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Forecasting
Chapter 18
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Learning Objectives
LO18-1 Define and describe the components of a time series.
LO18-2 Smooth a time series by computing a moving average.
LO18-3 Smooth a time series by computing a weighted
moving average.
LO18-4 Use regression analysis to fit a linear trend line to a
time series.
LO18-5 Use regression analysis to fit a nonlinear time series.
LO18-6 Compute and apply seasonal indexes to make
seasonally adjusted forecasts.
LO18-7 Deseasonalize a time series using seasonal indexes.
LO18-8 Conduct a hypothesis test of autocorrelation.
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LO18-1 Define and describe the
components of a time series.
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LO18-1
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LO18-1
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LO18-1
Irregular variation
Behavior of a time series other than trend
cycle or seasonal.
Subdivided into:
Episodic.
Residual.
Also known as forecasting error.
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LO18-2 Smooth a time series by
computing a moving average.
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LO18-2
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LO18-2
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LO18-3 Smooth a time series by computing
a weighted moving average.
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LO18-3
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LO18-3
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LO18-3
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LO18-4 Use regression analysis to fit a
linear trend line to a time series
Linear Trend
The long term trend of a time series may approximate
a straight line.
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LO18-4
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LO18-4
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LO18-4
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LO18-4
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LO18-5 Use regression analysis
to fit a nonlinear time series.
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LO18-5
Must transform the data to create a linear relationship. We will convert the
data using log function as follows:
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LO18-5
4.500000
4.000000
3.500000
Log(sales)
3.000000
2.500000
2.000000
1.500000
1.000000
0.500000
0.000000
0 2 4 6 8 10 12 14 16
Code
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LO18-5
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LO18-5
= 10 4.967588
= 92,809
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LO18-6 Compute and apply seasonal indexes
to make seasonally adjusted forecasts.
Seasonal Variation
One of the components of a time series.
Seasonal variations are fluctuations that coincide with certain
seasons and are repeated year after year.
Understanding seasonal fluctuations help plan for sufficient goods
and materials on hand to meet varying seasonal demand.
Analysis of seasonal fluctuations over a period of years help in
evaluating current sales.
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LO18-6
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LO18-6
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LO18-6
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LO18-6
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LO18-7 Deseasonalize a time
series using seasonal indexes.
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LO18-7
To find the trend component of the time series, run a regression analysis of:
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LO18-8 Conduct a hypothesis
test of autocorrelation
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LO18-8
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LO18-8
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LO18-8
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LO18-8
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LO15-1
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Testing for Autocorrelation:
Durbin-Watson Statistic
Critical values for d are found in Appendix B.9. For this
example:
α - significance level = 0.05
n – sample size = 20
K – the number of predictor variables = 1
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LO18-8
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LO18-8
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Testing for Autocorrelation:
Durbin-Watson Statistic
Step 5: Take a sample, do the analysis, make a decision.
The d statistic is 0.8522 which is less than 1.20. Therefore we reject the null
hypothesis and conclude that the observations are correlated and not independent.
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Testing for Autocorrelation:
Durbin-Watson Statistic
Step 6: Interpret the results. The observations are
autocorrelated. A key assumption of regression analysis, the
observations are independent and uncorrelated, is not true.
Therefore, we cannot make reliable conclusions for any
hypothesis tests concerning the significance of the regression
equation or the regression coefficients.
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