Time Series: Descriptive Analyses, Models, and Forecasting: Slide - 1

Chapter 14
Time Series:
Descriptive
Analyses,
Models, and
Forecasting
A LWAY S L E A R N I N G Copyright © 2018 Pearson Education, Ltd. Slide - 1
Content
1 Descriptive Analysis: Index Numbers

2 Descriptive Analysis: Exponential
Smoothing
3 Time Series Components
4 Forecasting: Exponential Smoothing
5 Forecasting Trends: Holt’s Method
6 Measuring Forecast Accuracy: MAD
and RMSE

Content
7 Forecasting Trends: Simple Linear

Regression
8 Seasonal Regression Models
9 Autocorrelation and the Durbin-
Watson Test

Learning Objectives
Focus on methods for analyzing data

generated by a process over time (i.e.,
time series data).
Present descriptive methods for
characterizing time series data.
Present inferential methods for forecasting
future values of time series data.

Time Series
Data generated by processes over time

Describe and predict output of processes
Descriptive analysis
Understanding patterns
Inferential analysis
Forecast future values

14.1
Descriptive Analysis:
Index Numbers

Index Number
Measures change over time relative to a

specific base period
Price Index measures changes in price
e.g. Consumer Price Index (CPI)
Quantity Index measures changes in
quantity
e.g. Number of cell phones produced
annually
Simple Index Number
A simple index number is based on the

relative changes (over time) in the price or
quantity of a single commodity.

Steps for Calculating
a Simple Index Number
1. Obtain the prices or quantities for the
commodity over the time period of interest.
2. Select a base period.
3. Calculate the index number for each period
according to the formula
Index number at time t

 Time series value at time t 
 100
 Time series value at base period 
a Simple Index Number
Symbolically
 Yt 
I t   100
 Y0 
where It is the index number at time t, Yt is
the time series value at time t, and Y0 is the
time series value at the base period.

Simple Index Number Example
Year $
1990 1.299
1991 1.098
The table shows the price per 1992 1.087
gallon of regular gasoline in 1993
1994
1.067
1.075
the U.S for the years 1990 – 1995 1.111
1996 1.224
2006. Use 1990 as the base 1997 1.199
year (prior to the Gulf War). 1998 1.03
1999 1.136
Calculate the simple index 2000 1.484
number for 1990, 1998, 2001
2002
1.42
1.345
and 2006. 2003 1.561
2004 1.852
2005 2.27
2006 2.572
Simple Index Number Solution
1990 Index Number (base

period)  1990price   1.299 
 100   100  100
 1990price   1.299 
1998 Index Number

 1998price   1.03 
 100   100  79.3
 1990price   1.299 
Indicates price had dropped by 20.7% (100 –

79.3) between 1990 and 1998.
Simple Index Number Solution
2006 Index Number

 2006price   2.572 
 100   100  198
 1990price   1.299 
Indicates price had risen by 98% (100 –

198) between 1990 and 2006.

Simple Index Numbers
1990–2006

Simple Index Numbers
1990–2006
Gasoline Price Simple Index
250.0
200.0
150.0
100.0
50.0
0.0
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
Composite Index Number
Represents combinations of the prices or

quantities of several commodities
Disadvantage: Quantity of each commodity
purchased is not considered
A simple composite index is a simple
index for a time series consisting of the total
price or total quantity of two or more
commodities.

Composite Index Number
Example
The table on the next slide shows the

monthly closing stock prices on the last day
of the month for three high-technology
stocks listed on the New York Stock
Exchange. Construct the simple
composite index using January 2011 as
the base period.

