Timeseries

Time Series
The Art of Forecasting
Learning Objectives
Describe what forecasting is
Explain time series & its components
Smooth a data series
Moving average
Exponential smoothing
Forecast using trend models

Linear Regression
regressive
Simple
Auto-
What Is Forecasting?
Process of predicting a
future event
Underlying basis of
all business decisions
Production
Inventory
Personnel
Facilities
Forecasting Approaches
Qualitative Methods
Used when situation is
vague & little data exist
New products
New technology
Involve intuition,
experience
e.g., forecasting sales on
Internet
Quantitative Methods
Forecasting Approaches
Qualitative Methods
vague & little data exist
New products
New technology
Quantitative Methods
stable & historical data
exist
Existing products
Current technology
Involve intuition,
Involve mathematical
experience
techniques
e.g., forecasting sales on
e.g., forecasting sales of
Internet
color televisions
Quantitative Forecasting
Select several forecasting methods

Forecast the past
Evaluate forecasts
Select best method
Forecast the future
Monitor continuously forecast accuracy
Methods
Methods
Quantitative
Forecasting
Methods
Quantitative
Forecasting
Time Series
Models
Methods
Quantitative
Forecasting
Time Series
Models
Causal
Models
Methods
Quantitative
Forecasting
Causal
Models
Time Series
Models
Moving
Average
Exponential
Smoothing
Trend
Models
Methods
Quantitative
Forecasting
Causal
Models
Time Series
Models
Moving
Average
Exponential
Smoothing
Trend
Models
Regression
Methods
Quantitative
Forecasting
Causal
Models
Time Series
Models
Moving
Average
Exponential
Smoothing
Trend
Models
Regression
What is a Time Series?

Set of evenly spaced numerical data
Obtained by observing response variable at
regular time periods
Forecast based only on past values

Assumes that factors influencing past, present, &
future will continue
Example
Year: 1995199619971998 1999
Sales: 78.763.589.7 93.292.1
Time Series vs.

Cross Sectional Data
Time series data is a sequence of
observations
collected from a process
with equally spaced periods of time.
time
Time Series vs.

Contrary to restrictions placed on
cross-sectional data, the major
purpose of forecasting with time
series is to extrapolate
beyond the range of
the explanatory
variables.
Time Series vs.

Time series is
dynamic, it does
change over
time.
Time Series vs.

When working with time series data,
it is paramount that the data is
plotted so the researcher can view
the data.
Time Series Components

Trend

Trend
Cyclical

Trend
Seasonal
Cyclical

Trend
Cyclical
Seasonal
Irregular
Trend Component
Persistent, overall upward or downward
pattern
Due to population, technology etc.
Several years duration
Response
Mo., Qtr., Yr.
1984-1994 T/Maker Co.
Trend Component
Overall Upward or Downward Movement

Data Taken Over a Period of Years
Sales
t ren
d
r
a
w
Up
Time
Cyclical Component
Repeating up & down movements
Due to interactions of factors influencing
economy
Usually 2-10 years duration
Cycle
Response
Mo., Qtr., Yr.
Cyclical Component
Upward or Downward Swings

May Vary in Length
Usually Lasts 2 - 10 Years
Sales
Cycle
Time
Seasonal Component
Regular pattern of up & down fluctuations
Due to weather, customs etc.
Occurs within one year
Summer
Response
1984-1994 T/Maker Co.
Mo., Qtr.
Seasonal Component
Upward or Downward Swings

Regular Patterns
Observed Within One Year
Sales
Winter
Time (Monthly or Quarterly)
Irregular Component
Erratic, unsystematic, residual fluctuations
Due to random variation or unforeseen
events
1984-1994 T/Maker Co.
Union strike
War
Short duration &

nonrepeating
Random or Irregular
Component
Erratic, Nonsystematic, Random,
Residual Fluctuations
Due to Random Variations of

Nature
Accidents
Short Duration and Non-repeating
Time Series Forecasting

Time
Series

Time
Series
Trend?

Time
Series
Smoothing
Methods
No
Trend?

