ESGC6115 Time Series

Analysis
Lecture 3
Smoothing Methods

2
Smoothing Methods
Averaging Methods
The Mean.
Moving Averages.

Exponential Smoothing Methods
Single (Simple) Exponential Smoothing.
Holts Linear Method.
Holt-Winters Method.


3
Averaging Methods: The Mean
The method of simple averages is to take the
average of all observed data as the forecast


When a new observation Y
t+1
becomes available, the
forecast for time t+2 is the new mean including the
previous observed data plus this new observation

=
+
=
t
i
i t
Y
t
F
1
1
1

+
=
+
+
=
1
1
2
1
1
t
i
i t
Y
t
F
4
Averaging Methods: The Mean
Appropriate only if the process underlying the
observed Y values is stationary, i.e. it has
no noticeable trend
no noticeable seasonality

Data storage
For the first forecast, all the observed values will are
required
For all succeeding forecasts, only two items need to be
stored as time moves on.
5
Averaging Methods: The Mean
Since


can be written as






only the most recent forecast and the most recent observation need
to be stored.

# Refer additional notes for example.

+
=
+
+
=
1
1
2
1
1
t
i
i t
Y
t
F
1
1 1
2
+
+
=
+ +
+
t
Y F t
F
t t
t
1
1
1
2
+
+
=
+
=
+

t
Y Y
F
t
t
i
i
t
6
Averaging Methods: Moving Averages
One way to modify the influence of past data on the
mean as a forecast is to specify how many past
observations will included in the mean.

The term moving average is used to describe this
procedure because as each new observation
becomes available, a new average can be computed
by dropping the oldest observation and including the
newest one.

This moving average will then be the forecast for the
next period
7
A moving average of order or span k is given by



Note that this moving average is different from
that used in smoothing a time series to estimate
the trend-cycle, i.e. by taking an average of
nearby points
Here we are forecasting the next observation by taking
an average of the most recent observations

+ =
+
=
t
k t i
i t
Y
k
F
1
1
1
Averaging Methods: Moving Averages
8
Advantages
Compared to the simple means which deals with all the past
data, a moving average of order k deals only with the latest k
periods of known data
The number of data points in each average does not change
as time goes
Very simple to implement

Disadvantages
A moving average of order k requires more storage because
all of the k latest observations must be stored, not just the
average
It cannot handle trend and seasonality very well although it
can do better than the simple mean

Averaging Methods: Moving Averages
9
The role of the order k is very important. If it is large -
say 12 months - then many observations go into each
average, and extreme values have relatively little
effect on the forecasts.
The resulting series forecasts will be much smoother than
the original series.

For this reason the moving average method is called
a smoothing method.

If the order is small - say 3 months, then extreme
observations have a larger effect on the forecasts
the forecast series will be much less smooth
Averaging Methods: Moving Averages
10
At one extreme, if the order is k = 1, there is no
smoothing effect at all
this method simply forecasts next months value to be the
same as the current months value. i.e F
t+1
= Y
t

this is called the nave forecasting model
e.g. the forecast of tomorrows closing price of IBM stock is
todays closing stock.

At the other extreme, if the order in k = n, the number
of observations in the time series, the mean of all the
observations is used as a forecast
this is equivalent to mean forecast method discussed earlier.

Example (refer the additional notes):
Forecasting of the series for electric can openers


Averaging Methods: Moving Averages
11
A moving average forecasting system of order k will
require k data points to be stored in memory at any
one time
If k is small, say at 4 then the storage requirements are not
severe .
If k is large, then storage may become a problem.


In practice, the technique of moving averages as a
forecasting procedure is not used very often because
the methods of exponential smoothing are generally
superior.
Averaging Methods: Moving Averages
12
Exponential Smoothing Methods
There are two criticisms of the moving average
method
it puts equal weight on each value in a typical moving
average when making a forecast and it requires a lot of data
storage

Exponential smoothing is a method that addresses
both of these criticisms
it bases it forecasts on a weighted average of past
observations, with more weight put on the more recent
observations and it require very little storage


13
Exponential Smoothing Methods
Different versions of exponential smoothing
Single (Simple) exponential smoothing - is relevant when there
is no pronounced trend or seasonality in the series

Holts linear method - is relevant when trend but not seasonality
is present

Holt-Winters method - is relevant when both trend and
seasonality are present

14
Single Exponential Smoothing
Terminology

Every exponential smoothing method has at least
one smoothing constant, which is usually between
0 and 1.