Simple Composite Index
Solution

Simple Composite Index
Solution
Calculate the total for the three stock prices each month.
These totals are shown in the “TOTAL” column in the Excel
workbook. Then the simple composite index is calculated by
dividing each monthly total by the January 2011 total. The
index values are given in the last column.
Simple Composite Index Solution
The plot of the 2011 simple composite index for these high-
technology stocks shows a dramatic drop in the stock market in
July 2011, followed by an increasing trend. Overall, the
composite price of these high-technology stocks increased
about 11% from January (Index = 100) to December (Index =
111.32).
Weighted Composite Price
Index
A weighted composite price index weights
the prices by quantities purchased prior to
calculating totals for each time period. The
weighted totals are then used to compute
the index in the same way that the
unweighted totals are used for simple
composite indexes.

Laspeyres Index
Uses base period quantities as weights
Appropriate when quantities remain
approximately constant over time period
Example: Consumer Price Index (CPI)

Steps for Calculating a
Laspeyres Index
1. Collect price information for each of the k price series to
be used in the composite index. Denote these series by
P1t, P2t, …, Pkt .
2. Select a base period. Call this time period t0.
3. Collect purchase quantity information for the base
period. Denote the k quantities by
Q1t0 , Q2t0 , , Qkt0 .
4. Calculate the weighted totals for each time
period according to the formula
k
Q it0
Pit
i1

Laspeyres Index
5. Calculate the Laspeyres index, It, at time
t by taking the ratio of the weighted total
at time t to the base period weighted
total and multiplying by 100–that is,
k
Q it0
Pit
It  i1
k
 100
Q it0
Pit
0
i1

Laspeyres Index Number
Example
The 2011 January and December prices for the
three high-technology company stocks are given
below. Suppose that, in January 2011, an investor
purchased the quantities shown in the table.
Calculate the Laspeyres index for the investor’s
portfolio of high-technology stocks using January
2011 as the base period.
IBM Intel Micro
Shares Purchased 500 100 1000
January price 162.00 21.46 27.73
December price 183.88 24.25 26.96

Laspeyres Index Solution
January
k
Q
i 1
it0 Pit0  500(162.00)  100(21.46)  1000(27.73)
 110,876
December
k
Q
i 1
it0 Pit0  500(183.88)  100(24.45)  1000(26.96)
 121,325
Laspeyres Index Solution
k k
Q P
i , Jan i , Jan Q P
i , Jan i , Dec
I Jan  i 1
k
 100 I Dec  i 1
k
 100
Q
i 1
P
i , Jan i , Jan Q P
i , Jan i , Jan
i 1
110,876 121,325
  100   100
110,876 110,876
 100  109.42
The implication is that when weighted by quantities
purchased, the total value of these stocks increased by about
(109% - 100%) = 9% from January to December in 2011.
Paasche Index
Calculated by using price total weighted by
the purchase quantities of the period the
index value represents.
Compare current prices to base period prices
at current purchase levels
Disadvantages
Must know purchase quantities for each time
period
Difficult to interpret a change in index when base
period is not used
Paasche Index
1. Collect price information for each of the k
price series to be used in the composite
index. Denote these series by P1t, P2t, …,
Pkt .
2. Select a base period. Call this time period
t0.
3. Collect purchase quantity information for
the base period. Denote the k quantities
by
Q1t0 , Q2t0 , , Qkt0 .
Paasche Index
4. Calculate the Paasche index for time t by
multiplying the ratio of the weighted total
at time t to the weighted total at time t0
(base period) by 100, where the weights
used are the purchase quantities for time
period t. Thus,
k
Q P it it
It  i1
k
 100
Q P it it0
i1
Paasche Index Number Example
The 2011 January and December prices
and volumes (actual quantities purchased)
in millions of shares for three high-
technology company stocks are shown in
Table 14.4. Calculate and interpret the
Paasche index, using January 2011 as the
base period.
IBM Intel Micro
Price Volume Price Volume Price Volume
Jan. 162.00 7 21.46 91 27.73 65
Dec. 183.88 12 24.25 92 26.96 101
Paasche Index Solution
Q P
i , Jan i , Jan
I Jan  i 1
k
100  100
Q
i 1
P
i , Jan i , Jan