Time
Series
Smoothing
Methods
No
Trend?
Yes
Trend
Models

Time
Series
Smoothing
Methods
Moving
Average
No
Trend?
Exponential
Smoothing
Yes
Trend
Models

TT ii mm ee
SS ee rr ii ee ss
SS mm oo oo tt hh ii nn gg
MM ee tt hh oo dd ss
MM oo vv ii nn gg
AA vv ee rr aa gg ee
LL ii nn ee aa rr
NN oo
TT rr ee nn dd ??
YY ee ss
TT rr ee nn dd
MM oo dd ee ll ss
EE xx pp oo nn ee nn tt ii aa ll
QQ uu aa dd rr aa tt ii cc
AA uu tt oo -RR ee gg rr ee ss ss ii vv ee
Time Series Analysis

Plot time series data
No
trend? Yes
Smoothing
Forecasting
moving averages
linear
exponential smoothing
quadratic
exponential
autoregressive
Decomposition
cyclical analysis
Plotting Time Series Data

Intra-Campus Bus Passengers
(X 1000)
12
10
Number of Passengers
0
09/83
07/86
05/89
Month/Year
Data collected by Coop Student (10/6/95)
03/92
01/95
Moving Average Method

TT ii mm ee
SS ee rr ii ee ss
MM oo vv ii nn gg
LL ii nn ee aa rr
NN oo
TT rr ee nn dd ??
YY ee ss
TT rr ee nn dd
MM oo dd ee ll ss

Series of arithmetic means
Used only for smoothing
Provides overall impression of data over time

Series of arithmetic means
Used only for smoothing
Provides overall impression of data over time
Used for elementary forecasting
Moving Average Graph

Sales
Actual
8
6
4
2
0
93
94
95
96
Year
97
98
Moving Average
[An Example]
You work for Firestone Tire. You
want to smooth random
fluctuations using a 3-period
moving average.
1995
20,000
1996
24,000
1997
22,000
1998
26,000
1999
25,000
Moving Average
[Solution]
Year
1995
1996
1997
1998
1999
Sales MA(3) in 1,000

20,000
NA
24,000
(20+24+22)/3 = 22
22,000
(24+22+26)/3 = 24
26,000
(22+26+25)/3 = 24
25,000
NA
Moving Average
Year
Response Moving
Ave
1994
NA
1995
1996
1997
3.67
1998
1999
NA
Sales
8
6
4
2
0
94 95 96 97 98 99
Exponential Smoothing
Method

TT ii mm ee
SS ee rr ii ee ss
MM oo vv ii nn gg
LL ii nn ee aa rr
NN oo
TT rr ee nn dd ??
YY ee ss
TT rr ee nn dd
MM oo dd ee ll ss
Method
Form of weighted moving average
Weights decline exponentially
Most recent data weighted most
Requires smoothing constant (W)

Ranges from 0 to 1
Subjectively chosen
Involves little record keeping of past data
[An Example]
Youre organizing a Kwanza meeting. You
want to forecast attendance for 1998 using
exponential smoothing
( = .20). Past attendance (00) is:
1995
4
1996
6
1997
5
1998
3
1999
7
1995 Corel Corp.
Ei = WYi + (1 - W)Ei-1
Smoothed Value, Eii
(W = .2)
Forecast
^
Yii ++ 11
Time
Yii
1995
4.0
NA
1996
(.2)(6) + (1-.2)(4.0) = 4.4
4.0
1997
(.2)(5) + (1-.2)(4.4) = 4.5
4.4
1998
(.2)(3) + (1-.2)(4.5) = 4.2
4.5
1999
(.2)(7) + (1-.2)(4.2) = 4.8
4.2
2000
NA
NA
4.8
[Graph]
Attendance
Actual
8
6
4
2
0
93
96
97
Year
98
99
Forecast Effect of
Smoothing Coefficient (W)
^
Yi+1 = WYi + W(1-W)Yi-1 + W(1-W)2Yi-2 +...
Weight
2 Periods 3 Periods
W is... Prior Period
Ago
Ago
22
W(1-W)
W(1-W)
0.10
10%
9%
8.1%
0.90
90%
9%
0.9%
Linear Time-Series
Forecasting Model

TT ii mm ee
SS ee rr ii ee ss
MM oo vv ii nn gg
LL ii nn ee aa rr
NN oo
TT rr ee nn dd ??
YY ee ss
TT rr ee nn dd
MM oo dd ee ll ss
Linear Time-Series
Forecasting Model
Used for forecasting trend
Relationship between response variable Y &
time X is a linear function
Coded X values used often
Year X:
Coded year:
Sales Y:
1995 1996 1997 1998

0
1
2
3
78.7 63.5 89.7 93.2
1999
4
92.1
Linear Time-Series Model
Yi b0 b1X 1i
b1 > 0
b1 < 0
TT ii mm ee ,, XX 11
Linear Time-Series Model