Single exponential smoothing has a single
smoothing constant denoted by .

L
t
is the level of the series at time t. This value is
not observable but can only be estimated.



15
Single Exponential Smoothing
Single exponential smoothing is defined by the
following equations



F
t+1
is the one-step-ahead forecast
Note that these two equations are equivalent to


By replacing F
t
with its components




( )
1
1

o + o =
t t t
L Y L
t t
L F =
+1
(1)
(2)
( )
t t t
F Y F o + o =
+
1
1
( ) ( ) | |
( ) ( )
1
2
1
1 1 1
1 1
1 1

+
+ + =
+ + =
t t t
t t t t
F Y Y
F Y Y F
o o o o
o o o o
If this substitution process is repeated by replacing F
t-1

by its components, F
t-2
by its components, and so on, the
results is



So F
t+1
represents a weighted moving average of all past
observations.
The weights for all past data sum approximately to one.
Greater value of gives more weight to recent
observations and less for the past observations.

16
Single Exponential Smoothing
( ) ( ) ( )
( ) ( ) ( )
1 1
1
4
4
3
3
2
2
1 1
1 1 1
1 1 1
F Y Y
Y Y Y Y F
t t
t
t t t t t
o o o o o
o o o o o o o
+ + + +
+ + + =

17


Single Exponential Smoothing

Equation (1) shows how to update the estimate of
the level
it is the weighted average of the current observation Y
t
and
the previous level L
t-1
with respective weights and (1-)

Equation (2) shows how forecast one period ahead is
obtained
the one-period-ahead forecast F
t+1
is equal to the most
recently estimated level L
t


18
Single Exponential Smoothing
The initial value of the level L
1
is often taken as the
first value of the time series Y
1


Since the first forecast F
1
is unknown, it is taken as
F
1
=

Y
1.
Hence the second forecast is F
2
= Y
1


Another possibility

for an initial value of level L
1
and
hence F
1
is to take an average of the first four or five
values of the data set.
19
Single Exponential Smoothing
What value of should we use?
No universally accepted answer
Some practitioner recommend a value between 0.1 and 0.2.
Others recommend experimenting with different values of
until a measure such as MSE is minimised
That is optimise MSE
When a small value of is chosen, the initial forecast plays
a more prominent role than when a larger is used .

Examples : Forecasting electric can opener
shipments (refer the additional notes).

20
Single Exponential Smoothing

Notice that the forecast function is flat for long range
forecasts
When the forecast horizon is more than one period ahead
F
t+m
= F
t+1
m = 2, 3, . . .

A flat forecast function is used because single
exponential smoothing works best for time series
that have no trend, no seasonality, or other
underlying pattern.


21


Example: Number of Dwelling Units

We examine the time series: Number of private dwelling units
approvals in Victoria Sept 1983 Oct 2001 (Source: DX database)

The time series plot shows that there is no apparent trend but
some cyclical behaviour and much random variation

Does a simple exponential smoothing model track these data well?
How do the forecasts depend on the smoothing parameter?
Number of Dwelling Units Approved: Vic
0
500
1000
1500
2000
2500
3000
3500
4000
S
e
p
-
8
3
J
u
l -
8
4
M
a
y
-
8
5
M
a
r
-
8
6
J
a
n
-
8
7
N
o
v
-
8
7
S
e
p
-
8
8
J
u
l -
8
9
M
a
y
-
9
0
M
a
r
-
9
1
J
a
n
-
9
2
N
o
v
-
9
2
S
e
p
-
9
3
J
u
l -
9
4
M
a
y
-
9
5
M
a
r
-
9
6
J
a
n
-
9
7
N
o
v
-
9
7
S
e
p
-
9
8
J
u
l -
9
9
M
a
y
-
0
0
M
a
r
-
0
1
Month
22
Applying Exponential to the time series from
Jan 1990 to Oct 2001

