00 #N/A

54 61 42.67 #N/A

55 68 51.33 6.33

56 82 57.67 8.21

57 71 70.33 10.59

58 50 73.67 9.13

59 67.67 12.32

Moving Average

0

10

20

30

40

50

60

70

80

90

50 51 52 53 54 55 56 57 58

Months

C

r

i

m

e

s

Actual

Forecast

Dr. C. Ertuna 14

Exponential Smoothing

Exponential smoothing is a time-series smoothing

and forecasting technique that produces an

exponentially weighted moving average in which

each smoothing calculation or forecast is dependent

upon all previously observed values.

The smoothing factor is a value between 0

and 1, where closer to 1 means more weigh to the

recent observations and hence more rapidly

changing forecast.

Dr. C. Ertuna 15

Exponential Smoothing Model

where:

F

t

= Forecast value for period t

Y

t-1

= Actual value for period t-1

F

t-1

= Forecast value for period t-1

= Alpha (smoothing constant)

) F Y ( F F

1 t 1 t 1 t t

1 t 1 t t

F ) 1 ( Y F

or

Dr. C. Ertuna 16

Exponential Smoothing Model

Tools/ Data Analysis / Exponential

Smoothing.

Input Range: Observations with title (No

time)

Output Range: Select next column to the

input range and first Row of the first

observation

Damping Factor: 1- (not )

Month Crimes alpha=0.7

50 48 #N/A

51 35 48.0

52 49 38.9

53 44 46.0

54 61 44.6

55 68 56.1

56 82 64.4

57 71 76.7

58 50 72.7

59 ? 56.8

Exponential Smoothing

0

10

20

30

40

50

60

70

80

90

50 51 52 53 54 55 56 57 58 59

Months

C

r

i

m

e

s

Actual

Forecast

Dr. C. Ertuna 17

Exponential Smoothing Model

To determine

best we can

use forecast

accuracy.

MSE = Mean

Square Error is a

good measure for

forecast

accuracy.

A B C D

1 Month Crime 0.7

2 50 48 #N/A

3 51 35 48.00 ! Actual observation B2

4 52 49 38.90

5 53 44 45.97

6 54 61 44.59

7 55 68 56.08

8 56 82 64.42

9 57 71 76.73

10 58 50 72.72

11 59 ? 56.82 =$C$1*B10+(1-$C$1)*C10

12

13 MSE = 193.0 =SUMXMY2(B3:B10,C3:C10)/COUNT(B3:B10)

Dr. C. Ertuna 18

Holt-Winters Model

The Holt-Winters forecasting model could

be used in forecasting trends. Holt-Winters

model consists of both an exponentially

smoothing component (E, w) and a trend

component (T, v) with two different

smoothing factors.

Dr. C. Ertuna 19

Holt-Winters Model

where:

F

t+k

= Forecast value k periods from t

Y

t-1

= Actual value for period t-1

E

t-1

= Estimated value for period t-1

T

t

= Trend for period t

w = Smoothing constant for estimates

v = Smoothing factor for trend

k = number of periods

) T E )( w 1 ( wY E

1 t 1 t 1 t t

1 t 1 t t t

T ) v 1 ( ) E E ( v T

t t k t

kT E F

1. E

1

and T

1

are

not defined.

2. E

2

= Y

2

3. T

2

= Y

2

Y

1

Dr. C. Ertuna 20

Holt-Winters Model

E_2 = Y_2 and T_2 = (Y_2-Y_1)

E_12 = $D$1*C14+(1-$D$1)*(D13+E13)

T_12 = $E$1*(D14-D13)+(1-$E$1)*E13

F_13 = D14+E14

A B C D E

1 w = 0.7 0.5 = v

2 Month Sales E T F

3 1 4.8 N/A N/A

4 2 4.0 4.0 -0.8

5 3 5.5 4.8 0.0 3.2

6 4 15.6 12.4 3.8 4.8

7 5 23.1 21.0 6.2 16.1

8 6 23.3 24.5 4.8 27.2

9 7 31.4 30.8 5.6 29.3

10 8 46.0 43.1 8.9 36.3

11 9 46.1 47.9 6.9 52.1

12 10 41.9 45.8 2.4 54.8

13 11 45.5 46.3 1.4 48.1

14 12 53.5 51.8 3.5 47.7

15 13 55.24

Holt-Winter Forecasting

0.0

10.0

20.0

30.0

40.0

50.0

60.0

1 2 3 4 5 6 7 8 9

1

0

1

1

1

2

1

3

Months

S

a

l

e

s

Sales

F

Dr. C. Ertuna 21

Holt-Winters Model

Set E (smoothing component), T (trend

component), and F (forecasted values) columns

next to Y (actual observations) in the same

sequence

Determine initial w and v values

Leave E,T &F blanc for the base period (t=1)