Paasche Index Solution
k
Q P
iDec iDec
I Dec  i 1
k
 100
Q
i 1
P
iDec iJan
12(183.88)  92(24.25)  101(26.96)

 100
12(162.00)  92(21.46)  101(27.73)
7160.52
  100  106.6
6719.05
The implication is that in 2011, December prices represent
a (106.6% - 100%), = 6.6% increase from January prices,
assuming the purchase quantities were at December levels
for both periods.
14.2
Descriptive Analysis:
Exponential Smoothing

Type of weighted average that assigns
positive weights to past and current values
of the time series
Allows overall trend to be identified
Used for forecasting future values
Exponential smoothing constant (w) is a
single weight that affects “smoothness” of
series. 0 < w < 1.

Constant
Exponential smoothing constant, 0 < w < 1
w close to 0
More weight given to previous values of time
series
Smoother series
w close to 1
More weight given to current value of time
series
Series looks similar to original (more variable)

Steps for Calculating an
Exponentially Smoothed Series
1. Select an exponential smoothing
constant, w, between 0 and 1.
Remember that small values of w give
less weight to the current value of the
series and yield a smoother series.
Larger choices of w assign more weight
to the current value of the series and
yield a more variable series.

Steps for Calculating an
Exponentially Smoothed Series
2. Calculate the exponentially smoothed
series Et from the original time series Yt
as follows:
E1 = Y1
E2 = wY2 + (1 – w)E1
E3 = wY3 + (1 – w)E2
…
Et = wYt + (1 – w)Et–1
Example
Annual sales data (recorded in thousands of
dollars) for a firm’s first 35 years of operation
are provided in Table 14.5. Create an
exponentially smoothed series for the sales
time series using w = .7 and plot both series.

Example

Solution
E1 = Y1 = 5.8
E2 = wY2 + (1 – w)E1 = .7(4.0) + .3(5.8) = 4.54
E3 = wY3 + (1 – w)E2 = .7(5.5) + .3(4.54) = 5.21 etc.
…
Et = wYt + (1 – w)Et–1

Solution

14.3
Time Series Components

Descriptive v. Inferential
Models
Descriptive Model
Picture of the behavior of the time series
e.g. Index numbers, exponential smoothing
No measure of reliability
Inferential Model
Goal: Forecasting future values
Measure of reliability

Time Series Models
Additive Time Series Model Yt = Tt + Ct + St + Rt
Tt = secular trend (describes long–term movements

of Yt)
Ct = cyclical effect (describes fluctuations about the
secular trend attributable to business and
economic conditions)
St = seasonal effect (describes fluctuations that
recur during specific time periods)
Rt = residual effect (what remains after other
components haveCopyright
been © 2018removed)
A LWAY S L E A R N I N G Pearson Education, Ltd. Slide - 45
14.4
Forecasting:

Exponentially Smoothed
Forecasts
Assumes the trend and seasonal component are
relatively insignificant
Et = wYt + (1  w) Et  1
The exponential smoothed forecast for Yt is simply
the smoothed value at time t:
Ft+1 = Et (Ft+1 is the forecast of Yt.)
Ft+2 = Ft+1
Ft+3 = Ft+1
Use for short–term forecasting only
Calculation of Exponentially
Smoothed Forecasts
1. Given the observed time series Y1, Y2, … ,

Yt, first calculate the exponentially
smoothed values E1, E2, … , Et, using
E1 = Y1
E2 = wY2 + (1 – w)E1


Et = wYt + (1 – w)Et –1

Calculation of Exponentially
Smoothed Forecasts
2. Use the last smoothed value to forecast

the next time series value:
Ft +1 = Et
3. Assuming that Yt is relatively free of trend
and seasonal components, use the same
forecast for all future values of Yt:
Ft+2 = Ft+1
Ft+3 = Ft+1


Forecasting Example
The annual sales data (recorded in
thousands of dollars) for a firm’s first 35
years of operation are reproduced in the
Minitab worksheet. Apply the exponential
smoothing technique to the data for years 1
to 32 in order to forecast sales revenue in
years 33, 34, and 35. Make forecasts using
both w = .3 and w = .7 and compare the
results.

