Decomposition

Lesson #7

Decomposition Method

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 Decomposition

Model Introduction
•Assumes that every time series is composed of four
components:
–Trend, seasonality, cyclical, and random
•Method decomposes the time series in to its basic
components
•Uses the estimated component factors to forecast future
values
•Method format:
–Y = T × S × C

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 Decomposition

Model Details
•Method characteristics
–Decomposes a time series in to its parts
–Estimates each component of the time series
individually and then combines then together to
generate a forecast for the future.
•When to use method
–Any time series can be decomposed
•When not to use
–Not applicable
•

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 Decomposition

Forecasting Steps
1.Set an objective
2.Build model
3.Evaluate model
4.Use model
•

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 Decomposition

Objective Setting
•Simpler is better
•Decomposition allows to test whether a breaking down of
the time series works as a model. Objectives should
take that principal under consideration
•Example objectives for New One Family Homes Sold (see
next slide):
–Test if New One Family Homes Sold can be fit to a
decomposition model
–If One Family Homes Sold exhibits a statistically
significant fit, review and interpret results
–If model looks good, create a forecast based off
model
•
•
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 Decomposition

Example: Houses Sold

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 Decomposition

Build Model
•Model breaks down time series in to its appropriate
parts, independently estimates each part, and then
combines the estimated parts together to forecast
future values

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 Decomposition

Evaluate Model
•Descriptive Statistics
–Mean
–Variance & Standard Deviation
•Accuracy / Error
–SSE
–RMSE
–MAPE
–R2; Adjusted R2
•Statistical Significance
–F-Test
–P-Value F-Test

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 Decomposition

Example
Descriptive Statistics
•Mean
–5.88
•Variance
–0.34
•Standard Deviation
–0.58

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 Decomposition

Example
Accuracy / Error
•SSE
–1.97
•RMSE
–0.22
•MAPE
–2.78%
•R2; Adjusted R2
–84.80%
–84.39%

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 Decomposition

Example
Statistical Significance
•F-Test
–55.80
•P-Value F-Test
–0.000021

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 Decomposition

Compare Multiple Models

•Skip this step until have knowledge of multiple methods
•Will use accuracy/error statistics to compare multiple
models to find best models

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 Decomposition

Use Model
•Understand limitations of model
•Answer objectives

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 Decomposition

Example
•Forecasts
–4.888234437

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