FORECASTING

Forecasting is the process of making

predictions based on past and present data and
most commonly by analysis of trends. A
commonplace example might be estimation of
some variable of interest at some specified
future date. Basically, it is a decision-making
tool that helps businesses cope with the impact
of the future's uncertainty by examining
historical data.
Forecasting as a Decision-making Tool
 TIME SERIES ANALYSIS

The time series forecast is a popular quantitative

forecasting technique that involves collecting data
during a certain period in order to identify trends.
Time series analyses are one of the simplest ways to
use and can be quite accurate, particularly in the short
term. A time series is simply a series of data points
ordered in time. In a time series, time is often the
independent variable and the goal is usually to make a
forecast for the future.
 There are other aspects that come into play
when dealing with time series.

 Is it stationary?
 Is there a seasonality?
 Is the target
variable autocorrelated?
 Stationarity

Stationarity is an important
characteristic of time series. A time
series is said to be stationary if its
statistical properties do not change
over time. In other words, it
has constant mean and variance, and
covariance is independent of time.
 Example of a stationary process
 Looking again at the same plot, we see that the
process above is stationary. The mean and variance
do not vary over time.
 Often, stock prices are not a stationary process, since
we might see a growing trend, or its volatility might
increase over time (meaning that variance is
changing).
 Ideally, we want to have a stationary time series for
modelling. Of course, not all of them are stationary,
but we can make different transformations to make
them stationary.
Time series Analysis Plot
Dicky-Fuller p=0.00000
How to test if a process is stationary
Dickey-Fuller p-value:0.518
Seasonality
 Example of seasonality
 As you can see above, there is a clear daily
seasonality. Every day, you see a peak towards
the evening, and the lowest points are the
beginning and the end of each day.
 Remember that seasonality can also be derived
from an autocorrelation plot if it has a
sinusoidal shape. Simply look at the period,
and it gives the length of the season.
 Autocorrelation
Informally, autocorrelation is the similarity between
observations as a function of the time lag between
them. Example of Autocorrelation Plot
 Example of an autocorrelation plot
 Above is an example of an autocorrelation plot.
Looking closely, you realize that the first value and
the 24th value have a high autocorrelation.
Similarly, the 12th and 36th observations are highly
correlated. This means that we will find a very
similar value at every 24 unit of time.
 Notice how the plot looks like sinusoidal function.
This is a hint for seasonality, and you can find its
value by finding the period in the plot above, which
would give 24h.
THANK YOU

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