Use Minitab to calculate the exponentially
smoothed series for years 1–32 using both
w = .3 and w = .7. These smoothed values
are shown in in the columns labeled EXP3
and EXP7, respectively.
Now, the forecast for year 33 is simply the
smoothed sales revenue value in the last
year of the smoothed series, year 32.
Consequently, we have
F33 = E32 = 128.45 for w = .3 (values
highlighted on Figure 14.10)
142.43 for w = .7

Forecasting Solution
With exponential smoothing, the same forecasts are made
for any future year. Thus, we have
F34 = E32 = 128.45 for w = .3
142.43 for w = .7
and
F35 = E32 = 128.45 for w = .3
142.43 for w = .7
Both sets of forecasts are shown in Table 14.6. Also shown
are the actual sales revenue values and corresponding
forecast errors for years 33–35. The forecast error is
defined as the actual value minus the forecast value, i.e.,
Forecast error = (Actual - Forecast)
You can see that the forecast errors using w = .7

are considerably smaller than the forecast errors for
w = .3. Consequently, future forecasts of the sales
revenue time series will likely have a smaller
forecast error when a smoothing constant of .7 is
employed.
Note that both the w = .3 and w = .7 forecasts

underestimate the sales revenues for years 33–35.
This is because exponentially smoothed forecasts
implicitly assume no trend exists in the time series.
This example illustrates the risk associated with
anything other than very
Copyright short-term forecasting.Slide - 54
© 2018 Pearson Education, Ltd.
A LWAY S L E A R N I N G
14.5
Forecasting Trends:
Holt’s Method

The Holt Forecasting Model
Recognizes trends in time series

Two components
Exponentially smoothed component, Et
Smoothing constant 0 < w < 1
Trend component, Tt (estimated adaptively)
Smoothing constant 0 < v < 1
Close to 0: More weight to past trend
Close to 1: More weight to recent trend

Components of the Holt
Forecasting Model
1. Select an exponential smoothing constant

w between 0 and 1. Small values of w
give less weight to the current values of
the time series and more weight to the
past. Larger choices assign more weight
to the current value of the series.

Forecasting Model
2. Select a trend smoothing constant v
between 0 and 1. Small values of v give
less weight to the current changes in the
level of the series and more weight to the
past trend. Larger values assign more
weight to the most recent trend of the
series and less to past trends.

Forecasting Model
3. Calculate the two components, Et and Tt,
from the time series Yt beginning at time t = 2
E2 = Y2 and T2 = Y2 – Y1
E3 = wY3 + (1 – w)(E2 + T2)
T3 = v(E3 – E2) + (1 – v)T2
…
Et = wYt + (1 – w)(Et–1 + Tt–1)

Tt = v(Et – Et–1) + (1 – v)Tt–1
Holt Example
Refer to the yearly sales data, Example 14.4 (p. 14-13).

Using w = .7 and v = .5, apply Holt’s smoothing method to
the data for years 1 through 30. Give the values of the
smoothed and trend components each year, then plot the
data and the smoothing component, Et, on the same graph.

Holt Example
A graph of Yt and Et is shown in Figure
14.12. Note that the trend component Tt
measures the general upward trend in
Yt.

Holt Solution
The choice of v = .5 gives equal weight to

the most recent trend and to past trends in
the sales of the firm. The result is that the
exponential smoothing component, Et,
provides a smooth, upward-trending
description of the firm’s sales.

Holt’s Forecasting Methodology
1. Calculate the exponentially smoothed and
trend components, Et and Tt, for each
observed value of Yt (t ≥ 2) using the
formulas given in the previous box.
2. Calculate the one-step-ahead forecast
using
Ft+1 = Et + Tt
3. Calculate the k-step-ahead forecast using
Ft+k = Et + kTt
Holt Forecasting Example
Refer to Example 14.6 and Figure 14.11,

which lists the sales revenue for years 1–30
along with Holt’s smoothing components
using w = .7 and v = .5. Apply Holt’s
forecasting methodology to forecast the firm’s
annual sales in years 31–35. Compute the
forecast errors for each of these five years.