Set E

2

= Y

2

Set T

2

= Y

2

-Y

1

Note: (F

2

is blanc)

Dr. C. Ertuna 22

Holt-Winters Model

Formulate E

3

= w*Y

3

+ (1-w)*(E

2

+T

2

)

Formulate T

3

= v*(E

3

-E

2

) + (1-v)*T

2

Formulate F

3

= E

2

+ T

2

Copy the formulas down until reaching one

cell further than the last observation (Y

n

).

Compute MSE using Ys and Fs

Use solver to determine optimal w and v.

Dr. C. Ertuna 23

Holt-Winters Model

Solver set up for Holt Winters:

Target Cell: MSE (min)

Changing Cells: w and v

Constrains: w <= 1

w >= 0

v <= 1

v >= 0

Dr. C. Ertuna 24

Forecasting with Crystal Ball

CBTools / CB Predictor

[Input Data] Select

Range, First Raw, First Column Next

[Data Attribute] Data is in Next

[Method Gallery] Select All Next

[Results] Number of periods to forecast [1]

Select Past Forecasts at cell Run

periods, etc.

Dr. C. Ertuna 25

Forecasting with Crystal Ball

Year Actual Revenue

1975 5.0 Actual Revenues of EASTMAN KODAC

1976 5.4 Data: EASTMANK

1977 6.0

1978 7.0

1979 8.0

1980 9.7

1981 10.3

1982 10.8

1983 10.2

1984 10.6

1985 10.6

1986 11.5

1987 13.3

1988 17.0

1989 18.4

1990 18.9

1991 19.4

1992 20.2

1993 16.3

1994 13.7

1995 15.3

1996 16.2

1997 14.5

1998 13.4

1999 14.1

Dr. C. Ertuna 26

Forecasting with Crystal Ball

Forecast:

Date

Lower:

5% Forecast Upper: 95%

2000 11.9 14.4 17.0

Method

Errors:

Method RMSE MAD MAPE

Best

:

Double

Exponential

Smoothing 1.5043 0.9871 7.68%

2nd:

Single Exponential

Smoothing 1.5147 1.1566 9.03%

3rd:

Single Moving

Average 1.5453 1.2042 9.40%

4th:

Double Moving

Average 2.0855 1.592 11.16%

Method Parameters:

Method Parameter Value

Best

:

Double Exponential

Smoothing Alpha 0.999

Beta 0.051

2nd:

Single Exponential

Smoothing Alpha 0.999

3rd: Single Moving Average Periods 1

4th: Double Moving Average Periods 2

Actual Revenue

0.0

5.0

10.0

15.0

20.0

25.0

1

9

7

5

1

9

7

7

1

9

7

9

1

9

8

1

1

9

8

3

1

9

8

5

1

9

8

7

1

9

8

9

1

9

9

1

1

9

9

3

1

9

9

5

1

9

9

7

1

9

9

9

Data

Fitted

Forecast

Upper: 95%

Lower: 5%

Student

Edition

Student

Edition

Dr. C. Ertuna 27

Performance of a Model

Performance of a model is measured by

Theils U.

The Theil's U statistic falls between 0 and 1.

When U = 0, that means that the predictive

performance of the model is excellant and

when U = 1 then it means that the forecasting

performance is not better than just using the

last actual observation as a forecast.

Dr. C. Ertuna 28

Theils U versus RMSE

The difference between RMSE (or MAD or

MAPE) and Theils U is that the formars are

measure of fit; measuring how well model

fits to the historical data.

The Theil's U on the other hand measures

how well the model predicts against a naive

model. A forecast in a naive model is done by

repeating the most recent value of the variable

as the next forecasted value.

Dr. C. Ertuna 29

Choosing Forecasting Model

The forecasting model should be the one with

lowest Theils U.