149
150
151
152
153
A B C D E F G H I
Aug-01 3632 2479 2351 1281 35.28
Sep-01 2961 2527 2479 482 16.28
Oct-01 3309 2605 2527 782 23.63
Nov-01 2605
Dec-01 2605
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
A B C D E F G H I
Single Exponential Smoothing
a1 SSE MSE 167010
0.1 23548414.58 MAPE 15.91
Month Unit (Yt) Level (Lt) Forecast(Ft) Error (Et) |Et/Yt x 100|
Jan-90 1800 1800
Feb-90 1988 1819 1800 188 9.46
Mar-90 2096 1847 1819 277 13.23
Apr-90 1756 1837 1847 -91 5.15
May-90 2350 1889 1837 513 21.81
Jun-90 1871 1887 1889 -18 0.95
Jul-90 1843 1883 1887 -44 2.38
Aug-90 1930 1887 1883 47 2.46
Sep-90 1633 1862 1887 -254 15.57
Oct-90 1913 1867 1862 51 2.67
Nov-90 2018 1882 1867 151 7.48
Dec-90 1343 1828 1882 -539 40.14
Smoothing parameter
between 0 and 1
Sum of square errors
Target cell for Solver
23
Using Solver to Optimize the Smoothing Constant


Excel:Tools/Solver
149
150
151
152
153
A B C D E F G H I
Aug-01 3632 3212 2677 955 26.31
Sep-01 2961 3071 3212 -251 8.49
Oct-01 3309 3205 3071 238 7.18
Nov-01 3205
Dec-01 3205
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
A B C D E F G H I
Single Exponential Smoothing
a1 SSE MSE 97250.91
0.560914062 13712377.79 MAPE 11.41
Month Unit (Yt) Level (Lt) Forecast(Ft) Error (Et) |Et/Yt x 100|
Jan-90 1800 1800
Feb-90 1988 1905 1800 188 9.46
Mar-90 2096 2012 1905 191 9.09
Apr-90 1756 1869 2012 -256 14.60
May-90 2350 2139 1869 481 20.49
Jun-90 1871 1989 2139 -268 14.30
Jul-90 1843 1907 1989 -146 7.89
Aug-90 1930 1920 1907 23 1.20
Sep-90 1633 1759 1920 -287 17.57
Oct-90 1913 1845 1759 154 8.05
Nov-90 2018 1942 1845 173 8.56
Dec-90 1343 1606 1942 -599 44.62
Optimized smoothing
parameter between 0 and 1
Sum of square errors
Target cell for Solver
24
Accuracy Measures


While there is a slight improvement in the MSE and MAPE after
optimization, both MSE and MAPE are still fairly large

However a plot of the time series with the optimal forecasts shows that
the single exponential smoothing does to some extent appear to track
the series fairly well
Number of Dwelling Units Approved: Vic
0
500
1000
1500
2000
2500
3000
3500
4000
O
c
t
-
9
0
A
u
g
-
9
1
J
u
n
-
9
2
A
p
r
-
9
3
F
e
b
-
9
4
D
e
c
-
9
4
O
c
t
-
9
5
A
u
g
-
9
6
J
u
n
-
9
7
A
p
r
-
9
8
F
e
b
-
9
9
D
e
c
-
9
9
O
c
t
-
0
0
A
u
g
-
0
1
Month
Unit (Yt)
Forecast(Ft)
25
Splitting Into Initialization and Test Sets

Very poor MSE and MAPE for the test set.
142
143
144
145
146
147
148
149
150
151
A B C D E F G H I
Jan-01 1649 2343 -694 42.08
Feb-01 2282 2343 -61 2.67
Mar-01 2185 2343 -158 7.23
Apr-01 1811 2343 -532 29.37
May-01 2658 2343 315 11.86
Jun-01 2615 2343 272 10.41
Jul-01 2817 2343 474 16.83
Aug-01 3632 2343 1289 35.49
Sep-01 2961 2343 618 20.88
Oct-01 3309 2343 966 29.20
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
A B C D E F G H I
Single Exponential Smoothing
a1 SSE Initialisation Set
0.1 19783074.17 MSE 151015.8
MAPE 15.64
Test Set
MSE 416847.1
Month Unit (Yt) Level (Lt) Forecast(Ft) Error (Et) |Et/Yt x 100| MAPE 20.60
Jan-90 1800 1800
Feb-90 1988 1819 1800 188 9.46
Mar-90 2096 1847 1819 277 13.23
Apr-90 1756 1837 1847 -91 5.15
May-90 2350 1889 1837 513 21.81
Jun-90 1871 1887 1889 -18 0.95
Jul-90 1843 1883 1887 -44 2.38
Smoothing parameter
between 0 and 1 Sum of square errors
Target cell for Solver
Initialisation Set:
Jan-90 to Dec-00
Test Set:
Jan 01 to Oct 01
26
Using Solver to Optimize the Smoothing Constant
Again very poor MSE and MAPE for the test set.
142
143
144
145
146
147
148
149
150
151
A B C D E F G H I
Jan-01 1649 1864 -215 13.04
Feb-01 2282 1864 418 18.32
Mar-01 2185 1864 321 14.69
Apr-01 1811 1864 -53 2.93
May-01 2658 1864 794 29.87
Jun-01 2615 1864 751 28.72
Jul-01 2817 1864 953 33.83
Aug-01 3632 1864 1768 48.68
Sep-01 2961 1864 1097 37.05
Oct-01 3309 1864 1445 43.67
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
A B C D E F G H I
Single Exponential Smoothing
a1 SSE Initialisation Set
0.538732079 11539416.02 MSE 88087.15
MAPE 11.15
Test Set
MSE 884699.6
Month Unit (Yt) Level (Lt) Forecast(Ft) Error (Et) |Et/Yt x 100| MAPE 27.08
Jan-90 1800 1800
Feb-90 1988 1901 1800 188 9.46
Mar-90 2096 2006 1901 195 9.29
Apr-90 1756 1871 2006 -250 14.25
May-90 2350 2129 1871 479 20.37
Jun-90 1871 1990 2129 -258 13.80
Jul-90 1843 1911 1990 -147 7.98
Initialisation Set:
Jan-90 to Dec-00
Test Set:
Jan 01 to Oct 01 Smoothing parameter
between 0 and 1
Sum of square errors
Target cell for Solver
27
Accuracy Measures