Holt Forecasting Solution
From Figure 14.11 the smoothed and trend
values (highlighted) for the last year (year
30) are E30 = 124.73 and T30 = 5.46.
The 1-year-ahead forecast:
F31 = E30 + T30 = 124.73 + 5.46 = 130.19
The forecast 2 years ahead:
F32 = E30 + 2T30 = 124.73 + 2(5.46) = 135.65

For years 33–35 we find
F33 = E30 + 3T30 = 124.73 + 3(5.46) = 141.11
F34 = E30 + 4T30 = 124.73 + 4(5.46) = 146.57
F35 = E30 + 5T30 = 124.73 + 5(5.46) = 152.03

The forecasts and forecast errors for these five
years are shown in Table 14.7 (next slide). Note
that unlike the constant exponential smoothing
forecasts, Holt’s forecast values increase from
year 31 to year 35. This upward trend in the
forecast is a result of Holt’s estimated trend
component. Note, also, that the forecast errors
fluctuate in magnitude and in sign. This is due to
the fact that the actual time series value (sales
revenue) does not necessarily increase at the
same rate as Holt’s forecasted values.


14.6
Measuring Forecast Accuracy:

MAD and RMSE

Mean Absolute Deviation
Assume time series data for t = 1, 2, 3, …, n
are used to make forecasts for the periods t
= n + 1, …, n + m.
Mean absolute difference between the
forecast and actual nvalues
m
of the time series
 Yt  Ft
MAD  t n 1
m
where m = number of forecasts used

Mean Absolute Percentage
Error
Mean of the absolute percentage of the
difference between the forecast and actual
values of the time series
nm
 Yt  Ft 

t  n 1 Yt
MAPE   100
m

Root Mean Squared Error
Square root of the mean squared difference
between the forecast and actual values of
the time series
nm
 Y  F 
2
t t
RMSE  t  n1
m

Forecasting Accuracy
Example
Using the annual sales data, three time series
models were constructed and forecasts made for
the next four months.
Model I: Exponential smoothing (w = .3)
Model II: Exponential smoothing (w = .7)
Model III: Holt–Winters (w = .7, v = .5)

Example

Example
Model I
7.01  18.51  16.11  25.31  27.21

MADI   18.83
5
7.01 18.51 16.11 25.31 27.21
   
150.2 161.7 159.3 168.5 170.4
MAPEI   100  11.44
5
 7.01   18.51   16.11   25.31   27.21

2 2 2 2 2
RMSEI   21.16
5

Example

14.7
Forecasting Trends:
Simple Linear Regression

Inferential forecasting model
Model: E(Yt) = β0 + β1t
Relates time series, Yt, to time, t
Cautions
Risky to extrapolate (forecast beyond observed
data)
Does not account for cyclical effects

Example
The data shows the
average undergraduate
tuition at all 4–year
institutions for the years
1996–2004 (Source: U.S.
Dept. of Education). Use
least–squares regression to
fit a linear model. Forecast
the tuition for 2005 (t = 11)
and compute a 95%
prediction interval for the
forecast.
Solution
From Excel
Yˆt  7997.533  528.158t

Solution
$15,000
$14,000
Yˆt  7997.533  528.158t
$13,000
$12,000
Tuition
$11,000
$10,000
$9,000
$8,000
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Year

Solution
Forecast tuition for 2005 (t = 11):
Yˆ11  7997.533  528.158(11)  13807.27

95% prediction interval:
1  tp  t 
2
yˆ  t / 2 s 1  
n SStt
1  11  5.5 
2
13807.27   2.306   286.84  1 