[An Example]
Youre a marketing analyst for Hasbro Toys. Using
coded years, you find Yi = .6 + .7X^i.
1995
1996
1997
1998
1999
Forecast 2000 sales.
1
1
2
2
4
Linear Time-Series [Example]

Year
1995
1996
1997
1998
1999
2000
Coded Year
0
1
2
3
4
5
Sales (Units)
1
1
2
2
4
?
2000 forecast sales: Yi = .6^+ .7(5) = 4.1

The equation would be different if Year used.
The Linear Trend Model

Year Coded Sales
Yi b0 b1 X i 2.143 .743 X i
94
95
96
97
98
99
Excel Output
Coefficients
Intercept
2.14285714
X Variable 1 0.74285714
8
7
Projected to
year 2000
2
1
0
1993
1994
1995
1996
1997
1998
1999
2000
Time Series Plot

Surgery Data
(Time Sequence Plot)
(X 1000)
20
19
18
Number of Surgeries
17
16
01/93
01/94
01/95
Month/Year
Source:
General Hospital, Metropolis
01/96
01/97
Time Series Plot [Revised]

Revised Surgery Data
(Time Sequence Plot)
(X 100)
193
191
189
Number of Surgeries
187
185
183
01/93
01/94
01/95
Month/Year
Source: General Hospital, Metropolis
01/96
01/97
Seasonality Plot
(Seasonal Decomposition)
100.5
100.3
Monthly Index
100.1
99.9
99.7
Jan
Feb
Mar
Apr
May
Jun
Jul
Month
Source:
General Hospital, Metropolis
Aug
Sep
Oct
Nov
Dec
Trend Analysis
(Trend Analysis)
(X 1000)
19.5
19.2
18.9
Number of Surgeries
18.6
18.3
18
12/92
10/93
8/94
6/95
Month/Year
Source: General Hospital, Metropolis
9/96
2/97
12/97
Quadratic Time-Series
Forecasting Model

TT ii mm ee
SS ee rr ii ee ss
MM oo vv ii nn gg
LL ii nn ee aa rr
NN oo
TT rr ee nn dd ??
YY ee ss
TT rr ee nn dd
MM oo dd ee ll ss
Forecasting Model
time X is a quadratic function
Coded years used
Forecasting Model
time X is a quadratic function
Coded years used
Quadratic model
2
Yi b0 b1X 1i b11X 1i
Model Relationships
Y
b11 > 0
Y e a r, X
Y
Y e a r, X
Y e a r, X
b11 < 0
b11 > 0
b11 < 0
Y e a r, X
Quadratic Trend Model

Year Coded Sales
94
95
96
97
98
99
Yi b0 b1 X i b2 X i
Coefficients
Intercept
2.85714286
X Variable 1 -0.3285714
X Variable 2 0.21428571
Excel Output
2
Yi 2.857 0.33 X i .214 X i
Exponential Time-Series
Model

TT ii mm ee
SS ee rr ii ee ss
MM oo vv ii nn gg
LL ii nn ee aa rr
NN oo
TT rr ee nn dd ??
YY ee ss
TT rr ee nn dd
MM oo dd ee ll ss
Forecasting Model
Relationship is an exponential function
Series increases (decreases) at increasing
(decreasing) rate
Forecasting Model
Relationship is an exponential function
Series increases (decreases) at increasing
(decreasing) rate
Model Relationships
b1 > 1
0 < b1 < 1
Y e a r, X
Exponential Weight
[Example Graph]
Sales
8
Data
6
4
Smoothed
2
0
94
95
96
97
98
99 Year
Exponential Trend Model

Xi
Yi b0b1
Year Coded Sales
or log Yi log b0 X 1 log b1
94
95
Coefficients
Intercept 0.33583795
X Variable 10.08068544
96
Excel Output of Values in logs
97
98
antilog(.33583795) = 2.17
antilog(.08068544) = 1.2
99
Xi
Yi ( 2.17 )( 1.2 )
Autoregressive Modeling

TT ii mm ee
SS ee rr ii ee ss
MM oo vv ii nn gg
LL ii nn ee aa rr
NN oo
TT rr ee nn dd ??
YY ee ss
TT rr ee nn dd
MM oo dd ee ll ss
Autoregressive Modeling
Like regression model
Independent variables are lagged response
variables Yi-1, Yi-2, Yi-3 etc.
Assumes data are correlated with past data

values
1st Order: Correlated with prior period
Estimate with ordinary least squares
Time Series Data Plot