While the MSE and MAPE for the initialization set improve with
optimization, they become very poor for the test set.

Clearly exponential smoothing is not appropriate for forecasting too
many steps ahead - also evident from the time plots
Number of Dwelling Units Approved: Vic
0
500
1000
1500
2000
2500
3000
3500
4000
O
c
t
-
9
0
A
u
g
-
9
1
J
u
n
-
9
2
A
p
r
-
9
3
F
e
b
-
9
4
D
e
c
-
9
4
O
c
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9
5
A
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-
9
6
J
u
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9
7
A
p
r
-
9
8
F
e
b
-
9
9
D
e
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-
9
9
O
c
t
-
0
0
A
u
g
-
0
1
Month
Unit (Yt)
Forecast(Ft)
28
Holts Linear Method
The exponential smoothing method generally works
well if there is no obvious trend in the series.
But if there is a trend, then this method lags behind.
For example if the series is constantly increasing, simple
exponential smoothing forecast will be consistently low

Holts linear model rectifies this by dealing with trend
explicitly.
29
Holts Linear Method
In addition to the level of the series L
t
, Holts model
includes a trend term b
t
and a corresponding smoothing
constant .

The interpretation of L
t
is exactly as before - level of the
series and it has to be estimated.

The interpretation of b
t
is that it represents an estimate of
the change in the series from one period to the next.

30
Holts Linear Method for Trend

The equations for Holts method are



( ) ( )
1 1
1

+ + =
t t t t
b L Y L o o
( ) ( )
1 1
1

| + | =
t t t t
b L L b
t t m t
mb L F + =
+
(1)
(2)
(3)
31
Holts Linear Method
Equation 1 says that the updated level is a weighted average of
the current observation and the previous level plus the
estimated change.

Equation 2 says that the updated trend term is a weighted
average of the difference between two consecutive levels and
the previous trend term.

Equation 3 says that a m-period-ahead forecast made in period
t is the estimated level plus m times the estimated change per
period.

32
Holts Linear Method

The initialisation process requires two estimates the
first level L
1
and the trend b
1.

Use L
1
= Y
1


Use b
1
= Y
2
Y
1
or b
1
= (Y
4
- Y
1
)/3

Another alternative is to use the least squares
regression on the first few values of the series for
finding L
1
and b
1
.
33
Holts Linear Method

Both and take on values between 0 and 1
This new smoothing constant controls how quickly
the method reacts to perceived changes in the trend.
If it is small the method reacts slowly
If it is large, the method reacts more quickly

What value of and should we use?
Some practioners suggest using a small value of and
(0.1 to 0.2).
Others suggest using an optimization option to select the
best smoothing constants .

Examples : Forecasting inventory demand (refer the
additional notes).



