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Time-Series Forecasting: Basic Business Statistics, 11e © 2009 Prentice-Hall, Inc. Chap 16-1
Time-Series Forecasting: Basic Business Statistics, 11e © 2009 Prentice-Hall, Inc. Chap 16-1
Time-Series Forecasting
Common Approaches
to Forecasting
12.00
10.00
8.00
the horizontal axis 6.00
1995
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1997
1999
2001
Y ear
Time Series
Sales rd t re nd
U pwa
Sales Sales
Time Time
Downward linear trend Upward nonlinear trend
Sales
Summer
Winter
Summer
Winter Spring Fall
Spring Fall
Time (Quarterly)
Basic Business Statistics, 11e © 2009 Prentice-Hall, Inc.. Chap 16-9
Cyclical Component
Long-term wave-like patterns
Regularly occur but may vary in length
Often measured peak to peak or trough to
trough
1 Cycle
Sales
Year
Basic Business Statistics, 11e © 2009 Prentice-Hall, Inc.. Chap 16-10
Irregular Component
Moving Averages
Calculate moving averages to get an overall
impression of the pattern of movement over time
Averages of consecutive time series values for a
chosen period of length L
Exponential Smoothing
A weighted moving average
Second average:
Y2 Y3 Y4 Y5 Y6
MA(5)
5
etc.
1 23 60
2 40
50
3 25
40 …
4 27
5 32 Sales 30
6 48 20
7 33 10
8 37 0 …
9 37 1 2 3 4 5 6 7 8 9 10 11
10 50 Year
11 40
etc… etc…
30
trend 20
10
0
1 2 3 4 5 6 7 8 9 10 11
Year
E1 Y1
Ei WYi (1 W )Ei1
For i = 2, 3, 4, …
where:
Ei = exponentially smoothed value for period i
Ei-1 = exponentially smoothed value already
computed for period i - 1
Yi = observed value in period i
W = weight (smoothing coefficient), 0 < W < 1
Basic Business Statistics, 11e © 2009 Prentice-Hall, Inc.. Chap 16-20
Exponential Smoothing Example
Suppose we use weight W = 0.2
Time Forecast
Sales Exponentially Smoothed
Period from prior
(Yi) Value for this period (Ei)
(i) period (Ei-1)
E1 = Y 1
1 23 -- 23 since no
2 40 23 (.2)(40)+(.8)(23)=26.4 prior
3 25 26.4 (.2)(25)+(.8)(26.4)=26.12 information
4 27 26.12 (.2)(27)+(.8)(26.12)=26.296 exists
5 32 26.296 (.2)(32)+(.8)(26.296)=27.437 Ei
6 48 27.437 (.2)(48)+(.8)(27.437)=31.549 WYi (1 W )Ei1
7 33 31.549 (.2)(48)+(.8)(31.549)=31.840
8 37 31.840 (.2)(33)+(.8)(31.840)=32.872
9 37 32.872 (.2)(37)+(.8)(32.872)=33.697
10 50 33.697 (.2)(50)+(.8)(33.697)=36.958
etc. etc. etc. etc.
Basic Business Statistics, 11e © 2009 Prentice-Hall, Inc.. Chap 16-21
Sales vs. Smoothed Sales
Fluctuations
have been 60
smoothed
50
40
NOTE: the Sales
30
smoothed value in
20
this case is
generally a little low, 10
since the trend is 0
upward sloping and 1 2 3 4 5 6 7 8 9 10
Time Period
the weighting factor Sales Smoothed
is only .2
2004 5 65
Basic Business Statistics, 11e © 2009 Prentice-Hall, Inc.. Chap 16-24
Linear Trend Forecasting
(continued)
The linear trend forecasting equation is:
Time
Year Period Sales Ŷi 21.905 9.5714 Xi
(X) (Y)
Sales trend
1999 0 20
80
2000 1 40 70
60
2001 2 30 50
sales
40
2002 3 50 30
20
2003 4 70 10
0
2004 5 65 0 1 2 3 4 5 6
Year
Basic Business Statistics, 11e © 2009 Prentice-Hall, Inc.. Chap 16-25
Linear Trend Forecasting
(continued)
Forecast for time period 6:
Time Ŷ 21.905 9.5714 (6)
Year Period Sales
(X) (y) 79.33
1999 0 20 Sales trend
2000 1 40
80
2001 2 30 70
60
2002 3 50 50
sales
2003 4 70 40
30
2004 5 65 20
10
2005 6 ?? 0
0 1 2 3 4 5 6
Year
Basic Business Statistics, 11e © 2009 Prentice-Hall, Inc.. Chap 16-26
Measuring Errors
Choose the model that gives the smallest
measuring errors
Sum of squared errors Mean Absolute Deviation
(SSE) (MAD)
n n
SSE (Yi Ŷi ) 2
Y Ŷ
i i
i1
MAD i1
n
Sensitive to outliers
Less sensitive to extreme
observations