Intra-Campus Bus Passengers
(X 1000)
12
10
Number of Passengers
0
09/83
07/86
05/89
Month/Year
Data collected by Coop Student (10/6/95)
03/92
01/95
Auto-correlation Plot
Intra-Campus Bus
(Auto Correlation
PassengersFunction
Plot
0.5
-0.5
-1
0
10
15
Lag
20
25
Autoregressive Model
[An Example]
The Office Concept Corp. has acquired a number of office

units (in thousands of square feet) over the last 8 years.
Develop the 2nd order Autoregressive models.
Year Units
92
93
94
95
96
97
98
99
4
3
2
3
2
2
4
6
Autoregressive Model
[Example Solution]
Develop the 2nd order
table
Use Excel to run a
regression model
Excel Output
Coefficients
Intercept
3.5
X Variable 1
0.8125
X Variable 2
-0.9375
Year
92
93
94
95
96
97
98
99
Yi
4
3
2
3
2
2
4
6
Yi-1
--4
3
2
3
2
2
4
Yi 3.5 .8125Yi 1 .9375Yi 2
Yi-2
----4
3
2
3
2
2
Evaluating Forecasts
Quantitative
Forecasting Steps
Select several forecasting methods
Forecast the past
Evaluate forecasts
Select best method
Forecast the future
Monitor continuously forecast accuracy
Forecasting Guidelines
No pattern or direction in forecast error
ei = (Actual Yi - Forecast Yi)
Seen in plots of errors over time
Smallest forecast error

Measured by mean absolute deviation
Simplest model
Called principle of parsimony
Pattern of Forecast Error

Trend Not Fully
Accounted for
Desired Pattern
EE rr rr oo rr
EE rr rr oo rr
00
00
TT ii mm ee (( YY ee aa rr ss ))
TT ii mm ee (( YY ee aa rr ss ))
Residual Analysis
e
Random errors
T
Cyclical effects not accounted for
Trend not accounted for
T
Seasonal effects not accounted for
Principal of Parsimony
Suppose two or more models provide good

fit for data
Select the Simplest Model
Simplest model types:
least-squares linear
least-square quadratic
1st order autoregressive
More complex types:

2nd and 3rd order autoregressive
least-squares exponential
Summary
Described what forecasting is
Explained time series & its components
Smoothed a data series
Moving average
Exponential smoothing
Forecasted using trend models
You and StatGraphics

Specification
[Know assumptions
underlying various
models.]
Estimation
[Know mechanics of
StatGraphics Plus Win].
Diagnostic checking
Questions?
Source of Elaborate Slides

Prentice Hall, Inc
Levine, et. all, First Edition
ANOVA
End of Chapter

Timeseries

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Time Series

The Art of Forecasting

Forecast using trend models

Select several forecasting methods

What is a Time Series?

Forecast based only on past values

Time Series vs.

Time Series vs.

Time Series vs.

Time Series vs.

Time Series Components

Time Series Components

Time Series Components

Time Series Components

Time Series Components

Mo., Qtr., Yr.

1984-1994 T/Maker Co.

Overall Upward or Downward Movement

Mo., Qtr., Yr.

Upward or Downward Swings

Upward or Downward Swings

Time (Monthly or Quarterly)

1984-1994 T/Maker Co.

Short duration &

Due to Random Variations of

Short Duration and Non-repeating

Time Series Forecasting

Time Series Forecasting

Time Series Forecasting

Time Series Forecasting

Time Series Forecasting

Time Series Forecasting

Time Series Forecasting

Time Series Analysis

Plotting Time Series Data

Moving Average Method

Time Series Forecasting

Moving Average Method

Moving Average Method

Used for elementary forecasting

Moving Average Graph

Sales MA(3) in 1,000

Time Series Forecasting

Requires smoothing constant (W)

Involves little record keeping of past data

1995 Corel Corp.

(.2)(6) + (1-.2)(4.0) = 4.4

(.2)(5) + (1-.2)(4.4) = 4.5

(.2)(3) + (1-.2)(4.5) = 4.2

(.2)(7) + (1-.2)(4.2) = 4.8

Time Series Forecasting

1995 1996 1997 1998

Linear Time-Series Model

Linear Time-Series Model

Linear Time-Series [Example]

2000 forecast sales: Yi = .6^+ .7(5) = 4.1

The Linear Trend Model

Time Series Plot

General Hospital, Metropolis

Time Series Plot [Revised]

General Hospital, Metropolis

Time Series Forecasting

Quadratic Trend Model