Forecasting

Models
With
Trend and Seasonal Effects

Types of Seasonal Models

Two possible models are:
Additive Model
yt = Tt + St + t

Multiplicative Model
yt = TtStt

Trend Effects
Seasonal Effects
Random Effects

Additive Model
Regression Forecasting Procedure
Suppose a time series is modeled as having k seasons
(Here we illustrate k = 4 quarters)
The following 4 equations represent time series value of 4
seasons

Season 1: yt = 0 + 1t + 2 + t
Tt

St

Season 2: yt = 0 + 1t + 3 + t
Season 3: yt = 0 + 1t + 4 + t
Season 4: yt = 0 + 1t + 5 + t

Additive Model
Regression Forecasting Procedure
Combining the 4 equations into one, we can use 4 dummy
variables, S1, S2, S3 and S4 corresponding to seasons 1, 2,
3 and 4 respectively:
yt = 0 + 1t + 2S1 + 3S2 + 4S3 + 5S4 + t
Tt

St

The combination of 0s and 1s for each of the dummy variables at each

period indicate the season corresponding to the time series value.

Season 1:
Season 2:
Season 3:
Season 4:

S1 = 1, S2 = 0, S3 = 0, S4 = 0
S1 = 0, S2 = 1, S3 = 0 ,S4 = 0
S1 = 0, S2 = 0, S3 = 1, S4 = 0
S1 = 0, S2 = 0, S3 = 0, S4 = 0

We can simplified the above equation by removing 5S4

Additive Model
Regression Forecasting Procedure

Season 1:
Season 2:
Season 3:
Season 4:

S1 = 1, S2 = 0, S3 = 0
S1 = 0, S2 = 1, S3 = 0
S1 = 0, S2 = 0, S3 = 1
S1 = 0, S2 = 0, S3 = 0

yt = 0 + 1t + 2S1 + 3S2 + 4S3 + t

Tt

St

The combination of 0s and 1s for each of the dummy variables at each

period indicate the season corresponding to the time series value.

Multiple regression is then done on with t, S1, S2, and S3 as

the independent variables and the time series values yt as
the dependent variable.

Example
Troys Mobil Station
Troy owns a gas station in a vacation resort city
that has many spring and summer visitors.
Due to a steady increase in population Troy feels that
average sales experience long term trend.
Troy also knows that sales vary by season due to the
vacationers.

Based on the last 5 years data below with sales in

1000s of gallons per season, Troy needs to predict
total sales for next year (periods 21, 22, 23, and
24).
YEAR
SEASON
1
FALL
3497
WINTER 3484
SPRING 3553
SUMMER 3837

2
3726
3589
3742
4050

3
3989
3870
3996
4327

4
5
4248 4443
4105 4307
4263 4466
4544 4795

Scatterplot of Time Series

Fall

Winter

Summer

Spring

General Pattern: Winter less than Fall, Spring more than

Winter, Summer more than Spring, Fall less than Summer

The Model
There is also apparent long term trend.
The form of the model then is:
yt = 0 + 1t + 2F + 3W + 4S + t
Fall

Winter Spring

The Excel Input

Add Dummy Variables

In Fall, not Winter, not Spring
Not Fall, In Winter, not Spring
Not Fall, not Winter, In Spring
Not Fall, not Winter, not Spring

Pattern Repeats

Regression Intput

Regression Output

Low p-value for F-test

Low p-values for all t-tests

Conclusion
Good model all factors significant

Troys Mobil Station

Performing the forecast
The forecasting additive model is:
Ft = 3610.625 + 58.33t 155F 323W
248.27S
Forecasts for year 6 are produced as follows:
F(Year 6, Fall) = 3610.625+58.33(21) 155(1) 323(0)
248.27(0)
F(Year 6, Winter) = 3610.625+58.33(22) 155(0) 323(1)
248.27(0)
F(Year 6, Spring) = 3610.625+58.33(23) 155(0) 323(0)
248.27(1)
F(Year 6, Summer) = 3610.625+58.33(24) 155(0) 323(0)
248.27(0)

The Forecasts

=$G$17+$G$18*B22+$G$19*C22+$G$20*D22+$G$21*E22

=SUM(F22:F25)

Drag F22 down to F25

What if Some of the p-values are high?

Would not just eliminate Spring or Winter
A test exists to decide if adding the dummy
variables add value to the model
H0 : 2 = 3 = 4 = 0
HA: At least one of these s 0

Run 2 models:
Full: Time + (3) Seasonal Variables
Reduced: Time Only
Test --- Reject H0 (Accept HA) if F > F,3,DFE(Full)
F = ((SSEREDUCED-SSEFULL)/3)/MSEFULL
So if F >F,3,DFE(Full) ---Include seasonal variables

Multiplicative Model
Classical Decomposition Approach
The time series is first decomposed into
its components (trend, seasonal
variation).
After these components have been
determined, the series is re-composed by
multiplying the components.

Classical Decomposition

Smooth the time series to

remove random effects and
seasonality and isolate trend.

Calculate moving averages to

get values for Tt for each
period t.

Determine period factors to

isolate the (seasonal) (error)
factors.

Calculate the ratio yt/Tt.

Determine the unadjusted

seasonal factors to eliminate
the random component from the
period factors

Average all the yt/Tt that

correspond to the same season.

Classical Decomposition (Contd)

Calculate:
[Unadjusted seasonal factor]
[Average seasonal factor]

Determine the adjusted

seasonal factors.

Determine Deseasonalized data

values.

Calculate:

Determine a deseasonalized
trend forecast.

Use linear regression on the

deseasonalized time series.