If the best Theils U model is not the same as

the best RMSE model then you need to run

CB again by checking only the best Theils U

model to obtain forecasted value.

P.S. CB uses forecasting value of the lowest

RMSE model (best model according CB)!

Dr. C. Ertuna 30

Determining Performance

Theils U determins the forecasting

performance of the model.

The interpretation in daily language is as

follows:

Interpret (1- Theil U)

1.00 0.80 High (strong) forecasting power

0.80 0.60 Moderately high forecasting power

0.60 0.40 Moderate forecasting power

0.40 0.20 Weak forecasting power

0.20 0.00 Very weak forecasting power

Dr. C. Ertuna 31

Regression or Time Series Forecast

Here is the guiding principle when to apply

Regression and when to apply Time Series Forecast.

As some thing changes (one or more independent

variables) how does another thing (dependent

variable) change is an issue of directional relationship

For directional relationships we can use regression.

If the independent variable is TIME (as time changes

how does a variable change) Then we can use either

regression or time series forecasting models

Dr. C. Ertuna 32

Explanatory Methods

Simple Linear Regression Model: The

simplest inferential forecasting model is the

simple linear regression model, where time

(t) is the independent variable and the least

square line is used to forecast the future

values of Y

t

.

Dr. C. Ertuna 33

Regression in Forecasting Trends

where:

Y

t

= Value of trend at time t

0

= Intercept of the trend line

1

= Slope of the trend line

t = Time (t = 1, 2, . . . )

t 1 0 t t

t ) Y ( E F

Dr. C. Ertuna 34

Regression in Forecasting

Seasonality

Many time series have distinct seasonal pattern. (For

example room sales are usually highest around summer

periods.)

Multiple regression models can be used to forecast a time

series with seasonal components.

The use of dummy variables for seasonality is common.

Dummy variables needed = total number of seasonality 1

For example: Quarterly Seasonal: 3 Dummies are needed, Monthly

Seasonal: 11 Dummies needed, etc.

The load of each seasonal variable (dummy) is compared to the

one which is hidden in intercept.

Dr. C. Ertuna 35

Regression in Forecasting

Seasonality

t 3 4 2 3 1 2 1 0 t t

Q Q Q t ) Y ( E F

where:

Q

1

= 1 , if quarter is 1, = 0 otherwise

Q

2

= 1 , if quarter is 2, = 0 otherwise

Q

3

= 1 , if quarter is 3, = 0 otherwise

2

= the load of Q

1

above Q

4

0

= the overall intercept + the load of Q

4

t = Time (t = 1, 2, . . . )

Dr. C. Ertuna 36

Seasonal Regression

MegaWatts

Power Load Year Q1 Q2 Q3

106.8 1973.1 1 0 0

89.2 1973.2 0 2 0

110.7 1973.3 0 0 3

91.7 1973.4 0 0 0

108.6 1974.1 1 0 0

98.9 1974.2 0 2 0

120.1 1974.3 0 0 3

102.1 1974.4 0 0 0

113.1 1975.1 1 0 0

94.2 1975.2 0 2 0

120.5 1975.3 0 0 3

107.4 1975.4 0 0 0

116.2 1976.1 1 0 0

104.4 1976.2 0 2 0

131.7 1976.3 0 0 3

117.9 1976.4 0 0 0

Seasonal Regression

80.00

85.00

90.00

95.00

100.00

105.00

110.00

115.00

120.00

125.00

130.00

135.00

1

9

7

3

.

1

1

9

7

3

.

2

1

9

7

3

.

3

1

9

7

3

.

4

1

9

7

4

.

1

1

9

7

4

.

2

1

9

7

4

.

3

1

9

7

4

.

4

1

9

7

5

.

1

1

9

7

5

.

2

1

9

7

5

.

3

1

9

7

5

.

4

1

9

7

6

.

1

1

9

7

6

.

2

1

9

7

6

.

3

1

9

7

6

.

4

Year/Quarter

P

o

w

e

r

Predicted Power

Load

Actual Power

Load

E(Y_Q1) = -10801.6 + 5.52 * Year.1 + 8.06

E(Y_Q2) = -10801.6 + 5.52 * Year.2 + -3.50

E(Y_Q3) = -10801.6 + 5.52 * Year.3 + 5.51

E(Y_Q4) = -10801.6 + 5.52 * Year.4

Dr. C. Ertuna 37

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