10 82.5
13006.21  y11  14608.33

14.8
Seasonal Regression Models

Seasonal Regression Models
Takes into account secular trend and
seasonal effects (seasonal component)
Uses multiple regression models
Dummy variables to model seasonal
component
E(Yt) = β0 + β1t + β2Q1 + β3Q2 + β4Q3
where
1 if quarter i
Qi  
0 if not quarter i
14.9
Autocorrelation and the

Durbin-Watson Test

Autocorrelation
Time series data may have errors that are
not independent
Time series residuals: Rˆt  Yt  Yˆt
Correlation between residuals at different
points in time (autocorrelation)
1st order correlation: Correlation between
neighboring residuals (times t and t + 1)

Autocorrelation
The correlation between time series
residuals at different points in time is called
autocorrelation. Correlation between
neighboring residuals (at times t and t + 1) is
called first-order autocorrelation. In
general, correlation between residuals at
times t and t + d is called dth-order
autocorrelation.

Autocorrelation

Durbin–Watson Test
H0: No first–order autocorrelation of
residuals
Ha: Positive first–order autocorrelation of
residuals
Test Statistic
 
n 2
Rˆt  Rˆt 1
d t 2
n
 Rt
ˆ
t 1
2

Durbin–Watson Test
 Rˆ  Rˆ 
t t 1
where n is the number of observations (time periods) and

represents the difference between a pair of
successive time series residuals. The value of d always falls
in the interval from 0 to 4. The interpretations of the values
of d are given in the box. Most statistical software packages
include a routine that calculates d for time series residuals.

Interpretation of Durbin-
Watson d-Statistic
 
n
 ˆ
R  ˆ
R t t 1
d t 2
n
Range of d : 0  d  4
 Rt
ˆ 2
t 1
1. If the residuals are uncorrelated, then d ≈ 2.

2. If the residuals are positively autocorrelated, then
d < 2, and if the autocorrelation is very strong,
d ≈ 0.
3. If the residuals are negatively autocorrelated, then
d >2, and if the autocorrelation is very strong,
d ≈ 4.
Rejection Region for the Durbin–
Watson d Test
Rejection region:
evidence of
positive
autocorrelation
d
0 1 dL dU 2 3 4
Possibly significant Nonrejection region:
autocorrelation insufficient evidence of
positive autocorrelation
Durbin–Watson d-Test for
Autocorrelation
One-tailed Test
H0: No first–order autocorrelation of residuals
Ha: Positive first–order autocorrelation of
residuals
(or Ha: Negative first–order autocorrelation)
 
n 2
Test Statistic  ˆ
R  ˆ
R t t 1
d t 2
n
 t
Rˆ
t 1
2

Autocorrelation
Rejection Region:
d < dL,
[or (4 – d) < dL,
If Ha : Negative first-order autocorrelation
where dL, is the lower tabled value
corresponding to k independent variables
and n observations. The corresponding
upper value dU, defines a “possibly
significant” region between dL, and dU,
Autocorrelation
Two-tailed Test
H0: No first–order autocorrelation of
residuals
Ha: Positive or Negative first–order
autocorrelation of residuals
Test Statistic
 
n 2
Rˆt  Rˆt 1
d t 2
n
 Rt
ˆ
t 1
2

Autocorrelation
Rejection Region:
d < dL, or (4 – d) < dL,
where dL, is the lower tabled value

corresponding to k independent variables
and n observations. The corresponding
upper value dU, defines a “possibly
significant” region between dL, and dU,

Requirements for the Validity
of the d-Test
The residuals are normally distributed.

Durbin–Watson Test Example
Use the Durbin–Watson test to test for the
presence of autocorrelation in the tuition
data. Use α = .05.