34

Example: Purchase Value of Housing from all
Lenders in Victoria
We examine the time series: Purchase Value of Housing
from all Lenders in Victoria Oct 1975 Sept 2001
(Source: ABS)

The time series plot shows that there is trend some cyclical
behaviour and much random variation

Does a Holts linear track these data well? How do the
forecasts depend on the smoothing constant ?
Purchase Value of Housing from all Lenders in Victoria
0
10000
20000
30000
40000
50000
60000
70000
80000
90000
O
c
t
-
7
5
O
c
t
-
7
6
O
c
t
-
7
7
O
c
t
-
7
8
O
c
t
-
7
9
O
c
t
-
8
0
O
c
t
-
8
1
O
c
t
-
8
2
O
c
t
-
8
3
O
c
t
-
8
4
O
c
t
-
8
5
O
c
t
-
8
6
O
c
t
-
8
7
O
c
t
-
8
8
O
c
t
-
8
9
O
c
t
-
9
0
O
c
t
-
9
1
O
c
t
-
9
2
O
c
t
-
9
3
O
c
t
-
9
4
O
c
t
-
9
5
O
c
t
-
9
6
O
c
t
-
9
7
O
c
t
-
9
8
O
c
t
-
9
9
O
c
t
-
0
0
35
Applying Holts Linear method to the time series from Jan
1990 to Sept 2001


1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
A B C D E F G H
Holt's Linear trend method
a1 b1 SSE
0.1 0.1 2.319E+10 MSE 165641399.7
MAPE 34.09
Month Period Value (Yt) Level (Lt) Trend(bt) Forecast(Ft) Error (Et) |Et/Yt x 100|
Jan-90 1 18210 18210.00 5322.00
Feb-90 2 23532 23532.00 5322.00 23532.00 0.00 0.00
Mar-90 3 25725 28541.10 5290.71 28854.00 -3129.00 12.16
Apr-90 4 19080 32356.63 5143.19 33831.81 -14751.81 77.32
May-90 5 25392 36289.04 5022.11 37499.82 -12107.82 47.68
Jun-90 6 19604 39140.44 4805.04 41311.15 -21707.15 110.73
Jul-90 7 19645 41515.43 4562.04 43945.48 -24300.48 123.70
Smoothing parameter
between 0 and 1
Change for Solver
Smoothing parameter
between 0 and 1
Change for Solver
Sum of square
errors
Target cell for
Solver
154
155
156
157
158
A B C D E F G H
Aug-01 140 84609 65364.59 234.68 63226.32 21382.68 25.27
Sep-01 141 73180 66357.35 310.49 65599.27 7580.73 10.36
Oct-01 142 66667.84
Nov-01 143 66978.33
Dec-01 144 67288.82
36
Using Solver to Optimize the Smoothing Constant


Excel:Tools/Solver
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
A B C D E F G H
Holt's Linear trend method
a1 b1 SSE
0.478363 0.142975 7.103E+09 MSE 50735311.62
MAPE 14.34
Month Period Value (Yt) Level (Lt) Trend(bt) Forecast(Ft) Error (Et) |Et/Yt x 100|
Jan-90 1 18210 18210.00 5322.00
Feb-90 2 23532 23532.00 5322.00 23532.00 0.00 0.00
Mar-90 3 25725 27357.20 5108.00 28854.00 -3129.00 12.16
Apr-90 4 19080 26062.22 4192.53 32465.20 -13385.20 70.15
May-90 5 25392 27928.59 3859.94 30254.74 -4862.74 19.15
Jun-90 6 19604 25959.90 3026.60 31788.53 -12184.53 62.15
Jul-90 7 19645 24517.87 2387.69 28986.50 -9341.50 47.55
Optimized Smoothing
parameter between 0
and 1
Optimized smoothing
parameter between 0 and 1
Sum of square
errors
Target cell for
Solver
154
155
156
157
158
A B C D E F G H
Aug-01 140 84609 81908.35 2555.69 79431.75 5177.25 6.12
Sep-01 141 73180 79066.17 1783.93 84464.04 -11284.04 15.42
Oct-01 142 80850.10
Nov-01 143 82634.02
Dec-01 144 84417.95
37
Accuracy Measures

After optimization there is an improvement in the MSE, and
MAPE but the values are still quite large.
A plot of the time series with the optimal forecasts shows that
the Holts Linear does appear to track the series fairly well


0
20000
40000
60000
80000
100000
120000
J
a
n
-
9
0
J
u
l -
9
0
J
a
n
-
9
1
J
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l -
9
1
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Value (Yt)
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Purchase Value of Housing from all Lenders in
Victoria
38
Splitting Into Initialization and Test Sets