Determine an adjusted
seasonal forecast.

yt
[Adjusted seasonal factors]t

Calculate:
(Desesonalized values)
[Adjusted seasonal factors]).

CANADIAN FACULTY
ASSOCIATION (CFA)
The CFA is the exclusive bargaining agent for
public Canadian college faculty.
Membership in the organization has grown over
the years, but in the summer months there was
always a decline.
To prepare the budget for the 2001 fiscal year, a
forecast of the average quarterly membership
covering the year 2001 was required.

CFA - Solution
Membership records from 1997 through 2000
were collected and graphed.
YEAR
PERIOD
YEAR
PERIOD

1997
1997

1998
1998

1999
1999

2000
2000

11
22
33
44
55
66
77
88
99
10
10
11
11
12
12
13
13
14
14
15
15
16
16

AVERAGE
AVERAGE
QUARTER MEMBERSHIP
QUARTER MEMBERSHIP

11
22
33
44
11
22
33
44
11
22
33
44
11
22
33
44

7130
7130
6940
6940
7354
7354
7556
7556
7673
7673
7332
7332
7662
7662
7809
7809
7872
7872
7551
7551
7989
7989
8143
8143
8167
8167
7902
7902
8268
8268
8436
8436

AverageDues
DuesPaying
PayingMembers
Members(payroll
(payrolldeduction)
deduction)
Average
9000
9000

8500
8500

The graph exhibits long term trend

The graph exhibits seasonality pattern

8000
8000

7500
7500

7000
7000

6500
6500

1
1

2
2

3
3

1997

4
4

5
5

6
6

7
7

1998

8
8

9
P er i od
Per i od

10
10

11
11

1999

12
12

13
13

14
14

15
15

2000

16
16

Step 1:
Isolating the Trend Component
Smooth the time series to
remove random effects and
seasonality.

Calculate moving averages.

Average membership for the first 4 periods First moving average period is
centered at quarter (1+4)/ 2 = 2.5
= [7130+6940+7354+7556]/4 = 7245.01
Average membership for periods [2, 5]
= [6940+7354+7556+7673]/4 = 7380.75

Centered moving average of the first

two moving averages is
[7245.01 + 7380.75]/2 = 7312.875

Second moving average period

is centered at quarter (2+5)/ 2 = 3.5

Centered location is t = 3
Trend value at period 3, T3

=AVERAGE(C3:C6,C4:C7)
Drag down to D16

Step 2
Determining the Period Factors
Determine period factors
to isolate the
(Seasonal)(Random error)
factor.

Calculate the ratio yt/Tt.

Since yt =TtStt, then the period factor,

factor Stt is given by

St t = yt/Tt
Example:
In period 7 (3rd quarter of 1998):
S77= y7/T7 = 7662/7643.875 = 1.002371

=C5/D5
Drag down to E16

Step 3
Unadjusted Seasonal Factors
Determine the unadjusted
seasonal factors to eliminate
the random component from
the period factors

Average all the yt/Tt that

correspond to the same
season.

This eliminates the random factor from the period factors, S tt This
leaves us with only the seasonality component for each season.
Example: Unadjusted Seasonal Factor for the third quarter.
S3 = {S3,97 + S3,98 3,98 + S3,99 3,99}/3 = {1.0056+1.0024+1.0079}/3 = 1.0053

=AVERAGE(E3,E7,E11,E15)

Drag down to F6

Copy F3:F6

Paste Special(Values)

Step 4
Adjusted Seasonal Factors
Determine the adjusted
seasonal factors so that
average adjusted factor is 1

Calculate:
Unadjusted seasonal factors
Average seasonal factor

Average seasonal factor = (1.01490+.96580+1.00533+1.01624)/4=1.00057

Quarter
1
2
3
4

Unadjusted
Seasonal Factor
1.01490
.96580
1.00533
1.01624

Adjusted
Seasonal Factor
1.014325
.965252
1.004759
1.015663

Unadjusted Seasonal Factors/1.00057

F3/AVERAGE($F$3:$F$6)
Drag down to G18

Step 5
The Deseasonalized Time Series
Determine Deseasonalized
data values.

Calculate:
yt
[Adjusted seasonal factors]t

Deseasonalized series value for Period 6

(2nd quarter, 1998)
y6/(Quarter 2 Adjusted Seasonal Factor) =
7332/0.965252 = 7595.94

=C3/G3
Drag to cell H18

Step 6
The Time Series Trend Component
Regress on the Deseasonalized Time Series
Determine a deseasonalized forecast from
the resulting regression equation

(Unadjusted Forecast)t = 7069.6677 + 78.4046t

Period (t)
17
18
19
20

Unadjusted Forecast (t)

8402.55
8480.95
8559.36
8637.76

Run regression
Deseason vs. Period

=$L$18+$L$19*B19
Drag to cell I22

Step 7
The Forecast
Re-seasonalize the forecast by multiplying
the unadjusted forecast by the adjusted
seasonal factor for each period.
Period
17
18
19
20

Unadjusted
Forecast (t)
8402.55
8480.95
8559.36
8637.76

Adjusted
Seasonal Factor
1.014325
.965252
1.004759
1.015663

Adjusted
Forecast (t)
8522.92
8186.26
8600.09
8773.06

=I19*G3
Drag down to J22

Seasonally
Adjusted
Forecasts

Review

Additive Model for Time Series with Trend and

Seasonal Effects
Use of Dummy Variables

1 less than the number of seasons

Use of Regression

Modified F test if all p-values not < .05

Multiplicative Model for Time Series with Trend

and Seasonal Effects
Determine a set of adjusted period factors to
deseasonalize data
Do regression to obtain unadjusted forecasts
Reseasonalize results to give seasonally adjusted
forecasts.

Excel