Durbin–Watson Test Solution
• H0: No 1st–order
autocorrelation
• Ha: Positive 1st–order

autocorrelation
•   .05 10 =
n =
1
k
• Critical Value(s):
d
0 2 4
.88 1.32
Durbin–Watson Solution
Test Statistic
 
n 2
Rˆt  Rˆt 1
d t 2
n
 t
Rˆ
t 1
2
(152.1515  274.3091) 2  (5.9939  152.1515) 2  ...  (463.8909  204.0485) 2


(274.3091) 2  (152.1515) 2  ...  (463.8909) 2
 .51

Durbin–Watson Test Solution
• H0: No 1st–order Test Statistic:
autocorrelation d = .51
• Ha: Positive 1st–order
autocorrelation
.05 10 1 Decision:
•  n = k
= Reject at  = .05
• Critical Value(s): Conclusion:
d There is evidence of
0 2 4 positive autocorrelation
.88 1.32
Key Ideas
Time Series Data

Data generated by processes over time.

Key Ideas
Index Number
Measures the change in a variable over
time relative to a base period.
Types of Index numbers:
1. Simple index number
2. Simple composite index number
3. Weighted composite number (Laspeyers
index or Pasche index)

Key Ideas
Time Series Components

1. Secular (long-term) trend
2. Cyclical effect
3. Seasonal effect
4. Residual effect

Key Ideas
Time Series Forecasting

Descriptive methods of forecasting with
smoothing:
1. Exponential smoothing
2. Holt’s method

Key Ideas

An Inferential forecasting method:
least squares regression

Key Ideas

Measures of forecast accuracy:
1. mean absolute deviation (MAD)
2. mean absolute percentage error (MAPE)
3. root mean squared error (RMSE)

Key Ideas

Problems with least squares regression
forecasting:
1. Prediction outside the experimental
region
2. Regression errors are autocorrelated

Key Ideas
Autocorrelation
Correlation between time series residuals
at different points in time.
A test for first-order autocorrelation:

Durbin-Watson test

Time Series: Descriptive Analyses, Models, and Forecasting: Slide - 1

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Chapter 14

1 Descriptive Analysis: Index Numbers

A LWAY S L E A R N I N G Copyright © 2018 Pearson Education, Ltd. Slide - 2

7 Forecasting Trends: Simple Linear

A LWAY S L E A R N I N G Copyright © 2018 Pearson Education, Ltd. Slide - 3

Focus on methods for analyzing data

A LWAY S L E A R N I N G Copyright © 2018 Pearson Education, Ltd. Slide - 4

Data generated by processes over time

A LWAY S L E A R N I N G Copyright © 2018 Pearson Education, Ltd. Slide - 5

A LWAY S L E A R N I N G Copyright © 2018 Pearson Education, Ltd. Slide - 6

Measures change over time relative to a

A simple index number is based on the

A LWAY S L E A R N I N G Copyright © 2018 Pearson Education, Ltd. Slide - 8

Index number at time t

A LWAY S L E A R N I N G Copyright © 2018 Pearson Education, Ltd. Slide - 10

1990 Index Number (base

1998 Index Number

Indicates price had dropped by 20.7% (100 –

2006 Index Number

Indicates price had risen by 98% (100 –

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Gasoline Price Simple Index

Represents combinations of the prices or

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The table on the next slide shows the

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12(183.88)  92(24.25)  101(26.96)

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Time Series Components

A LWAY S L E A R N I N G Copyright © 2018 Pearson Education, Ltd. Slide - 43

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Tt = secular trend (describes long–term movements

A LWAY S L E A R N I N G Copyright © 2018 Pearson Education, Ltd. Slide - 46

1. Given the observed time series Y1, Y2, … ,

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2. Use the last smoothed value to forecast

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You can see that the forecast errors using w = .7

Note that both the w = .3 and w = .7 forecasts

A LWAY S L E A R N I N G Copyright © 2018 Pearson Education, Ltd. Slide - 55

Recognizes trends in time series

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1. Select an exponential smoothing constant

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Et = wYt + (1 – w)(Et–1 + Tt–1)

Refer to the yearly sales data, Example 14.4 (p. 14-13).