Very poor MSE and MAPE for the test set
108
109
110
111
112
113
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A B C D E F G H I
Oct-97 94 67866 56353.97 1267.58 55074.85 12791.15 18.85
Nov-97 95 60359 57895.29 1294.95 57621.54 2737.46 4.54
Dec-97 96 64486 59719.82 1347.91 59190.24 5295.76 8.21
Jan-98 97 48230 61067.73 -12837.73 26.62
Feb-98 98 56090 62415.64 -6325.64 11.28
Mar-98 99 63467 63763.55 -296.55 0.47
Apr-98 100 51085 65111.46 -14026.46 27.46
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A B C D E F G H I
Holt's Linear trend method
a1 b1 SSE Initialization Set
0.1 0.1 1.846E+10 MSE 194319245
MAPE 43.84
Test Set
MSE 1048472351
MAPE 45.17
Month Period Value (Yt) Level (Lt) Trend(bt) Forecast(Ft) Error (Et) |Et/Yt x 100|
Jan-90 1 18210 18210.00 5322.00
Feb-90 2 23532 23532.00 5322.00 23532.00 0.00 0.00
Mar-90 3 25725 28541.10 5290.71 28854.00 -3129.00 12.16
Apr-90 4 19080 32356.63 5143.19 33831.81 -14751.81 77.32
May-90 5 25392 36289.04 5022.11 37499.82 -12107.82 47.68
Jun-90 6 19604 39140.44 4805.04 41311.15 -21707.15 110.73
Jul-90 7 19645 41515.43 4562.04 43945.48 -24300.48 123.70
Smoothing parameter
between 0 and 1
Change for Solver
Smoothing parameter
between 0 and 1
Change for Solver
Sum of square
errors
Target cell for
Solver
Initialization Set:
Jan90 to Dec97
Test Set:
Jan98 to Sept01
39
Using Solver to Optimize the Smoothing Constant


Again very poor MSE and MAPE for the test set
1
2
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A B C D E F G H I
Holt's Linear trend method
a1 b1 SSE Initialization Set
0.685597 0.130018 2835394262 MSE 29846255.4
MAPE 14.67
Test Set
MSE 998852235
MAPE 45.78
Month Period Value (Yt) Level (Lt) Trend(bt) Forecast(Ft) Error (Et) |Et/Yt x 100|
Jan-90 1 18210 18210.00 5322.00
Feb-90 2 23532 23532.00 5322.00 23532.00 0.00 0.00
Mar-90 3 25725 26708.77 5043.08 28854.00 -3129.00 12.16
Apr-90 4 19080 23064.07 3913.52 31751.85 -12671.85 66.41
May-90 5 25392 25890.51 3772.18 26977.59 -1585.59 6.24
Jun-90 6 19604 22766.48 2875.55 29662.69 -10058.69 51.31
Jul-90 7 19645 21530.49 2340.97 25642.03 -5997.03 30.53
Initialization Set:
Jan90 to Dec97
Test Set:
Jan98 to Sept01
Optimized smoothing
parameter between 0
and 1
Optimized smoothing
parameter between 0 and 1
Sum of square
errors
Target cell for
Solver
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109
110
111
112
113
A B C D E F G H I
Oct-97 94 67866 65874.08 1743.87 61530.43 6335.57 9.34
Nov-97 95 60359 62641.24 1096.81 67617.95 -7258.95 12.03
Dec-97 96 64486 64250.84 1163.48 63738.05 747.95 1.16
Jan-98 97 48230 65414.32 -17184.32 35.63
Feb-98 98 56090 66577.81 -10487.81 18.70
Mar-98 99 63467 67741.29 -4274.29 6.73
40
Accuracy Measures

While the MSE and MAPE for the initialization set
improve with optimization, they become very poor for
the test set.

Clearly Holts linear method is not forecasting future
values as well as it does so for known values
This is also evident from the time plots

Purchase Value of Housing from all Lenders in Victoria
0
20000
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140000
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41
Appendix:

Strategy for evaluating any forecasting methodology

Stage 1
The time series of interest is divided into two parts:
initialization and test sets, so that an evaluation of a
forecasting method can be conducted

Stage 2
A forecasting is chosen from a list of possible methods

Stage 3
The initialization set is used to get the forecasting method
started
Estimates of any trend components, seasonal components
and parameter values are made at this stage



42
Stage 4
The method is applied to the test set to see how well it does
on data that were not used in estimating the components of
the model
After each forecast, the forecasting error is determined and
over the complete data set and accuracy measures such as
MSE, MAPE are determined